Dallas reader D.H. asks a question most advisors are reluctant to answer.

"My financial planner is recommending that I move monies from my company managed pension fund to a managed account. The fee for this managed account is 2.5%. This seemed pretty high to me, but he indicated that it was within standard. Can you please elaborate on what fees are considered within a normal range and what would be considered as 'high?'?"

The first thing we all need to know is that many in the financial services community practice what might be called willful ignorance. They know what the "normal" fees are in their segment of the industry are but remain willfully ignorant of all the choices you and I have as investors.

Annual fees of 2.5 percent are typical of what "wrap" accounts seek to charge for relatively small portfolios. It is supposed to be an all-inclusive fee that includes any brokerage expenses. As a practical matter, most registered reps will tell you that fees are often negotiated down. Paying 2.5 percent is the equivalent of visiting a car dealer and paying the full sticker price.

As a practical matter, we also need to know that there is no relationship between a "normal" fee in financial services and whether we will benefit as investors. When people in financial services set their fees, they set them to meet their business plan. They don't set them to meet our retirement plans. In general, the higher the fees, the poorer your long term results will be. Here's a list of typical fee levels in different "distribution channels."

• Hedge Funds. Designed for well-off investors, these rapidly growing vehicles often charge 2 percent a year plus 20 percent of net profits. I think of them as Vanity Capital, something that appeals to people who truly have more money than brains.

• Variable Annuities. Due to the high cost of their chosen distribution system, this investment product generally has annual expenses of 2.0 to 2.5 percent and subjects all earnings to ordinary tax rates upon withdrawal.

• Wrap Accounts. Targeted at annual fees of 2.5 percent but often settling for slightly under 2.0 percent, wrap accounts are how the brokerage industry hopes to transition from a transaction based business to a management fee based business. Again, the fee structure is based on their business model, not our long term welfare.

• Traditional Investment Counsel accounts. Here, investment advisors will manage portfolios of stocks and bonds for a decades old standard fee of 1 percent of assets.

• Managed Mutual Funds. Most load funds now pay a 12b-1 "trail" fee that is supposed to support providing ongoing advice to the investor. A good advisor can guide you to a low cost fund family (like the American Funds group) and your long term cost of advice and fund management can be as low as 0.6 percent to 0.8 percent. Total expenses at many independent advisory firms are more likely to run from 1.0 percent to 1.5 percent.

• Lifecycle Managed Funds. This path, now a common feature of 401(k) accounts, has a wide range of expenses but they run from slightly over 1.0 percent at T. Rowe Price to just more than 0.70 percent at Fidelity, to just more than 0.30 percent at Vanguard.

The ultimate in low costs is available to government employees through their Thrift Savings Plan. This plan offers a variety of index fund options, including five lifecycle funds, all at an annual cost of 0.07 percent a year.

For you and me as investors, the guiding question is very simple: What are the odds that the more expensive management channels will be able to add enough return to recover their fees?

Answer: The higher the fees, the greater the odds your advisor will do more harm than good. This effect can be seen directly in long term mutual fund performance. At the end of June, the average annualized return of all moderate allocation (balanced) funds over the preceding 15 years was 8.67 percent.

Funds in the top 25 percent had returns of 10.03 percent or better and averaged 10.91 percent after annual expenses that averaged 0.94 percent.

Funds in the bottom 25 percent, however, had returns of 7.73 percent or less and averaged 6.72 percent after expenses of 1.63 percent. Indeed, if you examine the table below, annualized returns appear to rise as annual expenses decline.

High Management Expenses= Low Investor Returns
This table compares the average 15 year annualized returns of moderate allocation mutual funds to the average expense ratios for the same group. It shows that higher expenses appear to result in significantly lower returns.
Performance Group	15 Year Annualized Return	Average Expense Ratio
Top 10 percent	11.95 percent	0.80 percent
Top 25 percent	10.91	0.94
Top 50 percent	10.17	1.09
Bottom 50 percent	7.28	1.52
Bottom 25 percent	6.72	1.63
Bottom 10 percent	6.12	1.79
Source: Morningstar Principia, June 30, 2006 data

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Personal finance writer Scott Burns is syndicated by Universal Press. His twice weekly column appears in newspapers from Boston to Seattle. He is the Chief Investment Strategist for AssetBuilder, Inc. Readers can register at www.scottburns.com. Questions/comments can be posted directly. They can also be sent, without registration, to scott@scottburns.com. Questions of general interest will be answered in future columns and on this blog.

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