25 Jan Clarity about investment fee deductions

Q. As a sole proprietor, it is my understanding that the “advisory fees” of my managed portfolio are deductible expenses on my year-end tax return as bank fees. This makes these high fees of an advised account much more palatable to me, though I wonder about indexing in retirement, which I am about five to 10 years away from.
— Getting closer

A. You do have a potential deduction here, but not in the way you think.

Advisory fees for your managed portfolio are deductible but not as a business expense against your sole proprietorship income, said Gail Rosen, a Martinsville-based certified financial planner.

She said the same thing applies to charitable donations that are deducted as an itemized deduction and not allowed as a business expense against your sole proprietorship income.

“The investment advisory fees are an expense that is classified as a `miscellaneous itemized deduction,'” she said. “It may result in a tax deduction for you if you itemize your deductions depending on your adjusted gross income (AGI) and the total of all your miscellaneous items.”

First, Rosen said, you compute the total of all expenses that fall into the miscellaneous deduction categories. This amount is deductible as an itemized deduction but only — and to the extent — that it is greater than 2 percent of your AGI. Note that since it is an “itemized deduction,” it can only be claimed if you itemize your deductions and don’t claim the standard deduction.

“Other miscellaneous itemized deductions include tax preparation costs — not for your business — employment related expenses, job search expenses, other investment expenses such as investment publications and the cost of a safe deposit box,” she said.

We want to make sure you’re using the right term when you talk about “advisory fees.”

You may be confusing “advisory fees” with asset management fees, said Brian Power, a certified financial planner with Gateway Advisory in Westfield.

“Typically, an advisor charges `advisory fees’ for financial planning and investment oversight services,” he said. “The financial planning services can include, retirement planning, retirement income planning, education planning, estate planning, tax guidance and insurance needs analysis.”

Power said the investment oversight services can include asset allocation study, rebalancing, investment consulting, investment vehicle management, and tracking performance.

He said you can speak with multiple advisors and each one may handle the investment consulting and investment vehicle management services differently.

“This is where you would find differing philosophies about indexing versus active management,” Power said. “It’s the actual vehicles an advisor uses to implement your investment strategy that are actively-managed versus passively-managed.”

These vehicles differ greatly in costs, Power said. In most cases, your passive investment vehicle choices are far less expensive than their comparable actively-managed investment vehicles.

If you mean by saying “indexing in retirement” that you would like to buy an assortment of passively-managed indexed funds and hold for the long run instead of having an advisor provide the list of services above, it’s definitely an option.

“Keep in mind, once you’re retired and you start living off your investments versus accumulating investments, a good solid financial planning and investment process and discipline might be worth the advisor’s fees,” Power said. “Making investment mistakes while still working can be masked much easier than once you start drawing on your assets.”

Given your timeframe to retirement, consider participating in NJMoneyHelp’s money makeovers. They’re free, anonymous, and you’ll get an objective second opinion about how your money is working towards your long-term goals. Just send us a note at .

Email your questions to .

This story was first posted in January 2016.