Understanding and Minimizing Investment Fees

October 2, 2014

I love listening to market pundits talk about how to beat the market, that gold is a great or stupid investment, which tech stocks are going to boom or bust, or about the coming market meltdown. It makes for great theatre… but horrible investing.

They -- and most investors -- spend too much of their time focusing on the things they can’t control, and ignoring factors they CAN control that could potentially have a huge impact on your long-term net worth.

So, what is a factor you can control? There are a few, but the fees you pay as an investor rank high on the list.

Let’s start with the fees you might pay a financial advisor. Advisors typically charge a percentage of assets under management. Having a financial advisor is usually a very smart move for the average investor, but there is no need to pay excessive fees that can have a dramatic, negative effect on the value of your portfolio.

Let me give you an example. Paying 2% each year in fees -- versus 1% -- on a $100,000 portfolio earning a typical market return, will decrease your portfolio by a whopping $148,000 over a 30-year period. My feeling is that no investor should be paying his or her advisor more than 1% per year, based on assets under management. I also encourage investors to use a “fee-only” financial advisor .

However, fees to the advisor are not the only fees you face as an investor. You should also understand that many fees are hidden. For example, some mutual funds can have extraordinarily high sales charges. Actively managed funds, which try to beat the market, typically charge higher fees than funds that simply track the market, called index funds.

Look at the fees you pay on each fund in your portfolio. You might be surprised at how expensive they can get. My preference is to invest in broad-based index funds that charge less than .25% per year.

If you do not choose to have a financial advisor, you can also have your portfolio with a full service or discount broker. A full service broker can give you advice, but you need to be aware that he or she is a salesperson who is paid on commission. There could be a conflict between the salesperson giving you good advice and maximizing income.

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