Maybe you’ve heard phrases like “you’ve got to spend money to make money.”
Or “it’s not how much you pay, it’s how much you keep.”
I don’t know about you, but this type of thinking makes me cringe, especially when it comes to your hard-earned savings and investments.
Other terms and phrases that get thrown around to justify some of the ridiculous fees and expenses in the financial advice industry include “this is a unique, limited-time offer” and “you’re only being offered this opportunity because you’re one of our top clients.”
These are just a few examples of some of the strategies and tactics used to entice you to subject your money to these “can’t miss” opportunities that will cost you an arm and a leg whether or not they prove to be a good investment.
For an entertaining example of what I’m talking about, read this May 21st article from Josh Brown, aka “The Reformed Broker.” Specifically, pay attention to the fictional dialogue between a “transparent broker” and their client about non-traded REITs.
Of course, it never happens like this.
Instead, many brokers rely on their sales training to overcome your objections by focusing on features and benefits. Kinda like someone selling you a car. Or a vacuum cleaner.
But high fees and expenses aren’t always associated with unique or limited availability investments.
Recently, a client asked me to review her Roth IRA account held at an independent brokerage firm.
She suspected that she was paying a little too much in fees.
Unfortunately, her suspicions were correct.
After reviewing her account statement, I calculated that she was paying her advisor 3% per year and this fee was being deducted from her account quarterly.
And if that wasn’t bad enough, it gets worse . . .
The mutual funds her advisor had recommended for her Roth IRA had internal expenses of 1.22% to 1.51% per year.
In total, this woman is being charged as much as 4.51% per year in fees and expenses.
To put that in perspective, if the long-term average of the stock market is around 10% per year, in an average year, this woman is paying approximately 45% of her total return to fees.
More importantly, however, is the impact of these fees on her lifestyle.
I created a simple financial planning analysis to illustrate how these fees will impact her achievable lifestyle in retirement.
Here are the assumptions:
- The woman is 38 today
- She will add $5,000 per year to her Roth IRA every year until retirement
- She will retire at age 62
To illustrate the lifestyle cost of these fees, using the assumptions above, I created two scenarios.
One scenario shows my average client fee of 1.11% which includes the internal expenses of the funds I utilize. The second scenario shows a total annual expense of 4.5% which is in line with the Roth IRA I recently reviewed.
The only difference between the two scenarios is the amount of retirement income this person can comfortably and confidently sustain from this account from her retirement at age 62 for the rest of her life. I’ve assumed her to live to age 94.
As you can see in the image below, the REAL cost of the high fees is that she’ll have to spend $11,750 less per year in retirement.
That’s a difference of almost $1,000 per month.
Think of what you could do with an extra $1,000 per month in retirement.
Over her 32 years of retirement, that’s a total difference of $376,000 less money she’ll have to use for the things and experiences that are important to her.
Clearly, there’s a lot more that goes into your lifestyle financial plan than just looking at a single investment account, but having isolated the impact of fees and expenses in this sample plan, you can get an idea of the true lifestyle impact of investment costs over time.
If you have questions about or would like to review the total fees and expenses associated with your investment portfolio, I offer a free investment expense audit service.
I regularly encounter total fees in the 2-3% range when reviewing a portfolio. Sometimes, as in this example, it can be a lot more.
There is a less expensive, more effective way to plan and invest that will support your best lifestyle today AND in the future. Let me know if you’d like to learn more.
Image: Insurance Journal