Investors seriously underestimate the importance of the fees they pay. In fact most investors don’t even know what they are paying their financial advisor because it is secondary to the sales process. Once you are hooked you are not going to back off of the decision you have made to invest or negotiate the fees because of a few percentage points. It’s the law of small numbers. The amount is so small it just doesn’t matter to you and you trust them. Most investors pay a percentage of their assets every year in fees. Many pay two fees, one fee to their financial advisor and another for the investments the advisor uses. These fees are so insidious and so sneaky that you don’t see them. This is done on purpose because if you had to give your advisor cash or a check for your investment fees every month you would think twice.
I routinely see investors paying around 2% per year in fees. Many advisors charge 1 to 1.5% just for their “asset management” fee. Plus mutual funds and annuities have their own fees that can easily be 1 to 2%. It is not unusual for me to see investors paying close to 3% per year. That’s just insane. Those same people spend time fuming about the $10 a month checking account fee they have to pay at their bank.
In my experience the average mutual fund costs you around 1% per year and the average financial advisor charges 1% per year. That’s pretty much the standard. Those fees are paid every year and they go up over time because your investment balances go up. Every dollar that you pay in fees is a dollar out of your pocket and just because you don’t see it doesn’t mean it’s not happening. That’s what is so sneaky about it. Wall Street figured out a long time ago that this strategy over time makes them a lot of money and their customers don’t object because they aren’t really aware of it.
I see investors who are convinced they are not paying any fees at all and when I show them what they are paying I don’t think they believe me. Maybe the thought that they could be paying out that much money without getting a bill and writing a check is just so foreign they can’t grasp the concept. It’s sort of like having your utility bill paid from your checking account. You tend to think less about the amount. Most investors know they are paying but they say it’s not much. They really don’t care. But they should.
Let’s say you are “only” paying 1.5% per year and you have a $500,000 account. You are paying $7,500 a year or $625 a month. Would you write a check for $625 every month for the rest of your life to your financial advisor? No automatic withdrawals, you have to write the check every month, put it in an envelope and mail it to your advisor. You would have to think every month and ask yourself “am I getting a good deal”?
It is definitely a good deal for your financial advisor because over time the advisor gets more and more of your money. Let’s say your $500,000 earns 7% and grows over 20 years to $1.9 million. Now your fees are $28,500 a year and you have to write that check for $2,375 a month. Would you do that? Would you do that when you are retired? In this example your investment fees will cost you hundreds of thousands of dollars over 20 years. Probably more than your house cost you. For many investors paying those high investment fees could mean the difference between retiring at age 65 or needing to wait another 3 or 4 years.