How Much Are You Paying In Fees?
True story . . .
I recently asked a good friend in her 70s how much she was paying her financial advisor. She thought she was paying about $125 every 3 months. I asked her what she would like to do in retirement, and she said she would like to have about $5,000-10,000 a year to travel. Do you know what we found out? She was paying over 3% of her total invested assets per year in fees! That totaled over $12,000 a year. There’s your travel budget right there! This is exceptionally high compared to what we typically see…usually folks are paying between 1-1.5% of their invested assets in fees, and so that case especially frustrates me.
I'm on a mission to put you in the know!
If you are reading this, you are potentially one step closer to saving a lot of money on your retirement! I am on a mission to make sure that people are educated on how much they are paying their advisor. I have become more and more passionate about it as time has gone on, and I have met more and more people who do not even realize how much they are paying.
I have a lot of friends in the industry and they are good people. They do not have ill intentions and are great advisors, helping people build their wealth for retirement and plan accordingly to live through their retirement. They mean no harm. Fee-based planning may be the route you want to go as well, and that's ok. Fees were not the standard; however, for most years and I believe many people do not realize how much they are really paying and need to understand this because - you do not have to pay them!
That’s right…you do not have to. In past years investors would pay their advisor through commissions. And many people already paid their dues through commissions on their assets and are still holding those same assets while now paying a fee on them.
Commissions don’t sound like a fun thing to pay either, but with mutual funds, you would pay a sales charge up front that ranges from next to nothing ($0 for amounts over certain thresholds) to 6% depending on how much you have invested with the mutual fund company. But then you were done and could switch funds within that mutual fund company any time without paying additional commissions (through free-exchange privileges). The advisor was already being paid a percentage of your assets as a commission through 12b-1 fees, albeit at a much lower level (.25% or lower after others took their share), but we were always compensated for managing your funds through this. The Department of Labor, in 2016, implemented their new Fiduciary Rule which resulted in many institutions and advisors moving toward a fee-based model to continue to advise clients. There was a thought that this would decrease churning - when an advisor moves you around from fund company to fund company to create additional commissions. I agree that it does, but if you have an honest advisor all your advisor needed to do is put you with a solid mutual fund company that has a variety of selections and a diversity of asset classes for fund selection. You would not have additional commissions and they would be paid for managing your funds.
Thankfully, the Department of Labor’s efforts did not fully come to fruition, but most mainstream shops ended up becoming more fee-based and guiding clients toward that model. It sounds innocent enough, as 1-1.5% does not sound like it will break the bank, but it adds up. For example, 1.5% on $400,000 is $6,000 a year! I did a calculation using a mainstream advisory firm’s fee-based schedule for a 25-year-old maxing out their Roth every year until age 65 and earning an average of 8% return, and then drawing down the rest of their life until age 85 (but staying invested), the difference between commission-based and fee-based was substantial. They would pay about $13,000 over their lifetime for the commission-based model, but would pay over $400,000 in their lifetime for the fee-based model!
The fee-based advisor would argue that you would give up certain things, like mixing availability of stocks and ETFs at no additional cost with your mutual funds and have access to institutional class shares of mutual funds with lower expense ratios than your traditional class A shares. This is true, but I believe it still isn’t enough to justify the amount folks are paying on an annual basis.
If you’d like to find out how this impacts you and how much you are paying in fees, we will look at your statements for you and give you the scoop! Just shoot us a note by filling in the info below and we will contact you. I will not pressure you to do anything - just let you know how you are impacted. If you would like to look at alternatives and get additional advice, I would love to help you out so keep us in mind! Either way, we will give you a straight answer and help you in your discovery process so you are in the know! I look forward to hearing from you!
God bless and remember: what we have is not our own…we are only given the resources by God to manage to the best of our abilities!
-Kris Jerke
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