By Wayne Cooper
CEO, Wealth Management Exchange

Many high net worth investors have become skeptical of the fees they are being charged by their wealth managers. A 1% fee may not seem like a lot, but to pay $200,000 per year to an advisor to oversee a $20 million portfolio adds up quickly over the years. And a 1% fee on a portfolio that yields 8% a year is actually a 12.5% tax.

With the effect of compounding, here's what a $20 million portfolio would grow to over the years with an 8% investment return (before taxes) at different levels of fees:

As you can see, these fees add up over the years.

And keep in mind that there are often hidden fees. One advisor I work with charges a 1% management fee, but also charges administrative and trading fees that tack on almost another 0.5%

Remember the Big Picture

While fees are important, they're not the primary issue. Having a trustworthy and competent financial advisor is the key. A good advisor can create tremendous value for you and a bad one can destroy value. Additionally, you must consider your own investing abilities, discipline and time availability to determine whether you could have achieved comparable returns on your own. For these reasons, fees, while important, are of secondary importance to the quality of your advisor for most clients.

According to a recent report by State Street Global Advisors and Wharton, most high net worth individuals aren't all that concerned about the absolute level of the fees. What they are concerned about is clarity and competence. While you might not avoid management fees, you should insist on getting value for the fees and not overpaying.

Savvy High Net Worth Investors Know When Fees are Justified

Paying an advisor 1% (or more) may make sense for certain categories of investments where there is a large variance in performance (such as private equity, venture capital, hedge funds), especially if an advisor can earn back more than his fees by superior allocation and risk management decisions. However, it is harder to justify this type of fee for basic stock and bond investing. Currently there are attractive, low cost mutual fund and ETF (exchange traded funds) options that provide good diversification and performance. The more control you have over your portfolio, or at least certain parts of it, the better you can direct investments towards those with low fee structures and save substantially.

Many sophisticated high net worth investors we know get substantial discounts on their stock and bond investments. Some leading firms charge <0.5% for overseeing equity portfolios of over $10 million and some don't charge any management fee for bond portfolios (rather, they charge modest transaction fees for buy and sell orders as they create a laddered bond portfolio).

Some sophisticated investors we know use external advisors for their alternative investments (hedge funds, private equity, real estate, etc.) where there are tremendous performance differences between top and bottom quartile investors, but use ETFs and low cost mutual funds to get diversified stock and bond portfolios with low fee dilution (since more than half of stock and bond managers don't outperform their market indexes on an after fee basis).

Only you can decide what's right for your investment plan, but you should keep an eye on the fees you are paying to your financial advisors and make sure you're getting your money's worth.