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The impact of fees on your investment returns
Fees may only be 1 or 2% but that can make a huge difference over time.
If you invest $10,000 at an annual rate of return of 7%, you will have about $150,000 at the end of 40 years.
If fees are 1% annually and your total return on your investments is reduced to 6%, you will have about $103,000 at the end of 40 years.
If fees are 2% annually and your total return on your investments is reduced to 5%, you will have about $70,000 at the end of 40 years.
2% of fees can cut the return on your investments by more then half over a 40 year period. Many of these fees are not clear.
Types of Fees
There are many types of fees can reduce your overall investment return. Some are from investment advisors and some are from investments themselves. Even if you invest on your own, there are fees to be careful to minimize.
- Transaction fees
- Money movement fees
- Money conversion dollar/peso
- Expense ratios
It is fine to work with a financial advisor but be very clear on how they are getting paid. There are many types of fees and some are not obvious. Some of the common hidden fees financial advisors charge include:
- Transaction fees
- Commissions (when you buy and/or sell the investment)
- 12b-1 fees
Fee Only Fiduciary Financial Advisors
If you would like to use an advisor, we strongly recommend using a fee-only advisor.
Only about 15% of all financial advisors are fee-only fiduciary financial advisors. They are paid directly from the client and not paid by the investments they sell to you. Many provide comprehensive financial planning services that include: investment management, retirement planning, tax planning, insurance review, and estate planning. They can evaluate your entire financial situation.
The other 85% are compensated by selling financial products and making money from the sales of the products. They are not unbiased and have an inherent conflict of interest. They may sell you annuities or mutual funds that pay them to have you invest in these, even if they are not appropriate.
Annuities pay very large commissions (around 15%) to the salesperson. Mutual funds can have loads that can provide a commission of around 5.75% upon buying or selling them and can have ongoing 12b-1 fees that pay the salesperson each year you are invested in the fund.
NAPFA.org is the national organization for fee only advisors (not fee based – fee only). Fee based advisors receive fees and commissions.
Spend less than you earn and invest the rest.
– Bill & Ivan