When it comes to investing, there are some things you can’t control. However, the one thing all investors can control is how much they pay in fees.
Numerous studies and surveys over the years have consistently demonstrated that when it comes to investment fees, most investors are unaware of two things: how much they are paying, and how they are paying for it.
One of the biggest reasons most investors are unaware how much they are paying is due to the fact that the vast majority of financial advisers and all mutual-fund fees are automatically deducted from their accounts.
Financial adviser fees
One of the most common methods of compensation for fee-only and fee-based advisers is based on the number of assets they have under management. When it comes to being compensated for their services, more than 95% of financial advisers choose to have their management fees automatically deducted from their client’s accounts. The problem with this “out of sight, out of mind” compensation arrangement is that a financial adviser’s fees are reducing the returns of a portfolio you are paying your adviser to grow.
The industry average asset management fee is 1.1%. At Capital Wealth Management, our asset management fee is 0.5%; however, unlike most financial advisers, we never deduct our management fee from our client’s accounts. Every quarter we mail our clients a detailed invoice that allows them to write a check from a separate outside account, earning little to no interest for our asset-management services, thus keeping more money in their account to grow for retirement.
Mutual-fund fees
An additional fee that investor’s have is that associated with investing in mutual funds. Every mutual fund has fees and, similar to most financial advisers, all mutual funds automatically deduct their fees from their shareholders’ accounts. The average stock mutual fund has an expense ratio of about 1%. At Capital Wealth Management, approximately 75% of our clients’ assets are invested in index funds, which have an average expense ratio of 0.1%.
Both fees combined
Mutual-fund fees combined with any fees deducted from an account to pay for a financial adviser’s management fee can significantly reduce the rate of return an individual investor can earn over time. The average financial adviser’s fee of 1.1% and mutual-fund fees of 1% combine for a total pf 2.1% in annual fees deducted from an account.
At Capital Wealth Management, the total fees deducted from our clients’ accounts is 0.1%, for a difference of 2%. How much can this 2% difference in fees make?
Say two individuals each have the same starting portfolio value of $500,000, and earn the same average annual return (before fees) of 8% over 10 years. Portfolio A’s financial adviser and mutual-fund fees of 2.1% are automatically deducted from his account. Portfolio B chooses to pay his financial adviser’s feefrom a separate outside account rather than having it deducted from his account. As a result, the only fees deducted from Portfolio B are the mutual-funds fees of 0.1%. The results after 10 years:
Portfolio A’s total fees: $136,657; Portfolio B’s total fees: $7,201.
Portfolio A’s average return after fees: 5.7%; Portfolio B’s average return after fees: 7.8%.
Portfolio A’s ending value: $873,007; Portfolio B’s ending value: $1,068,721.
Portfolio B ends up with $195,714 more than Portfolio A. The $129,456 of savings in fees allows an additional $66,258 of earnings to compound. This additional 22% of savings is due entirely to Portfolio B’s lower fees.
The fact is that high fees reduce investment returns, and it’s important for all investors to understand what investment fees they’re paying, and how they are paying for them.
Martin Krikorian, is president of Capital Wealth Management, a “Fee-Only” registered investment adviser at 9 Billerica Road, Chelmsford. He is the author of the investment books, “10 Chapters to Having a Successful Investment Portfolio” and the “7 Steps to Becoming a Better Investor.” He can be reached at 978-244-9254, Capital Wealth Managements website; https://ift.tt/1ieUUGe, or via email at, info@capitalwealthmngt.com.
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November 29, 2020 at 05:47PM
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Investment fees you don’t realize you’re paying - Sentinel & Enterprise
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