Are You Paying Too Much in Investment Fees?

Investment fees may seem like a small price to pay for professional money management –but over time, they can take a huge bite out of your returns. Even a seemingly modest fee can add up to hundreds of thousands of dollars lost over the course of your investing lifetime.

So, how much are you paying? And more importantly, are you paying too much? Let’s break it down.

Key Takeaways:

1. Investment fees compound and can cost you hundreds of thousands over time. Even a small difference in fees can drastically impact your long-term wealth.
2. Be mindful of your fees by working with a fee-only advisor, choosing low-cost funds and eliminating unnecessary charges.

Why Investment Fees Matter More Than You Think

Investment fees might not seem like a big deal at first glance. A 1% fee? That sounds reasonable, right? But the problem is that fees don’t just subtract from your account balance – they compound over time and eat away at your future wealth.

Consider this:

• If you invest $500,000 and earn an average 7% annual return, after 30 years, your account could grow to $3.8 million.
• But if you’re paying a 1.5% fee, your actual return drops to 5.5% -- and your final balance shrinks to $2.4 million.
• That’s $1.4 million lost – all because of fees.

Research by Morningstar found that higher-cost funds tend to underperform lower-cost ones, meaning you could be paying more for worse results.

What Exactly Are Investment Fees?

Before you can figure out if you’re paying too much, you need to know what you’re actually being charged. Investment fees come in different forms, including:

• Expense Ratios – Charged by mutual funds and ETFs, these cover fund management costs. A good benchmark: Anything over 0.50% for passive funds and 1.5% for actively managed funds is generally on the higher side. (A 1.5% fee translates to $150 every $10,000 invested.)
• Advisory Fees – Many financial advisors charge a percentage of assets under management (AUM), typically ranging from 0.50% to 1.50%.
• Trading Commissions – Some brokerage firms charge fees for buying and selling stocks, ETFs or mutual funds, although many have moved to zero-commission trading.
• Front-End or Back-End Loads – Sales charges on mutual funds, often ranging from 3% to 5% of your investment. These are typically unnecessary costs.
• Hidden Fees – Some firms tack on administrative or custodial fees that aren’t always obvious. Always read the fine print!

How Much Is Too Much?

So, when are fees considered too high? While there’s no one-size-fits-all answer, here are some general guidelines:

• Mutual fund expense ratios above 1.5% are often considered expensive. According to Morningstar’s latest data, the average was 0.59% for active funds and 0.11% for passive funds.
• Financial advisor fees above 1% can be high, especially if you aren’t receiving comprehensive financial planning.
• Load funds and high-commission products are often not worth the cost when there are no-load, low-cost alternatives available.

Ways to Manage Your Investment Fees

If you’re paying too much, don’t worry – you have options to cut costs without sacrificing quality.

1. Work with a Fee-Only, Fiduciary Adviser

Some advisers earn commissions by selling high-cost investment products, which means their interests may not align with yours. Instead, look for a fee-only adviser who is a fiduciary, meaning they are legally required to act in your best interest. Learn more about the importance of a fiduciary here.

At Advance Capital Management, for instance, we are a fee-only, independent firm, meaning we don’t earn commissions on financial products. Our only compensation comes from the advice we provide, ensuring that our focus is always on helping you succeed.

2. Avoid Load Fees and High-Commission Products

If your financial adviser recommends mutual funds with front-end loads (upfront sales charges) or high annual fees, it’s worth reconsidering. Many top-tier funds are available without these unnecessary expenses.

3. Understand Your Total Investment Costs

Investment fees aren’t always easy to spot. Look beyond just advisory fees – consider expense ratios, trading costs and custodial fees. Reviewing account statements regularly can help you stay informed about what you’re paying.

4. Align Your Investment Strategy with Your Goals

Higher fees don’t always mean better results. Ensure that your investment approach is cost-efficient while still aligning with your financial objectives, risk tolerance and time horizon.

The Bottom Line

Over time, investment fees can drain hundreds of thousands of dollars from your portfolio, reducing your financial security in retirement. By working with a fee-only fiduciary and eliminating unnecessary expenses, you can keep more of your hard-earned money working for you.

Want to make sure your investment fees aren’t eating away at your retirement?

Contact Advance Capital Management for a free review of your portfolio and a transparent look at how to optimize your costs.