Yes, for real! I said $100,000!!! I didn’t come up with the headline just to make you click on the article. It’s a real number.
Anything you’re not doing on your own, comes with fees, right? When you pay somebody to fix your car, you’re paying for the parts but the labor costs are much higher. The same is true for investing. Chances are you don’t know how to invest and if you think you do, you’re likely losing money—if the statistics are true.
Because of that, you will probably pay at least one person for help—probably more than one. Let’s go through how the fee structure works.
Top Layer- A Financial Adviser
A financial adviser is a generic term for somebody who manages your money. They might be called a financial planner, portfolio manager, wealth adviser, or something else. The distinctions are important but not for this article.
Their job is to get you into the right financial products to help you make money. Those products could be mutual funds, stocks, bonds, annuities, IRAs, 401(k)s, 403(b)s or any number of different things. They might work for you individually or they might be somebody associated with your company-sponsored retirement plan. They will either charge you commission or an ongoing fee, (or both).
Let’s be clear. You need a financial adviser. The right one is worth paying for. The good ones will charge a bit more but save you from paying other fees. That will make your overall fees lower.
How to pick the right one is the subject for another article coming soon.
Middle Layer- Fund Managers
If your financial adviser puts you in mutual funds or some other products, you pay a fee to the fund because the fund has to pay the people managing it. Unlike a good financial adviser, high fees for mutual funds aren’t worth the cost.
ALSO READ: How Do Mutual Funds Work?
Research shows that higher fees equals worse performance. Let me translate: Imagine heading out to purchase a TV and the sales person showed you two TVs with the same brand name—one was a 20” model with few features and the other was a 55” full of bells and whistles. The 20” was $1,699 and the 55” was $999. You would be a fool to buy the 20” but that’s what you’re likely doing every day with your investment choices. It’s not your fault, though. You didn’t know until now.
Research shows that higher fees equals worse performance.
Bottom Layer- Plan Administration
The last fee is the money you’re paying to the company that’s managing your employer’s retirement plan. They include record-keeping fees, fees for mailings, and fees to send somebody to your workplace to meet with you about your investments. These can be next to nothing all the way to bordering on thievery. There are also fees you don’t know about.
What does it all Cost?
Now that you know about the layers of fees, let’s put some numbers on everything. First, your company sponsored retirement plan. If you work for a really big company, you’re probably paying somewhere around 0.65% If you work for anybody else (most Americans do) you’re probably paying 1.5% to 2%. I’ve seen some small businesses paying more than 2%. That means that on your $10,000 balance, you’re paying at least $200 per year for the right to invest your money.
But 2% is such a small number, who cares? Over your lifetime you will pay more than $138,000 assuming that you pay 1% in fees yearly. And if your 1% is actually 1.5% or 2% you’re paying a lot more! That’s the $100,000 mistake!
Outside of a company sponsored plan, it’s even more complicated. You could pay more than 2% annually when you add the adviser’s fees with the fees of the funds. Good advisers manage your portfolio with fees in mind and will find ways to save you money.
READ MORE: How Much Should I Save For My Retirement?
Here’s what’s interesting. Let’s say you could lower your fees by 0.7%? If you’re in something with high fees, it’s not hard to do. Over 30 years you will have saved more than $160,000 in investing fees. That’s the HUGE impact fees have on your retirement.
Think about it: You could retire at least 2 years earlier.
“What Should I Do?”
Let’s make this simple and put it in a list:
1.) If you’re in a 401(k), look at your funds. Find the funds that are called index funds. They have very low expenses. You can see the expenses in the documents. Consider index funds rather than other funds, especially if you’re younger. Ask the plan adviser for help finding these funds if you’re unsure.
2.) Only use financial advisers who are fiduciaries. They are required to disclose all of their fees to you. Also consider using a fee-only adviser rather than one that works on commission. The good ones will cost a little more but they’ll use products that don’t come with high fees so you end up paying less in total expenses.
3.) Don’t think investing on your own will save you money. You need help and its worth paying for.
4.) You have no control over the financial markets but you do have control over the fees you pay. Concentrate on fees more than performance.
If your investments are in a company plan, look for the low cost mutual funds. If you have investments outside of the company plan, I suggest a fee-only adviser that can help point you in the right direction. If you need help finding one, e-mail me. If you have an adviser now and would like an unbiased look at how they’re doing for you, let me know. I have resources that can help you.
Have a question about anything in your financial life? Click below to ask me. I respond to all questions.
Disclaimer: All financial advice in this article is for educational purposes. Not all financial advice is appropriate for everybody so don’t make decisions until you talk to somebody who can look at your personal financial picture.