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Why fees matter a lot!

 

Are you paying a 1% annual fee for a fee-only asset manager to hold your hand while you invest? After 30 years this would be the equivalent of suffering a 26% market crash. After 40 years it would be the equivalent of suffering a 33% market crash.

 

Value of $100,000 that grows 6% per year but with a 1% annual fee drag:

  No fees With 1% fee Setback
Year 10 $179,084 $161,961 -10%
Year 20 $320,713 $262,313 -18%
Year 30 $574,349 $424,846 -26%
Year 40 $1,028,571 $688,055 -33%

 

From Bad to Worse

If you are merely working with a fee-based asset manager who is also charging a 1% annual management fee it is likely that your adviser has been further putting a drag on your returns by recommending expensive actively managed mutual funds instead of low-cost index funds. One study determined that actively managed mutual funds under-performed simple index funds by 1.1% per year on average over a 5 year period. If so, after 30 years this would be the equivalent of suffering about a 47% market crash. (click here to see 2% chart)

 

Value of $100,000 that grows by 5% per year but with a 2.1% annual fee:

  No fees With 2.1% fee Setback
Year 10 $179,084 $144,839 -19%
Year 20 $320,713 $209,783 -35%
Year 30 $574,349 $303,848 -47%
Year 40 $1,028,571 $454,434 -55%

 

From Worse to Disastrous

Were you sold a retail variable annuity? You can identify a retail variable annuities simply by looking to see if it has a surrender penalty. Retail variable annuities have fees that total as much as 3% to 4% per year!

 

Value of $100,000 that grows by 5% per year but with a 3% annual fee:

  No fees With 3% fee Setback
Year 10 $179,084 $132,061 -26%
Year 20 $320,713 $174,402 -46%
Year 30 $574,349 $230,318 -60%
Year 40 $1,028,571 $304,161 -70%

 

Value of $100,000 that grows by 5% per year but with a 4% annual fee:

  No fees With 4% fee Setback
Year 10 $179,084 $119,061 -34%
Year 20 $320,713 $141,756 -56%
Year 30 $574,349 $168,776 -71%
Year 40 $1,028,571 $200,948 -80%

 

Better Options

 

Vanguard, Fidelity and Schwab offer "light" advice service. You invest on your own with computer modeling, but if you need to speak to a human adviser, help is available. Vanguard only charges 0.3% per year. After 30 years this will only cost you about 9%.

 

Value of $100,000 that grows by 5% per year but with a 0.3% annual fee:

  No fees With 0.3% fee Setback
Year 10 $179,084 $173,784 -3%
Year 20 $320,713 $302,009 -6%
Year 30 $574,349 $524,844 -9%
Year 40 $1,028,571 $912,096 -11%

 

You can invest in index funds that have fees of between 0.05% (VOO - S&P 500 index) and 0.07% (AGG - Total US Bond Market Index). Now let's see what kind of a drag 0.06% will put on your portfolio.

 

Value of $100,000 that grows by 5% per year but with a 0.06% annual fee:

  No fees With 0.06% fee Setback
Year 10 $179,084 $178,013 -0.6%
Year 20 $320,713 $316,886 -1.2%
Year 30 $574,349 $564,100 -1.8%
Year 40 $1,028,571 $1,004,172 -2.3%

 

 

 

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