Jeri Hurd is a school librarian at the Western Academy of Beijing. Last year, she wanted to invest some money. Her school introduced her to a European based investment company, The Alexander Beard Group. But after sitting down with one of their advisors, she wondered if the fees were too high.
Foreign investment firms cost a lot more than they do in the United States. Investors with Alexander Beard pay a $500 start up fee. Investors then pay a 5 percent sales commission. This means for every $1000 invested, you lose $50 right away. Investors pay an additional 1.5 percent of their portfolio's value each year.
Alexander Beard’s Division Director Janet Jenkinson says, “We believe that the total costs of our plan over any given period are lower than those of other offshore pension providers.” And she’s right. Offshore firms can cost up to 4 percent a year. After commissions, platform fees and fund expenses, Alexander Beard’s investors pay roughly 3 percent.
The U.S. firm, Personal Capital, lets Americans see if their investment fees are too high. Costs are categorized into zones. They include mutual fund expenses, commissions and platform costs. Fees totaling less than 1 percent earn Personal Capital’s green zone designation. That’s good. Investors paying between 1 percent and 1.99 percent annually are in the yellow zone—much like a moderate forest fire warning. Charges higher than 2 percent are in the red zone. Nobody light a match.
Investing has a general rule. If you take higher risks, you should expect greater returns. Stocks, for example, are riskier than bonds. Over time, they outperform. But they can provide a hairy ride. Let’s assume stocks earned 7 percent per year, but an investor paid a 5 percent annual fee. After fees, the investor would earn just 2 percent. In this case, the stock investor wouldn’t be compensated for the extra risk. Fees would have wiped out most of the profits.
|7 percent return||3 percent return|
|-5% fee||-0.2% fee|
|=2% return||=2.8% return|
Now for a real example: Alexander Beard sells ready-made portfolios created by AG2R La Mondiale. The firm’s “Very Long Term (Growth)” portfolio contains 20 percent bonds and 80 percent stocks. During the past five-years, stocks thumped bonds. So this portfolio should have easily beaten Vanguard’s lower risk balanced index fund because the Vanguard fund contains more bonds (40% bonds, 60% stocks). If $10,000 were invested in Alexander Beard’s “Very Long Term (Growth)” portfolio in June 2009, it would have grown to $16,146 five years later, after all fees. Of the six funds offered by Alexander Beard, this was their top performer. Vanguard’s balanced index fund (40% bonds, 60% stocks) wasn’t its company’s top performer. But it would have turned the same $10,000 into $19,763. Vanguard’s balanced index costs just .08 percent each year. Because of the index’s lower fees, investors would have earned 22 percent more. And they would have taken less risk.
Economic Nobel Prize winner, William F. Sharpe says if the average investor pays 3 percent in annual fees, the stock market will beat him by about 3 percent. It's a lot smarter to match market returns. Minus a tiny fee, you can do it with low cost index funds.
Comparing funds of equal risk, in the 5 years ending June 2014, Vanguard’s total stock market index beat Alexander Beard’s “Maximum Term (Adventurous)” portfolio by 5.1 percent per year. Vanguard’s balanced index beat Alexander Beard’s “Long Term (Balanced)” fund by 3.7 percent per year. Ten-year results for the higher cost firm were also disappointing.
Alexander Beard might do better in the years ahead. Past results aren’t a window to the future. But remember, the less you pay, the more you usually keep.
Vanguard doesn't allow U.S. expats to invest with them, unless they have opened accounts prior to leaving the United States. But I’ve listed some options in this previous column. Do-it-yourself investors could also buy ETFs with Schwab. Such a choice would even be cheaper than Vanguard.
Alexander Beard Versus Vanguard – June 2009-June 2014
|5 Year Annualized Return After Annual Fees||Growth of $10,000 After Set-up charges, Annual Fees, and 5% Sales Commissions|
|La Mondiale Short Term (Conservative)||+1.95%||$9,912|
|La Mondiale Medium Term (Defensive)||+7.2%||$12,741|
|La Mondiale Medium Long Term (Cautious)||+8.9%||$13,784|
|La Mondiale Long Term (Balanced)||+10.2%||$14,626|
|La Mondiale Very Long Term (Growth)||+12.4%||$16,146|
|La Mondiale Maximum Term (Adventurous)||+13.5%||$16,952|
|Vanguard Balanced Stock and Bond Index Fund||+13.9%||$20,128 (no applicable sales commission)|
|Vanguard Total Stock Market Index Fund||+19.6%||$25,694 (no applicable sales commission)|
|Return Sources: AG2R La Mondiale 2nd Quarter 2014 Report; Morningstar.comStart up fees and commission charges were deducted from the $10,000 before it was allowed to grow Alexander Beard Account Fees: http://www.abg.net/uploads/publications/ISRP/#2|
Alexander Beard Versus Vanguard
Starting With $10,000, Then Investing $10,000 Annually – 2004-2014
|10 Year Annualized Return After Annual Fees||Growth After Start-up Fee, Annual Fees And 5% Sales Commissions|
|La Mondiale Short Term (Conservative)||+2.33%||$120,026|
|La Mondiale Medium Term (Defensive)||+4.36%||$135,593|
|La Mondiale Medium Long Term (Cautious)||+5.06%||$141,451|
|La Mondiale Long Term (Balanced)||+5.44%||$144,743|
|La Mondiale Very Long Term (Growth)||+5.75%||$147,489|
|La Mondiale Maximum Term (Adventurous)||+5.65%||$146,597|
|Vanguard Balanced Stock and Bond Index Fund||+7.05%||$168,018 (no applicable sales commission)|
|Vanguard Total Stock Market Index Fund||+7.95%||$177,501 (no applicable sales commission)|
|Vanguard International Stock Market Index||+7.25%||$170,078 (no applicable sales commission)|
|Return Sources: AG2R La Mondiale 2nd Quarter 2014 Report; Morningstar.com. Start up fees and commission charges were deducted from the $10,000 before it was allowed to grow Alexander Beard Account Fees: http://www.abg.net/uploads/publications/ISRP/#2|