The charges you pay for investing your money is a really big deal. It’s important to know what you’re paying and if you are getting your money’s worth. John Bogle, the founder of Vanguard and a thought leader of the financial services industry said it best. “The miracle of compounding returns is overwhelmed by the tyranny of compounding costs.”

Why do costs matter? At first glance, investment charges may not look very big. But they add up, compounding along with your investment returns. In other words, you don't just lose the fees you pay each year—you also lose all the growth that money might have had for years into the future.

Common fees for investors include expense ratios, investment management/advisory fees, transaction fees, load fees, surrender charges, commissions, account fees, and custodian fees. Let’s take a deeper look at a couple of fees that can really impact your long-term returns in a negative way.

Expense ratios for mutual funds vary greatly. These are the fees you pay the investment company to manage the funds. MorningStar, in their study named Fund Fees Predict Future Success or Failure, found a straightforward relationship between fees and performance. The higher the fees, the lower the performance. So if you have a fund that’s charging 1.5% and there is a similar one charging .35%, you should consider the less expensive fund. If you’re told the expensive one is really worth it, be sure to check out its long-term performance and try to find proof that the higher expenses make a difference.

Next, let’s consider financial advisor fees. A typical financial advisor fee is 1%, but they're often charged on a sliding scale. So the more assets you have under management, the lower your fee percentage will be. While 1.02% was the average financial advisor fee for a $1 million account in 2021, a $50,000 account paid closer to 1.2% on average and a $30 million account paid 0.59%, according to an AdvisoryHQ survey.

So, are you getting your money’s worth out of a 1% advisor fee? You may be if you’re also receiving tax advice, estate planning help, or other help beyond just managing your money. If you have $500,000 under management with the advisor, you are paying $5,000 per year. Another way to look at it is as a percentage of your investment earnings. If you earn 8% per year, with a 1% you are paying 12.5% of your earnings to that advisor. This seems pretty steep, and you had better be confident that what you’re getting is worth all that lost future earnings. In most cases, I doubt it. Personally, I don’t get why most people pay such high fees. If you go to your accountant for advice, do you agree to pay them 1% of all your money each year for the rest of your life? Probably not.

One of the single best improvements in financial services in recent years has been the lowering of fees (index funds, ETFs, free trades) and the availability of information. Now you can easily reign in your costs by using companies like Vanguard, Charles Schwab, or Fidelity. There’s no reason to pay high fees anymore. Even for the smallest of investors.

If you feel that you need help in putting together a low-cost investment strategy for your retirement dollars, let’s chat.

Enjoy the Journey!