One reason the investment advisory business is so profitable is because most people don’t understand how investment firms charge for services.
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!
- 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!)
- Shop around. The difference between 1.25% and 1.0% can be significant over a long period of time.
- If you enjoy finance, don’t rule out investing on your own and purchase low-cost mutual funds along the way.