One reason the investment advisory business is so profitable is because most people don’t understand how investment firms charge for services.

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Investment fees are collected in a similar manner as your paycheck’s tax withholdings: they’re automatically deducted from your account. And because people don’t write a check for those advisory services, they just let it go — and rarely consider these automatically deducted fees as “real” money. But make no mistake about it: The fees deducted are real money — real money you’ll need during retirement, to pay for your children’s college, or for a down payment on a second home.

Let’s assume you’re considering hiring an advisor under the following assumptions:

  • 35 years old
  • Begin with $100,000 worth of investments
  • Invest $5,000 per year for 30 years
  • Investments earn 7% per year
  • Pay 1.25% per year for advice

Over thirty years, the time value of these fees come to $365,837. Keep in mind, the $365,837 DOES NOT include commissions that you might pay your advisor as well, or the fees that actively-managed mutual funds charge you. You can just add those fees to the total. Why are the fees so large? Because over a long period of time, 30 years, 1.25% really adds up!

Tilly’s advice:

  1. Pay VERY CLOSE attention to all advisor fees and make sure you understand how much you’re paying. (We’ll write another piece about fee details soon!)
  2. Shop around. The difference between 1.25% and 1.0% can be significant over a long period of time.
  3. If you enjoy finance, don’t rule out investing on your own and purchase low-cost mutual funds along the way.