The majority of investors are in the dark when it comes to identifying the fees they pay in their portfolio and for many, what they pay to their advisor if there is one. This can be detrimental to your portfolio return over time. When I say detrimental, I mean it could cost a person many hundreds of thousands of dollars over time (while making others wealthy feeding off the account like a tic on a poor dog's ear).
Let's see how the fees add up for the average investor. Many folks pay an advisor either through loads (commissions paid to a salesman) or AUM (assets under management (1% or more is pretty normal). Then the investments cost them money as well, such as the expense ratio on mutual funds. That usually runs from .6% to 2% based on the fund. This could easily average 2.5% per year or more in total.
What kind of affect that will have on a real life portfolio? What do you end up with on a $100,000 portfolio, earning 9% per year over 30 years with a 2.5% yearly fee? $620,774 is the answer. Sounds pretty good, right? How much did you pay in fees over that time? That would come to $226,153! Now let's run those numbers using an all index portfolio with no advisor load or money under management.
What if we have the same $100,000 earning the same 9% (index funds outperform high fee managed funds badly over time) with no advisor and an all index portfolio costing .07% per year. Your fees equal $10,253, with a final portfolio value of $1,299,187. If you do the math, that comes out to a difference of $678,413! So yes, fees matter a great deal and it is worth your time and effort to reduce them.
Now, you might think to yourself, I am not paying 2.5%. Okay, how much are you paying? If you don't know, then you are almost always paying way too much! Let's be kind and say you got lucky and "only" pay 1% in total fees per year. What does that look like? You end up paying $121,459 in fees and end up with $981,411. That is still a loss of $317,776 from the all index portfolio. Fees still matter!
Here is a question for you. Why do almost all of us look carefully at the price tag when we go shopping and yet only a small percent of people look at the price tag when we go investing? Here is a little secret. Wall Street buries their fees inside the products so you never really see what you are paying unless you dig deep. Most advisors just take money out of the portfolio. Nobody ever sends you a bill.
This might explain why many people say they are paying nothing or almost nothing when investing their money. Because they did not get a bill, they come to the conclusion that the cost was $0. Wall Street does not work for free! Here is another way to frame the issue. If you are paying 2.5% per year in fees and your return averages 7.5% per year, you are actually paying 33% in fees on your money. Damn!!!
Here is another way in which many investors pay way more fees than they should. A load mutual fund keeps getting purchased by an advisor, producing commissions as often as possible. This is called churning and it is illegal, but hard to prove as the advisor makes their case (ego and greed could be in play here) on why an investment should be sold and a new one bought. He wins and you lose!
Here is yet another way in which many investors pay way more fees. A "new" and "better" annuity is purchased every 8 years or so to start the commission schedule all over again (an 8 year surrender penalty pulls in an 8% commission for example). When one surrender period runs out, its time for a new annuity! This is simply another form of churning where he wins and you lose. Beware!
Here is another way as it relates to crappy whole life insurance policies (universal life is just as bad). They tell you how wonderful this type of "investment" can be wrapped up in a life insurance policy. What is not explained is that usually, 100% of the first years premium goes to paying commissions to the salesman. If your monthly premium is $500, then you just got zapped with $6,000 in fees. Ouch!
So, what can you do about this issue? You can identify the lowest cost investment options in your retirement plan at work and if they are all high, scream bloody murder until someone changes the investment options. These guys can help. If you have high fee funds in an IRA or brokerage, move those accounts to Vanguard and invest in low fee index funds there. See a list of index funds here.
Would you rather use low fee Exchange Traded Funds? Here you go: VTI (total U.S. market), VBR (mid/small cap value U.S.), VIOV (very small cap value U.S.), VNQ (commercial real estate U.S.), VXUS (large international in developed and emerging markets), VSS (small international in developed and emerging markets), BND (total bond U.S. government and corporate). Buy and hold is still the mantra.
So, what happens if all of this is overwhelming to you? Reach out to the right folks for help. You can reach out to me. I am FREE. You can reach out to these guys and pay a small fee to get the portfolio into low fee index funds. You could reach out to a Vanguard advisor to get money moved over to index funds and then fire them and do it yourself (it is a lot easier once the money is at Vanguard).
Have you ever heard ignorance is bliss? Sadly, it can be in the short run, but not long term. Many people stay clueless on this issue of fees as they defer to "their guy" who is managing the portfolio. In many cases, people put a fox in their hen house to protect their chickens and the eggs they hatch. It does not go well from there. The fox empties out the hen house and you're left with scraps.
Here is a pretty simple way to look at this situation. You can make financial people and their families wealthy or you can make you and your family wealthy. So, at the end of the day, it is up to you to decide who and where you want your money to go. It's up to you to decide what fees you will pay when investing. It is up to you to decide how you want this situation to look in 10, 20 or 30 years. It is up to YOU.
You can learn more on this issue by watching this video and this video. You can listen to Warren Buffett and his recommendations here. The truth is waiting for you. If you or a loved one are not convinced at this time, then you have probably put up a wall to stop new information from entering your brain. It's time to push pride aside and make the needed changes. Financial Freedom awaits!
