Intelligent

Investment Pieces

Why you need to run if your advisor is charging you total fees of "only" 2%!!!


Financial planners, advisors, banks, insurance companies, and wealth management firms, that invest your money will typically charge you an asset management (AM) fee of between 0.50% to 1.5% of your total assets per year.

In addition to the asset management fee, advisors may invest your money into mutual funds that carry an additional management expense ratio (MER) and trading expense ratio (TER) that may total another 1% to 2% of your assets. If your advisor has you invested in mutual funds with these type of fees, this is a huge red flag!!!!

The total fees, i.e., AM plus MER plus TER fees, can add up to 2 to 3% per year. And the advisors and mutual fund companies collect their fees from you whether the market goes up or down!

Now 2 to 3%, doesn’t seem like much, you say. After all, your advisor is a nice guy/gal, and they know the names of your parents/friends/kids.

Well, here are two scenarios that demonstrate why you need to run if your advisor is charging you total fees of “only” 2%!!!

Scenario #2

  • You are 18, you don’t have any money, and your job pays the minimum wage of $11.40 per hour.

  • But you do want to learn about investing, and you will find a way to save one hour of your pay per week, which will total $592.80 per year ($11.40 x 52 weeks = $592.80).

  • You have decided to invest the money for 40 years in an all-equity portfolio earning 10% per year. Once again, Betty Sue says she will only charge you total fees of 2% per year.

Let’s see the impact:

Well, an investment of $592.80 for 40 years, earning 10% per year, will grow to $262,360. Again, hard to believe, but true.

But, Betty Sue is going to charge you 2% a year – doesn’t sound like much, after all, she agreed to take you on even though you had very little money.

Now your annual investment of $592.80 is only earning only 8% per year for 40 years, and will grow to only $153,569.

Once again, Betty Sue's teeny, tiny, reasonable fee of only 2% per year has just cost you $108,800 or 41% of your money!!

Key Lesson: Fees Matter!!

Mutual funds can be very bad for you. If Betty Sue or Bob or a bank is charging you an asset management fee and then putting you into high-cost mutual funds, you need to have a conversation with your advisor.