Why it pays to know your investing fees
What’s that small sales commission going to cost you? Plenty, if you factor in lost compound interest.
U.S. NEWS & WORLD REPORT
AUGUST 20, 2019 - INVESTING
By Lou Carlozo
An educated investor needs to understand that not all fees are alike. (Photo: Getty Images)
IF THE TIRED OLD CLICHÉ applies and the best things in life are free, then surely its opposite does as well and the worst things in life are fee. ATM fees. Concert ticket surcharge fees. Airport tax fees. How shall we count the feeble paths to hair-tearing aggravation?
But if you're an investor, perhaps no fee rankles the spirit and wrangles the portfolio quite like the ones investment managers and financial advisors might overcharge.
And while it's possible to sweep such charges under the rug as the cost of doing business, investors do so at their portfolio's peril.
"I see it every week, when I ask investors questions," says Scott Krase, founder and president at CrossPoint Wealth in the Chicago area. "Whether in a meeting, video conference call or on the phone, I ask questions about their current investments. I ask if they know the risk they truly hold and what do these investments cost them. The answer is the same. They don't know."
Yes, but they absolutely need to know.
"Fees take a percentage of a client's return over time," says Ryan Goldenhar, partner advisor at AdvicePeriod and based in San Diego. "The higher the fees, the lower the benefits of compound interest for a client."
Albert Einstein supposedly called compound interest the eighth wonder of the world, adding: "He who understands it, earns it; he who doesn't pays it." Safe to say that if he weren't dabbling in the relativity thing, Einstein might well have made a splendid investment guru. For as money accrues in a portfolio, you can easily reinvest it – think of dividends – and create a mountain of money where none once existed.
For example, let's take $5,000 with a monthly addition of $10, compounded 10 years over a return rate of 8%. You'll end up with $12,553. Now, let's do it again: You're now up to $28,840. One more time, and in 30 years you've got a whopping $64,000. And all it cost you was 33 cents a day and some patience.
If you tried the same thing but did not contribute that $120 – which a financial advisor's commissions and hidden fees could far surpass – here's what happens: You'll have just $50,313 after those same 30 years, or close to $13,700 less. (You can run similar calculations at investor.gov, a website of the U.S. Securities and Exchange Commission.)
The trouble is, many people invest greater sums and hence miss out on much more money than that.
"Fees can be silent killers in a portfolio," says Daniel Kern, chief investment officer at TFC Financial Management in Boston.
TFC is independent and "fee only," but don't be confused by the term. It means they fulfill a fiduciary responsibility to always act in their clients' best interest. They do not accept any sales-related fees or compensation, which is where charges really begin to kill an investor.
"Managing costs and taxes is an important aspect of selecting an advisor or mutual fund," Kern says. "A 1% annual fee on a $500,000 investment at a 6% return over 20 years compounds to more than $180,000."
"Over an investors' lifetime, excessive fees can take an astonishingly huge share of the investors nest egg," says Stefan Sharkansky, creator of the Personal Fund analyzer site for advisors and individual investors. "Although some managers do beat the market before fees, it's impossible to know in advance who the lucky managers are going to be."
Investors should observe two types of fees, says Carlos Dias Jr., founder of Florida-Based MVP Wealth Management Group and Excel Tax & Wealth Group.
"With investment advisors, a portfolio manager – the person who's doing the actual investing – might charge 0.5% more or less, while the financial advisor – the person overseeing the account and providing financial advice – might charge 1%," Dias says.
When fees pass those amounts, or commissions run high, it's time to take a closer look at your arrangement. Another danger sign: lack of transparency in how an advisor constructs a portfolio, says Mason Williams, chief investment officer at Coral Gables Trust in Florida.
"Minimal proactive contact from your advisor is a clue," Williams says. "It's important to ask for service expectations up front and what is to be expected as a relationship begins."
That's the key word: relationship. Some people need the financial equivalent of a personal trainer to get themselves in ship shape, even if other people can start and follow their own fitness regimen.
"If advisors are only charging for investment advice, then arguably the fees might not be worth it to an investor," says Matthew Schulte, head of financial planning at eMoney Advisor.
Indeed, one way around high fees is to work with a web-based, automated investing platform commonly known as a robo advisor.
"Depending on an investor's personal financial situation, it might make sense for them to work only with a robo advisor," Schulte says. "If their needs are simple, pursuing a low-cost, low-touch module is certainly one possible way to achieve their financial goals. However, as their needs become more complicated, an investor can greatly benefit from working with a planning-led advisor who can provide recommendations based on their holistic financial picture."
And of course not all fees are alike, and an educated investor needs to learn the difference, says Brent Weiss, co-founder of Baltimore-based Facet Wealth.
"Start by educating yourself on the total fees that you are paying," Weiss says. "Ask your advisor or your service provider for a summary of all fees so you know the true cost."
Because in the end, knowing and dealing with the total cost now is far preferable to and cheaper than dealing with it later.
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