Returns are the most important thing for your investments. The single biggest detriment to your investment returns are the yearly fees you pay to your investment advisor. The biggest gap I see in the average investors knowledge gap is how fees affect their investment returns over many years. The average investor should be investing for 50 years at a minimum, if the average investor started investing when they were 25 and lived to 75 that would be 50 years. In the calculations I will show below my estimates will show your return on investing. The setup is important.
The investor will invest $5,000 a year for 40 years. Then they will withdraw $60,000 a year for 10 years. The return will be 7% a year and inflation will be 3% a year.
The variable will be the amount of money taken by the financial advisor. The fee.
I will show a .1% fee, a 1.5% fee and a 2.7% fee.
The fee/advisors money is calculated by taking the fee you are charged each year and applying the same 7% return to it. This is accurate since your advisor would be able to invest the money or if you’d kept it you would have left it invested.
You need to know that all of these are very easy fee amounts to be charged. Fund managers and financial advisors can sneak different fees in on your money in many places such as management fees, load fees, expense ratios and many others.
This graph shows how much money you will have after 50 years and how much your financial advisor will have after 50 years.
The orange line represents your money, investing $5,000 a year for 39 years at a 7% return and then withdrawing $60,000 for years in retirement. You retire in 39 years with $477,299 while your advisor has $481,100. Between the 2 of you you have $958,399. I specifically picked this rate (2.7%) so you and your advisor ended with about the same at your retirement. You can see that you don’t even make it 11 years in retirement (withdrawing $60,000 a year) and you are broke! Meanwhile, your financial advisor has over $1 million!
Below, scenario 2 shows an “only” 1.5% fee. This is a very, very common fee rate. 0.8% expense ratio + .8% management fee. You see you come out a little better. You at least retire with $646,448 while your advisor retires with $311,951.The 2 of you still split the same amount of money, $958,399. At least you got ⅔ of your money this time at 39 years. Meanwhile when you hit 50 years, you are down to $268,771 dollars. At least you still have some money!
The last scenario shows how you would be able to retire if you invested with very low expenses. 0.1%. You can see in this scenario at 39 years you have $933,150 while your advisor only has $25,249. This adds up to the same $958,399 as the other 2 scenarios. I hope this can show you that you and your advisor are splitting the same money and if your advisor is not a fiduciary his interests are not aligned with yours. In this 0.1% fee scenario you can see that at 50 years your money has actually grown to $969,501, compared to the other 2 scenarios where it is shrinking during your drawdown phase.
Here is a graph showing all 3 charts of your money at once with the different fee structures.
And below shows you how much money you have at the end of 39 and 50 years compared to your advisor. It also shows that at the end of each period you and the advisor are splitting the same amount of money. Your investing is really a tug of war between your advisor and your self. Who will you let keep the most of your money?
If you advisor is not a fiduciary they are not looking out for your best interests.
If you are interested in understanding the current fees you are paying and how you can reduce your fees contact me via email HooglandAxel@Highland-WealthManagement.com or phone 715-820-0377.