Fidelity Portfolio Advisory Service Review w/ Actual Holdings
Have you seen those “follow the green line” ads from Fidelity? Well, they reminded that a reader sent me their retirement account holdings for review which was managed through the Fidelity Portfolio Advisory Service (PAS). This is a managed portfolio service, which means that you pay Fidelity a fee and they do all the research, selection, buying, and selling for you. Fidelity has two managed-portfolio tiers for individual investors, with the Portfolio Advisory Service for account balances of $50,000+, and the Private Portfolio Service for those with $300,000+ to invest.
At only a $50,000 minimum portfolio size, it appears that the PAS is targeted a relatively large portion of the generic public. Unfortunately, in the wealth management business such small balances usually also mean generic, cookie-cutter portfolios with little or no personalization. Here’s what Fidelity says:
In the Fidelity Portfolio Advisory Service product, customers are invested into model portfolios of Fidelity and non-Fidelity mutual funds based on their time horizon, risk tolerance and investment goals. These model portfolios are managed by a team of investment professionals that includes Portfolio Strategists and Mutual Fund Analysts.
Sounds like “we make you answer a short questionnaire and the computer spits out an asset allocation” to me. Let’s see how Fidelity constructs this person’s portfolio. I will mention here that this is an IRA account, so that taxes aren’t a huge concern.
Portfolio Comparisons
Benchmark Portfolio
This particular account used the “Growth w/ Income Portfolio” benchmark, which has an overall 60% Stocks/40% Bonds balance. Other portfolio options are Conservative (20% stocks), Balanced (50% stocks), Growth (70% stocks), Aggressive Growth (85% stocks), and All Equity (100% stocks). Here are the indexes and asset allocation for this portfolio.
Stock
50% Total US (Dow Jones US Total Stock Market Index)
10% Developed International (MSCI EAFA Index)
Bond
25% US Investment Grade Bond (Barclays Capital US Aggregate Bond Index)
10% US High-Yield (Merrill Lynch US High Yield Master II Constrained Index)
Cash
5% Treasury Bills (Barclays Capital 3-month US T-Bill Index)
Hypothetical Index Fund Portfolio
As mentioned in the statement, you cannot invest in an index. So, I created below a portfolio consisting of actual investments that passively track the above indexes with minimal costs. I chose the cheapest ETF that tracks the exact index if possible, not the cheapest ETF that was similar. I also included the annual expense ratios.
50% SPDR Dow Jones Total Market ETF (TMW) 0.21%
10% Vanguard Europe Pacific ETF (VEA) 0.16%
25% Vanguard Total Bond Market ETF (BND) 0.14%
10% SPDR Barclays Capital High Yield Bond (JNK) 0.40%
5% SPDR Barclays Capital 1-3 Month T-Bill (BIL) 0.13%
The total weighted expense ratio was 0.20%.
Actual Fidelity-Managed Portfolio
The actual choice of investments in this account matches the benchmark asset allocation closely, and included over 30 different mutual funds. You can view the entire mutual fund list here, but here is the overall breakdown:
51.5% US Stock Funds
10.0% International Stock
28.5% Investment-Grade Bonds
10.0% High-Yield Bonds
0% Cash
This includes a mix of twenty (!) different actively-managed domestic stock funds from both Fidelity and outside companies like Janus and T. Rowe Price (Okay, 1.5% was in one index fund – S&P 500 Fidelity Spartan.) The average expense ratio for these was approximately 1%. Six different international stock funds were included, with an average expense ratio of ~1.2%. The overall bond fund expense ratios were 0.8%. This brought the total weighted expense ratio to ~0.94%.
Performance Comparisons
Now for the important part, returns after all fees. This account was not ten years old, so the best long-term return number was the 5-year historical annualized returns. The statement was as of 6/30/09.
First up, we have the 5-year annualized of the Benchmark Portfolio, which as of 6/30/09 was 1.6%. Of course this is a benchmark, which doesn’t include any management fees or commissions.
I was unable to find performance numbers as of 6/30/09 for my Hypothetical Index Fund Portfolio as it is already 2010 (if someone knows how to do this please let me know). However, we can estimate the return since the total weighted expense ratio was 0.20%. If we estimate trade commissions to be $5 per trade x 5 ETFs = $25 per month… on a $100,000 portfolio that is 0.30%. (Such trade commissions would be zero if held at Zecco or WellsTrade, given the account size.) Assuming the ETFs follow the indexes closely, then the 5-year returns would be in the neighborhood of 1.1%.
Now, what was the actual 5-year annualized return on this fully-managed account? -0.6%. Yes, negative 0.6%.
Conclusion
Over the past 5 years, the Fidelity Portfolio Advisory Service managed to construct a portfolio that lagged a simple index fund portfolio by 1.70% annually. That’s a huge difference over time. Use any compound interest calculator and stick in two numbers that differ by 1.7%, and you’ll see the effect of compound interest working against you for a few decades. Why did this account perform so poorly relative to its benchmark? Isn’t it supposed to beat the benchmark?
Too many advisors. To me, if people choose to hire someone to manage their investments, it would be to tap into their expertise and special insight. I’d want him/her to make calculated bets that will beat the market. Putting my money in 34 different mutual funds, each with their own team of advisors, seems like everyone’s bets would cancel each other out.
While the reason given for so many funds was “diversification”, the only phrases that came to my mind were “overlap” and “lack of focus”. You don’t need to own a ton of funds to get diversification. With so many funds, you’d probably end up owning the same companies as the index fund anyway.
Costs matter. The actively-managed mutual funds are the first layer of expenses, which was a weighted 0.94%. Then there is the second layer of management fees charged by Fidelity, which includes all trade commissions and varies from .25%–1.7% based on asset levels. In this account, it was 0.8%. Thus, in order to simply match the benchmark, the investments chosen would need to outperform it by 1.74%. Every. Single. Year. That is a stiff headwind.
The really sad thing is, even if I just invested in the index funds through the Fidelity PAS and basically paid them to do nothing, I would have still done better than the funds they chose. 1.6% index – 0.2% index fund expenses – 0.8% Fidelity fee = gaining 0.60% a year. Compare that with losing 0.60% a year.
For a $200,000 portfolio paying 1.38% in portfolio management fees, that’s $2,760 a year. Don’t pay nearly 3 grand a year for a cookie-cutter asset allocation that doesn’t even match an index fund. It can be well worth your time to learn more about investments yourself. Here are some starting ideas.
February 16th, 2010 at 8:24 am
Mr. Bogle would be proud. Great analysis.
February 16th, 2010 at 9:55 am
Uh oh, the Fidelity hawks are going to be after you for exposing this scam.
February 16th, 2010 at 11:03 am
Excellent evaluation but there is more (on the downside). About 3 years ago, I did an extensive evaluation of my portfolio with Fidelity as I was rolling over my company 401k and pension into a Fidelity roll-over IRA. When they presented their proposal of the mutual funds they would hold and manage for me as part of the PAS , I was struck by the large number of non-Fidelity funds and this seemed very odd. On further investigation, I found that many of these funds had 12b-1 charges. So not only were they on average charging me 1.5% for management fees, but also directing me into funds where they could rake additional profits.
There were some other downsides, but none as substantial as the one mentioned above and in your comments.
I have to admit they almost had me. But after the PAS proposal, I realized I did not need to pay them for all the overhead and went elsewhere for advice and low cost management (not assets under management) using index funds and asset allocation (Dimensional Funds, Vanguard, and Index Funds all managed at Schwab).
February 16th, 2010 at 11:29 am
I have a fidelity account and I get a lot of pressure from them to use their Portfolio Advisory Service; they keep calling every few months. now I know why they push it so aggressively; must be a big money maker for them. thanks for the hard work in exposing them.
February 16th, 2010 at 2:33 pm
I fixed the link to the scanned entire portfolio list.
I use Fidelity for a lot of things, but I would stay far away from this managed-portfolio service.
February 16th, 2010 at 2:55 pm
My wife’s 401(k) is with New York Life. Aside from the normal drawbacks of a small company 401(k)– tiny selection, no index funds, terrible online interface– this one has the added annoyance of three giant pictures on the home screen. One says “I want to manage my account,” the prominent middle photo says “I want experts to manage my account,” and the last says “I want to learn more.” The “learn more” material is so unhelpful it effectively pushes the account management service.
February 17th, 2010 at 10:36 am
Help
I have a PAS worth $600,000. with Fidelity since 7/07 when I retired I am still down approx.-7%, since I gave it to Fidelity. I have been thinking about switching to Vanguard but my wife ask what the difference the all charge you. Any thoughts about not having a PAS and not paying the quarterly expense. I know I will pay the funds expense but just have either Vanguard or Fildelity choose the funds.
I manage my 401 alot less simple. But don’t know if I could do the same for my main money. Looking for Help
February 17th, 2010 at 10:38 am
One more questions wouldn’t Vanguard just have a computer spit out the asset allocations?
February 17th, 2010 at 11:00 am
Since I have a PAS with Fidelity and I pay them a fee each quarter, who is paying the expenses and trades they make in my account? I never see a charge for a trade. Also since they have me in over 20 funds some with loads who is paying for that cost? Is it just take from the percent they charge me?
February 17th, 2010 at 1:50 pm
I second Chuck’s comment above. Index funds all the way.
February 17th, 2010 at 3:46 pm
Bud,
You are asking all the right questions and by visiting mymoneyblog you are headed the right direction. By going with index funds and doing simple asset allocation yourself you can save yourself thousands of dollars. Or you can go with advice from Vanguard which I would trust. I suggest you do not go with an asset under management model. Say that there is a 2% charge by Fidelity for PAS. That’s $12k/year for you. Are they providing that kind of value? One way of thinking about it is that 12k=60 hours at $200 an hour. Are you getting that kind of service you would expect for that?
For your education I suggest:
http://www.bogleheads.org/
It’s the perfect forum for asset allocation beginners and pros. Look at their reading list.
I am a big fan of Paul Merriman and his firm for all the free advice they give and their model portfolios: http://www.fundadvice.com/port.....portfolios
Get his book. But, they have an AUM model which I don’t believe in so I don’t use them (I’m with Evanson Asset Management if you want to google them). However, their portfolio advice is very good and although their podcasts are too ‘folksy’, the content is usually very good.
Good luck.
February 17th, 2010 at 6:25 pm
@Bud – The trade commissions are included in your quarterly fee.
The fund load expenses are taken from your account balance, which may be hard for you to see. For example, they might spend $10,000 on a fund but you’ll just end up with $9,500 of it to start, and you might think that’s just market volatility. They’ll justify by saying you’ll have lower annual expense ratios in the long run, but that’s just compared to the other share classes.
Annual expense ratios are taken daily bit-by-bit out of the net asset value (NAV) share price of the mutual fund. It won’t be a line item on your statements.
February 17th, 2010 at 9:55 pm
The .25%-1.7% management fees are ridiculously high, borderline rip off.
You can find portfolio management services that charge a fee of .10% to .25% based on asset level.
February 18th, 2010 at 8:06 am
I feel that you really need to have a significant amount of assets to benefit from hiring a money management firm and I don’t mean Fidelity, Schwab etc. If you are going to go with these types of firms then you are probably better served by a portfolio consisting of low cost index funds properly allocated. I do know of some high net worth, institution management firms that have excellent long term records of outperforming the market over long periods but then again most investors do not have the scratch to get that kind of service. Really the whole industry is a marketed collection of smoke & mirrors. That is why many of the smartest minds in the financial money management industry suggest the avg investor stick with index funds.
February 18th, 2010 at 9:10 am
I never see a charge for a trade. Also since they have me in over 20 funds some with loads who is paying for that cost? Is it just take from the percent they charge me?
February 18th, 2010 at 2:39 pm
Another brilliant expose of the pointlessness of managed fund services. A handful of ETFs can get most of the asset allocation covered at a fraction of the annual cost.
Personally, as well as my passive vehicles I do hold some individual stocks and indulge in a bit of trading, but at least I get to benefit from the fun of wasting money, rather than paying someone to do it for highly renumerated day job!
February 20th, 2010 at 5:35 am
[...] week is from My Money Blog. Jonathan looks at how a reader’s holdings have been analysed by Fidelity’s portfolio review service, and finds that they’re basically being stuffed with a higher cost, lower return alternative [...]
February 25th, 2010 at 4:51 am
Hey,
Thanks for the informative review, helped on this end.
As for your backdated market close prices, I don’t know if this helps – but when you enter new data into a new Morningstar portfolio, you can enter the purchase date and then click the $ button. This brings up the market close of the date. The only caveat is that this service is still sort of far from perfect, but maybe it helps.
February 25th, 2010 at 11:10 am
@”Ex-Fidelity”- “On further investigation, I found that many of these funds had 12b-1 charges. So not only were they on average charging me 1.5% for management fees, but also directing me into funds where they could rake additional profits.”
Look at Fidelity’s website there is a net vs. gross fee. All 12b-1 fees Fidelity recieves are credited back to the customer. Also they do not offer a portfolio that charges 1.5% (unless you are speaking of expense ratios + management charges)
@ Jonathan – Fidelity as an institution is not charged a Load for loaded funds you come across in the portfolio, so the client would not pay the load either.
Saying that…I agree with the general topic of conversation and the chance of Fidelity beating this bechmark very well may not happen. I would just emphasize the fact that with the ETF approach you need to make sure you rebalance and stick to a strategy (not jump in and out of the market based on emotion). If you are able to successfully take this approach over the next 5 yrs (which almost no individual investor has historically) you have a good shot at beating the “experts”.
February 25th, 2010 at 10:19 pm
Riletrade
In the Portfolio Advisory Service documents given to me from Fidelity there wasn’t anything I could see that said no 12b-1 charges. On the “Growth Portfolio-the Details” page they recommend 24 funds. Of these 24 funds only 7 are Fidelity which is what made me curious about the whole proposal. I mean, here is (was?) the largest mutual fund company in the world and they could not find funds in their own family to offer?
Here is a sampling of the data:
Name – Symbol – 12b-1 – expenses
August 2007: Jennison Growth Fund – PFJAX .3 1.04
Today: 5.5% front load; 1.13% finance (from google finance)
August 2007: Legg Mason Opportunity Trust – LMOFX .25 1.6
Today: 1.29% expense .25 12b-1
and…(12b-1, fees)
RSVAX (.25, 1.34)
ITHAX (.25, 1.18)
…
you get the idea.
In addition to the above fees in the PAS document (page 20) it states, “…your estimated net annual fee would be 0.74%”
February 25th, 2010 at 11:10 pm
If you read the PAS fine print, it seems like Fidelity reduces your portfolio management fee paid to them by the amount of “kickbacks” it receives from mutual funds. In theory this would make it a wash, although some customers may just see a cheap fee and not know it was subsidized by money paid to Fidelity by other mutual fund providers.
February 26th, 2010 at 10:42 am
Jonathan,
The issue I had with Fidelity is the nature of their offerings and the fine print. Perhaps it’s bad marketing collateral and lack of clarity on their part on the overall fees. But, as we know, fees is one of the things we can control in our selection of investments. If I can’t understand it, I won’t do it.
I want to say that Fidelity’s offerings were in line with asset allocation models and it’s better to pay Fidelity’s additional fees than have no plan at all. However, for the knowledgeable investor, there are other alternatives for portfolio advice at significantly less cost. For example, Vanguard’s services or fixed fee services which do not use assets under management. Or, models can be built from sites like yours or others.
thanks
March 19th, 2010 at 6:06 pm
Great blog; just did a rollover IRA to Fidelity, had meeting about PMS asset allocation, was asked my risk level number (1 thru 10–I said 6) and bingo, got the pre-cooked prospectus with the asset allocation chart with a bunch of both Fidelity and non-Fidelity funds. Now I’m not sure whether this is worth it based on these postings or should I just select 3 or 4 funds or index funds and monitor them/change every 6 months. Age 62 and I need to temporarily withdraw some in between jobs but also want stronger growth to make up for past losses. Was stuck in basically cash for last year and missed the 60% jump; don’t want to make same mistake. Any ideas/suggestions? Would active trading (not day trading, but more like monthly) with portion of rollover in say 10 stocks be good to “pump” up the IRA a la Jim Cramer advice, etc.? I agree that if you pay for management, they should be more proactive in protecting against losses.
April 10th, 2010 at 9:28 am
I would ask yourself why you were “stuck” in cash and missed the market rally. Was it because you were emotionally involved? Trying to time the market and got in/out at the wrong time? Where you frozen to the point where you didn’t know what to do? Those kind of mistakes can REALLY hurt a portfolio’s return in the long run. I would say if you are ready to commit to a discipled strategy and stick to your asset allocation & rebalancing plan, you are ready to manage the portfolio on your own. You can also think about taking 10% of your portfolio to invest in individual stocks to see if you can get lucky with a few and boost your overall return. But you also have to be prepared to do your homework (jim cramer says an hour a week per stock, so thats 10 hr/week) on those stocks. If you are honest with yourself and don’t think you will have the time, expertise, or interest to keep up with the management of your portfolio, best to have someone do it for you whether it be through actively managed funds or professional management.
April 11th, 2010 at 11:31 am
Great analysis of fido’s pas.
My wife’s rollover IRA ($325K+) has been with Fidelity PAS for several years. Her advisor kept her invested during the recent crash. All of her friends bailed out of the market, missed the rally and are still out.
While my wife balks about the fees (<.09) she sleeps well. I manage her other 401K ($50K+). If I managed the IRA, I am not certain I would have prevented her from joining her friends and bailing out as well.
Maybe the best approach is to have some management diversification!?
Regards,
tennis
May 17th, 2010 at 3:53 pm
Bud said:
“I have a PAS worth $600,000. with Fidelity since 7/07 when I retired I am still down approx.-7%, since I gave it to Fidelity. I have been thinking about switching to Vanguard but my wife ask what the difference the all charge you.
One more questions wouldn’t Vanguard just have a computer spit out the asset allocations?”
I realize I’m very late to this thread, Bud, but the difference is simple: while Vanguard’s portfolio advice services will also have a computer spitting out cookie-cutter allocations, they will recommend a portfolio with a small number of low-cost index funds, one for each asset class. So, instead of 8 different international funds like the Fidelity PAS, they’ll put you on Total International Index Fund or its three non-overlapping components (the Europe, Pacific and Emerging Market funds).
You can also expect your portfolio annual average expense ratio at Vanguard to be in the region of 0.20-0.30% (and even less if your portfolio is large enough to qualify for the institutional funds, or if you go the ETF route). So yes, they all charge you, it’s just that Vanguard’s going to charge you less than a third of what Fidelity does.
May 17th, 2010 at 3:58 pm
Great analysis. You should check out the holdings for the Fidelity Freedom target data funds—they have exactly the same problem as the portfolio you’re looking at, even if to a somewhat smaller degree (about 21 funds instead of 34).
“While the reason given for so many funds was ‘diversification’, the only phrases that came to my mind were ‘overlap’ and ‘lack of focus.’”
Well, the first phrase that comes to my mind is “let’s milk these suckers for a lot of fees and spread the wealth around to all of our less popular funds.” With a portfolio this badly designed, I can only blame malice.
June 9th, 2010 at 8:30 pm
They have a lot less funds now, moving to sub-advised funds to cut underlying expenses, utilize etf’s and reduce overlap. Fidelity also has 5%-8% of portfolios out of benchmark using TIPS, commodities and leveraged loans. Fee structure’s been reduced greatly as well. My advisor was buying stock in March of 2009 when I wanted to suck my thumb in the corner. That’s why I pay them .68%
July 7th, 2010 at 9:30 am
For starters, Fidelity is a very reputable company. PAS is an excellent solution for the majority of the population, because individual investors have a terrible track record of buying high/selling low. The main idea behind Asset Allocation, which is what PAS subscribes to, is risk management. You pay a fee for access to closed funds, loaded funds which you don’t have to pay a load for, and a disciplined research and rebalancing process. Probably the greatest benefit, is having a financial advisor, assigned to keep you abreast of the market, but mainly to keep you away from yourself. Who is there to tell you not to sell out of a freedom fund, or an index fund? no one. if you are concerned and want to sell out of the market, as lots of people were in say, march of 2009, PAS was buying more stock positions, and fully funding each asset class to ensure participation when the bull market hits. You pay a fee. Big deal. If you dont’ realize that paying this fee will fatten your investment account long term, then you are clueless. No one can predict the swings of the market, but long term, these programs are designed to give investors a much better chance than if they were on their own. Also, benchmarks aren’t there to be beaten. As mentioned above, fee’s make that nearly impossible, but if you can find a way to invest in a blended benchmark, go nuts. Again, you are responsible then to track/rebalance, and stay disciplined, and can’t be upset if active managers crush index funds every now and then as they did last year.
July 7th, 2010 at 10:39 am
@tony – Why not also disclose whether or not you work for Fidelity? Your IP addesss is from Fidelity Investments, so that suggests that you do. Isn’t that the type of thing they would teach you to do in such a reputable company?
July 20th, 2010 at 8:33 am
I have been investing for 30 years. I joined the PAS program 3 years ago. As tony said, Fido is a reputable company. Their service is very good. I can always contact my account manager. The other point is paramount. I joined PAS to take the emotion out of my investing decisions. One bad decision to get out at the bottom and not know when to get back in will cost your the equivalent of many years of sub 1% fees. I agree with the over diversification comments and they seem to be taking steps to correct this. As I get older I sleep better at night this way and not have to worry about outfoxing the market and potentially making a big mistake. I don’t have as much time to recover anymore. I have made mistakes in the past and I don’t want to make anymore. Yes it’s conservative but I think my risks are lower this way. I have worked for 35 years, have a big nest egg, and I want to make sure it’s there for me when I stop working working. My biggest investing mistakes have been driven by emotion. The PAS service takes the emotion out of the equation.