by Craig D. Price, Certified Financial Planner® and Will Thompson, Certified Financial Planners®, Certified Financial Advisor®, Stuart, Florida
High investment fees are a bit like high blood pressure: you don’t feel any pain, and you can’t know how serious it is unless you have it professionally assessed. High fees and high blood pressure both harm you silently over time, taking a toll on your wealth and your health. Unless there is proper treatment and corrective action, the impact of both conditions can be life-altering.
What Are Investment Fees?
The annual fee that your investment fund charges you is called the expense ratio. The expense ratio is expressed as an annual percentage and the expense reduces your investment return during the entire time you own the fund. A proportional amount of the expense ratio is deducted from the fund’s price, or net asset value, every business day of the year. You cannot see the expense ratio being deducted from your account.
Why You Should Care?
The impact of high expense ratios on investor returns is staggering. Imagine you have worked hard saving money all your life and you retire at age 65 with a $1,000,000 nest egg. Here is what your nest egg looks like at age 80, depending on whether your investment fees are low or high:
Source: BankrateMonitor Fee Calculator
The two outcomes are strikingly different. The portfolio with the 0.10% expense ratio yields $259,962 more profit for the retired investor. The second investor’s portfolio lost $209,468 in investment fee payments yielding him a stunning 25% less profit than the low fee portfolio!
Be Proactive and Ask About Fees
In a recent White Paper article, Morningstar research reports that “expense ratios consistently show predictive power” regarding which funds will perform better. In other words, lower fees predict higher returns for mutual fund and ETF investors. If you have never asked or researched what expense ratios you are paying, your financial health may be suffering serious harm. Failing to address high fees in your portfolio can materially increase your risk of out-living your money.
Shouldn’t Your Advisor Discuss The Fees You’re Paying?
Ideally, yes. However, not all financial professionals are held to the same standard of disclosure regarding fees. If you use a broker at a brokerage firm, he is not required to disclose the fees you will pay or the compensation he will earn by selling you a particular fund. The fee information is made available in the fund prospectus which you receive by mail, but only after your purchase is complete.
The advice you receive from a brokerage firm is subject to the ‘suitability’ standard. This means that as long as the recommended investment fits your risk tolerance and is considered appropriate for your financial circumstances, the broker can sell you the fund which is the most lucrative for his own compensation. The suitability standard is a low bar that does not require a broker to act in your best interest.
Unlike brokerage firms, Registered Investment Advisors (RIA’s) are fiduciaries under securities law.
The fiduciary standard means an RIA is legally required to:
- Act solely in the clients’ best financial interest
- Be transparent regarding fee disclosure
- Be attentive to investment expenses impacting their clients’ portfolio
- Avoid conflicts of interest
- Act prudently when making recommendations
Due to robust competition in recent years, low fee fund choices have proliferated. At firms such as Vanguard and Schwab, ETFs and index funds are available with expense ratios which are between 0.03% and 0.09%. If your financial counselor is not recommending funds with low expense ratios for your portfolio, you should consider whether your advisor is acting in your best interest.
We Are Fiduciaries
Price Wealth Management is an independent Registered Investment Advisory (RIA) firm whose clients custody their accounts at Charles Schwab.