Fees and costsSubscriber
The full cost of a managed portfolio, counted line by line
The advisory fee is the only cost most clients ever see on a statement. Four more sit underneath it, and together they usually exceed the one on the invoice.
In this story
Illustrative. Bank Season is an editorial prototype. This story, its sources, the issuers named in it and every figure it quotes are invented to demonstrate the publication. Nothing here is reported fact or investment advice. Read the disclosure.
The advisory fee is the number everybody argues about and it is rarely the largest one. A client paying one percent for management is usually paying something closer to one and three quarters once the costs sitting inside the funds, the costs of trading them, the drag from uninvested cash and the tax generated by turnover are counted. None of those four is hidden, exactly. They are disclosed in four different documents, in four different formats, none of which adds them up.
The five cost layers in a representative managed portfolio
| Layer | Typical range | Representative figure | Where it is disclosed | Negotiable |
|---|---|---|---|---|
| Advisory or management fee | 0.50% to 1.25% | 1.00% | Advisory agreement and quarterly invoice | Yes, above $1m |
| Underlying fund expenses | 0.03% to 0.95% | 0.38% | Each fund prospectus | Only by changing funds |
| Trading and spread costs | 0.02% to 0.35% | 0.11% | Rarely disclosed at all | Indirectly, through turnover |
| Cash drag | 0.00% to 0.30% | 0.09% | Statement, if you compare cash to the target | Yes |
| Tax on turnover, taxable accounts | 0.00% to 0.90% | 0.16% | Annual tax form, after the fact | Yes, through location and turnover |
Representative figures are Bank Season estimates for a $2m balanced portfolio at a mid-sized US advisory firm using a mix of active and index funds. Tax drag assumes a 24% federal bracket and 31% annual turnover.
That adds to 1.74%. The client sees 1.00% on the invoice and a set of returns that are reported net of everything, which means the other 0.74% is real, paid, and invisible in the only document most people read.
1.74%
All-in annual cost of a representative managed portfolio
Against an advisory fee of 1.00% shown on the quarterly invoice. The remaining 0.74% is paid but not itemised anywhere the client routinely reads.
All-in cost by service model, $2m taxable portfolio
| Service model | Advisory fee | Fund expenses | Trading, cash and tax | All-in cost |
|---|---|---|---|---|
| Full service wealth management | 1.00% | 0.38% | 0.36% | 1.74% |
| Independent adviser using index funds | 0.85% | 0.07% | 0.14% | 1.06% |
| Hybrid digital advice | 0.30% | 0.09% | 0.11% | 0.50% |
| Flat fee planner plus self-managed index funds | 0.18% | 0.06% | 0.09% | 0.33% |
| Self-managed index funds, no advice | 0.00% | 0.06% | 0.08% | 0.14% |
Flat fee planner modelled at $3,600 a year expressed as a percentage of $2m. Bank Season estimates. Advice has value and this table prices it rather than judging it.
The point of that table is not that advice is worthless. It is that advice costs what it costs and the client should know the figure, because the decision to pay 1.4 percentage points more than the cheapest option is defensible when it buys behaviour management, tax planning and estate coordination, and indefensible when it buys a quarterly review meeting and a model portfolio.
Tax drag by turnover and account type, on a portfolio returning 7% gross
| Annual turnover | Taxable account, 24% bracket | Taxable account, 37% plus surtax | Tax-deferred account | Roth account |
|---|---|---|---|---|
| 5%, index fund equivalent | 0.06% | 0.10% | 0.00% | 0.00% |
| 15% | 0.11% | 0.19% | 0.00% | 0.00% |
| 31%, representative active blend | 0.16% | 0.31% | 0.00% | 0.00% |
| 60% | 0.34% | 0.61% | 0.00% | 0.00% |
| 100%, tactical allocation | 0.52% | 0.90% | 0.00% | 0.00% |
Assumes realised gains split 70% long term and 30% short term, which is typical for a strategy with meaningful turnover. State tax is excluded and would add materially in high tax states.
0.90%
Annual tax drag on a fully turned over taxable portfolio in the top bracket
Against 0.10% for an index fund equivalent in the same account. Identical gross returns in both cases.
The last two columns are the reason asset location matters more than most fee negotiations. The same strategy costs nothing in tax inside a retirement account and up to ninety basis points a year in a taxable one. Moving the high turnover sleeve into the tax-deferred account and holding the low turnover equity in the taxable account is free, requires no negotiation with anyone, and is worth more than shaving fifteen basis points off an advisory fee.
Terminal value of $2m after twenty five years at 7% gross, by all-in cost
| All-in cost | Net return | Value at year 25 | Cost paid over 25 years | Shortfall against 0.14% |
|---|---|---|---|---|
| 1.74% | 5.26% | $7.20m | $3.65m | minus $3.24m |
| 1.06% | 5.94% | $8.46m | $2.39m | minus $1.98m |
| 0.50% | 6.50% | $9.67m | $1.18m | minus $0.77m |
| 0.33% | 6.67% | $10.07m | $0.78m | minus $0.37m |
| 0.14% | 6.86% | $10.44m | $0.41m | n/a |
Identical 7% gross return in every row. Cost paid is the difference between the gross and net terminal values. Bank Season model, illustrative and not a forecast.
Cumulative cost as a share of what the portfolio would otherwise be worth
Percentage of the gross terminal value consumed by all-in costs, by year. Both paths assume a 7% gross return on $2m.
Five questions and the document that already contains the answer
| Question | Where the answer is | What to look for |
|---|---|---|
| What is the total advisory fee, including any platform charge | Advisory agreement, fee schedule section | Separate platform or custody fees listed apart from the advisory rate |
| What do the underlying funds cost | Holdings statement plus each fund's summary prospectus | Asset weighted average, not the simple average |
| How much turnover is there | Prior year tax form for the account | Realised gains as a share of the account value |
| How much cash is being held | Monthly statement | Cash as a share of the account against the stated target |
| Does anyone receive payment for the products used | Form disclosing conflicts of interest | Revenue sharing, twelve b-one fees, proprietary fund use |
Every one of these documents is already sent to the client. None of them presents the total, which has to be assembled by hand.
Assembling it takes an afternoon and the result is durable, because cost is the one input to a portfolio's outcome that is known in advance. Returns are a forecast. Inflation is a forecast. The fee schedule is a fact, and it is the only lever a household can pull that produces a guaranteed improvement in the terminal number rather than a probable one.
The right conclusion is not always to pay less. A household that panicked in 2020 and was talked out of selling by an adviser has already received value that exceeds two decades of fee differential. The conclusion is to know the figure, compare it to what the relationship delivers, and make the trade deliberately rather than by default, which is how nearly every managed portfolio in the country currently arrives at its cost.