To better understand the true cost, let’s go through a typical investment fee payment structure. Let’s say you have a nest egg of $350,000 being managed by an investment advisory firm that charges you 1.5% of that amount per year. Plus, the mutual funds where they invest charge 0.75% per year. That means you pay $7,875 ($350,000 x 2.25%) in fees per year. Those fees are automatically debited from your $350,000 investment account “returns” — so you never really feel the pain of paying the money.
Let’s also say you earn $80,000 per year so your after-tax income is roughly $60,000. Therefore, you’re spending 13.1% ($7,875/$60,000) of your disposable income on financial advisory services. After housing, this is probably your largest expense!
But what if these investment firms mailed you a $656.25 ($7,875/12) invoice each month and you had to write a check for these services right out of your checking account? Would you question the services versus the fees you’re paying? You’d sure feel the sting. What would you do with $656.25 per month? Save some for retirement? Save for children’s college? Enjoy more travel?
Here are 3 tips for reducing your investment fees:
- Clearly understand how investment fees are charged. See Tilly’s free guide.
- Look at the fees as if you’re mailing them a check each month.
- Don’t overpay for a “relationship” with your advisor.
More to come on this topic!