Are Unnecessary Fees Eating Away At Your Wealth?
Realizing your financial dreams isn't easy. Yet too many of us make it far more difficult than it needs to be. We don't save enough. We gratify ourselves immediately instead of deferring for the future.
And, perhaps worst of all, we give money away.
Fees are one of the worst culprits in terms of wealth erosion. Unnecessary investment expenses are the nemesis of any serious wealth builder. They sap your resources while providing nothing of value in return. They're a constant source of "nest egg leakage."
This seems fairly obvious, right? Yet these fundamental lessons aren't sinking in. Or, at the very least, they aren't being applied. The U.S. Securities and Exchange Commission (SEC) recently released a bulletin with some sobering information.
The SEC notes that while individual fees seem small, over time they have a major impact on your portfolio -- and you'd probably be surprised at the scope of that impact.
For example, assume you have a $100,000 portfolio that grows at four-percent over two decades. You pay one-percent annually in fees.
That portfolio would be worth $220,000 in 20 years.
Not bad, right? Except you wouldn't earn the full $220,000. That seemingly insignificant one-percent fee would cost you $28,000 at the end of 20 years.
If that's not enough to grab your attention, it gets worse. Along with $28,000 in fees, the SEC calculates you'd lose another $12,000 in opportunity cost. In other words, had you invested that lost $28,000 at the same rate, you would have earned $12,000.
So let's do some quick math. The total cost of that "minor" one-percent fee ends up being $40,000. That's one third of the total return on the investment. That's a fairly staggering number. It's also evidence of the insidious nature of fees. They slowly eat away at your wealth, many times without you even realizing the damage that's occurring.
The importance of lower fees
Right now we're in the midst of an historic bull market. Investors have become accustomed to generous returns. In this kind of environment, one-percent fees don't seem terribly onerous.
Yet the S&P 500 isn't going to provide us with double digit returns indefinitely. A lower-return environment is a given. The market's performance thus far in 2015 may signal that this shift is already underway.
If we enter an era of sub-five percent investment returns, those fees will quickly look far more significant.
It's also worth remembering that a fee of one-percent is conservative. Many fees are even higher. If you're invested in an actively managed mutual fund, odds are you're paying more than one-percent. Most index funds, on the other hand, charge less.
All of this data shows one thing clearly -- it's critical to minimize fees wherever possible. If you aren't aware of the fees you're paying, request the information. As the SEC points out, mutual funds are legally obligated to furnish this information. If the fees are too steep, change your investment approach.
It's important to stay ahead of the curve by protecting your wealth before too much damage is done. Yet be forewarned -- navigating the world of investment fees isn't easy. The sheer variety and complexity of fee structures may be intimidating. So let's do a quick review.
There are two main varieties of fees: ongoing fees and transaction fees. Transaction fees occur when you buy or sell stocks. Ongoing fees are assessed regularly, for things like account maintenance. Some of the most common transaction fees include:
- Purchase or sale commissions.
- Price mark-ups.
- Surrender charges.
Typical ongoing fees include:
- Investment advisory fees.
- Annual operating expenses.
- 401k fees.
Additionally, brokers often have "hidden" charges, much like your typical bank. These include fees for things such as:
- Wire transfers.
- Failing to maintain a minimum balance.
- Account transfers.
- Account maintenance.
This isn't a comprehensive list -- fees come in many, many forms. It's important to familiarize yourself with most of them if you want to protect your nest egg.
What to do next
If you feel you're paying too much in fees, act immediately. Request all the information you need. Do your fees seem too high? Then ask questions -- and don't be afraid to negotiate.
Finally, never forget that you're in a competitive marketplace. If you're not happy with your arrangements, you're always free to move to a new firm. It's understandable that some are reluctant to break longstanding relationships. Yet sometimes the threat of a move is enough to deliver results.
Remember, it's your money -- and it's your future security at stake.