Financial Advisor Fees Are Detrimental In Long-Term Retirement Planning

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Financial advisor fees add up quickly over the lifetime on a portfolio and will make a massive impact to your wealth over time. For each year that I manage my own investments I’m saving $7,000 for every $1,000 I previously paid in financial advisor fees. 

Knowledge is power!  Do you know how much the fees you pay your financial advisor are really costing you? 

Managing your own investments can seem scary.  And admittedly, there is a bit of upfront work to learn how to manage your money.  However, it’s not too hard to figure out with a bit of effort. 

Learning how to manage your investment portfolio is similar to the class assignment that is worth 80% of your grade.  If you make sure to get a great grade on that assignment, you can hit cruise control and know you’ll get at least a B.  Click to tweet this.

Once you have a foundation of knowledge built on how investing works, your portfolio will grow faster with you managing it, then it would by paying an financial advisor to manage it for you.

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Understanding the Impact Financial Advisor Fees have on a Portfolio

You may be surprised by the true cost a financial advisor has on your retirement account.  The small financial advisor fees they charge to manage your account has a compounded factor over 10, 20 or 30 years that is significant. 

The money you paid in fees to have your portfolio managed is gone. Also gone, is the power of compound interest on that money in the years you have left until retirement. 

When I moved jobs, I rolled over $65K from my 401K to a managed IRA account at a different financial institution.  I saw quarterly fees of about $250 or 1.5%.  At the time, $250 didn’t seem like much when I had $65K to start with.  If only I had understood the power of compound interest.  

The $1K in yearly fees cost my retirement account $7K over 30 years in compound interest, assuming a 7% return on investment. I had these funds managed by a financial advisor for 5 years. 

That’s a net loss of about $35K ($7K x 5 years) in my retirement account over 30 years.  I never would have thought $5K in expenses could cost me 7 times that in my retirement account.

Types of Fees on an Investment Portfolio

There are different types of fees associated with an investment portfolio.  Most can be eliminated after doing a bit of homework. 

Do the research now and see the benefits for years to come with little or no effort later.

Investment Fund Fees

Depending on the type of fund selected the most notable investment fund fee is the Expense Ratio. This is a percent you will be charged by the financial institution to cover their operational and administrative fees. These are unavoidable.

The Expense Ratio can vary from 0% to over 0.5%.  Fidelity recently started offering funds with a 0% Expense Ratio. Prior to that Vanguard had some of the lowest Expense Ratios with a 0.04% Expense Ratio on their VTSAX fund.  A good Expense Ratio is less than 0.5%, lower is certainly obtainable.

Financial Advisor Fees

This is an avoidable fee. The average financial advisor fee is about 1% of your retirement account. This is the fee a financial advisor charges to manage your portfolio.

The financial advisor fee often goes down as your portfolio grows. In theory this sounds good but not when you factor in how much you truly lose in compound interest.

In the chart below, it shows how much more money you could lose as your balance grows even though the management fee goes down.

impact financial advisor fees have on a portfolio

There is a lot going on in this table, so let’s hone in on one scenario.  Let’s say you have:

  1. $100,000 in your investment portfolio that never grows
  2. 30 year to go before retirement
  3. you never add any additional funds to this portfolio
  4. you pay a 1% fee to have your account managed 

At the end of 30 years you will have paid $30,000 in fees and lost $94,461 in compound interest on that $30,000.  The net cost of paying a 1% fee to a financial advisor over 30 years on $100,000 has a net effect of $120,461 over 30 years. 

Most likely you will continue to add money to your investment accounts over the years, so the true cost would be even greater.  This calculator is a great tool to use to calculate the impact fees have on your own situation.

How to Stop Paying Financial Advisor Fees

How can you avoid paying financial advisor fees to have someone manage your portfolio when you’ve never managed your investment portfolio before?  Continue to educate yourself. 

Now, that you can see the true impact a 1% fee can have on your investment portfolio over the long run, it’s time to start learning about the different funds available to invest in. There are a variety of investment options ranging from Market Money funds (low risk, low returns) to Equity Funds (high risk, high returns). 

Mutual Funds

Index Funds

Ideally, over the course of time you want to invest in funds that are low in fees and high in returns.  The most common investment funds meeting these criteria are Index Funds.  Not all Index Funds are low in cost or yield a high return though.  You must do your homework and make sure you are investing your money in the right one(s).

Other Types of Mutual Funds

While Index Funds are not actively managed and provide passive income, most other Mutual Funds are actively managed and therefore, have higher fees associated with them.

A Mutual Fund may be a good option within a tax deferred retirement account, if you are able to find one with low fees and a high interest rate.  However, Mutual Funds may not be the best option if you are investing in a taxable account.

As Mutual Funds are actively being managed, the buying and selling of stocks is common.  In a taxable account, the capital gains (profit made by selling a stock) are taxable.  These taxes are paid by the fund shareholders unless their fund is in a tax deferred retirement account like a traditional 401K.  This could be a big shock to an under-educated Roth IRA investor.

Financial Investing Fees

These are some of the more notable fees associated with investing.  Clearly, fees are an important factor in the long term performance of an investment portfolio and should not be overlooked.  Next step is to make sure you invest in funds that have low fees and high returns.

Take the Investment Challenge

Put this new knowledge to the test.  It’s time to open your investment portfolio and see how your investments compare to other investments offered by your financial institution.  Take the investment challenge for beginners today!

You will learn how to understand the true profitability of a fund.  The growth of a fund is just as important as the fees associated with it.  By the end of the challenge, you will be able to tell where your current investment funds rank against other fund options available in your portfolio.

Happy investing!

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