We recently did a project for a new client, and reviewed some recent mutual funds in a retirement account. In researching the investments, we reviewed both the performance and expenses. The results were shocking. They were shocking both to the advisor as well as the client. She had no idea what she paid to purchase the funds or what the ongoing fees were. In this case she could have had a comprehensive financial plan (they received no plan whatsoever) with money left over, and much lower ongoing fees.
This is an eye-opener for many people, and something to pay attention to. It can have a significant impact on the growth of your investments. While transparency of fees has been mandated to a higher degree in retirement plans, fees are still a mystery to most investors.
The topic of transparency in financial services is very important to our firm. We founded Financial Freedom Planners to educate, empower and enrich our clients, and provide them with totally objective, impartial advice. Our fees are disclosed right up front, and we put them right in to our client agreement. This is a very different approach in our industry, and we do it for a reason. The Reputation Institute does a survey across 17 industries for reputation. In 2013 the financial services industry ranked dead last, #17 out of 17. We are trying to change that with our values, business model and process.
Ron Carson recently wrote a special article for CNBC entitled “Clueless Investors Blindly Pay Fees.” In a recent panel with consumer investors, the following two questions were asked. The first was “How many of you know the total cost of your investment management?”
According to Carson, most investors on the panel responded between .5% to 1.5%. The article has an evaluation chart to determine fees for an investment, including hidden costs. The actual numbers are between 1.5% and a whopping 3.5%. Keep in mind these charges are there each and every year you own the investment.
The second question was “How many of you believe that the fee you pay to your advisor is the only fee you pay?” The responses by the panel were as follow:
“Many panelists believed that, yes, the only fee they pay is the fee paid out to their advisor. Others said they were unable to get a straight answer from advisors when asking this question. But brace yourself: In reality, the fee paid to your financial advisor is not, in fact, the only charge incurred with investment management.”
On average there is a huge difference between perception and reality. Most investors believe what they pay their advisor is the only fee, which is generally not the case. In fact, a true total fee expense can be north of 3% per year, depending on the investments.
MSN Money has a calculator to determine how much you are paying in total fees for a given investment. It is our belief that investors can only make good decisions when all the facts are on the table. That’s what we do.
As pointed out in a recent article in the Guardian, it all comes down to compounding of return. In other words, if you invest two different funds that have identical returns over ten years, and the fees on one are 1% and the other 2%, you will have considerably more in the first example at the end of the period.
An example is ” Let’s say you invest $1,000 today in a fund that returns an average of 8% in each of the next 30 years, and that the management fee the fund charges is 1.5%. At the end of that 30-year period, your $1,000 will have become $6,394, and you will have paid out $3,668 in fees. If you paid only a fraction less in fees each year – 1.3% – you’d be paying only $3,267 in fees, and earning $6,796.”
We counsel you to ask your advisor to disclose the true costs associated with their investments…it makes a big difference over time! Fees chip away at your investments on an ongoing basis. Just say NO to high fees!
For a free white paper that gives you what questions to ask or what to look for regarding fees, go here to request a copy, or email us at firstname.lastname@example.org. There is no cost or obligation, and we are happy to help.