You may not think much about fees now, but imagine how you may feel with 1 percent or 2 percent stock market returns, or even worse, negative returns and fees zapping up to 1 percent or 2 percent of your total assets.
Investment fees matter. Let’s look at a few scenarios to understand the effect of high fees on a typical investment portfolio.
JoAnn is 40 years old and has an investment portfolio worth $200,000. She expects to retire at age 66. For the sake of this example, assume she doesn’t put any more money into her account (not a great idea). JoAnn doesn’t worry about fees and has actively managed mutual funds, and part of her money is with an investment advisor. Her average fees as a percent of total assets are 1.75 percent.
That means every year she’s paying out $3,500 in investment management and oversight fees. Multiply that $3,500 by 26 years until retirement, and at age 66, she’ll have shelled out $91,000 in fees. During the years her portfolio earns less than a 1.75 percent return, she’ll earn nothing on her investments.
Daren is also 40 years old and much smarter about investing than JoAnn. He invests in low-cost index and exchange-traded funds. He also has a portion of his portfolio with an advisor – a low-fee robo advisor – who also invests in low-cost index funds.
Daren also has a $200,000 investment portfolio, but his fees average 0.30 percent of his total assets. Unlike JoAnn, who pays $3,500 per year in fees, Daren pays just $600 per year on his investment portfolio. That’s $2,900 per year less than JoAnn. Over 26 years, when Daren retires at age 66, he will have paid just $15,600 in investment fees.
JoAnn paid almost six times more than Daren during their future investing horizon.
Do I have your attention?