How fees can impact your investment results
As with any product or service, there are fees associated with investing. These fees can affect your portfolio both positively and negatively. Our hope is that by writing this short educational piece we will help you see more clearly your current situation. Let’s break down the good news and the bad news.
The Good News
Never before has it been as cheap as it is now for good professional money management. The days of paying 2.5% to 5% for money management should be gone. The ability that investors have to find a terrific money manager for a small fee are better than ever.
In addition to lower fees, investors are now also getting more bang for their buck. In addition to the regular phone calls, your connection to those managing your money is greater than ever through blogs, websites, social media, etc. If you want to know what your money manager is thinking about the market you should know instantly by jumping online.
The Bad News
The bad news about fees is that people have no idea the impact that fees can have on a portfolio. Un-educated people are still paying their financial advisor the 2.5% plus fee for doing something that can be done much cheaper.
Let me visually show you what we mean by looking at three different portfolios.
Portfolio One – This portfolio is a commission based advisor charging 5%. This fee includes the cost of managing money, sales, advertising and other expenses. This is an old school example that unfortunately most broker dealers still implement today.
Portfolio Two – This portfolio is a fee only advisor charging a flat fee of 3%.
Portfolio Three – This portfolio is a fee only advisor charging a flat fee of 1.5%.
|Portfolio One||Portfolio Two||Portfolio Three|
|Total Dollar Amount||$100,000||$100,000||$100,000|
|Net Annual Return (after fees)||5%||7%||8.5%|
|Net Gain after 10 years||$162,889||$196,715||$226,098|
|Net Gain after 20 years||$265,329||$386,968||$511,204|
|Net Gain after 30 years||$432,194||$761,225||$1,155,825|
For those of you who like visuals, here is the graph of the numbers above.
By looking at these numbers you should notice the following . . .
- The difference after 30 yrs. Between Portfolio One (5% fee) and Portfolio Three (1.5%) is $723,631.
- The difference after 30 years between Portfolio One (5% fee) and Portfolio Two (3%) is $329,031.
- The difference after 30 years between Portfolio Two (3% fee) and Portfolio Three (1.5%) is $394,600.
- Lastly, you should know that if you are paying more than 1.5% for good portfolio management you are paying too much!
So what can you do about it?
The next step after realizing the impact that a little fee can have on investment returns is to find out how much you are being charged by your current advisor. If you are paying too much, find someone else to do the job. As you can see, the difference that these fees can have over time is the difference between enjoying retirement out on the lake fishing and working instead of retirement.