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Fees are one of the biggest factors driving success or failure, that investors must understand fully in order to maximize their retirement goals. Unfortunately, many of our competitors in the investment management and brokerage industry simply don’t provide enough up-front, transparent information on fees and costs to their clients to help them understand what they are actually paying and how it affects their returns. So we’ll help do it for them using examples from the fee-based, discretionary investment management industry. In an upcoming blog, we’ll cover financial advisor/brokerage commission and fee examples.
It’s also baseball season, so let’s use some hardball terms to help us shed more light on big fee issues we are frequently seeing with clients, who often just don’t understand what they have been paying in fees – sometimes for years.
If you hire an investment manager to manage money for you on a discretionary basis, so that the advisor you hire buys and sells stocks, mutual funds, bonds and other assets for you based on their investment strategies and philosophies, you are likely paying that advisor up to 1% or more on your assets annually. For a $100,000 account, your advisor with a 1% fee, would earn $1,000 per year, for example. .75% to 1% is widely regarded in the industry as a “standard” fee. (TruNorth’s fees are just 0.25% – 0.33%, as a comparison. We want more of your money working for you – not in fees).
Let’s add some more common fees to the math on what many investors are paying today. If your investment advisor invests in mutual funds, exchange traded funds, closed-end funds, or other products, that particular fund or product usually has a fee as well. According to Morningstar and the Investment Company Institute, for example, the average stock mutual fund fee today is about 1.3-1.44%.
So let’s bring those fees together to see what it really costs investors. If you are paying your investment advisor a 1% management fee, and the mutual fund chosen for you by that advisor has a 1.3% annual expense ratio fee, you are then paying total costs annually of about $2300 on $100,000. When the stock market returns 8% in a given year, (which is pretty close to long-term return averages), you are paying more than 25% of market returns to your investment advisor and mutual fund company – in fees!
These high fees that you are paying for investments MUST have great value for you, which you as the client ultimately must determine. The added value which makes the fees worthwhile to you may come in the quality advice on retirement and financial planning you are receiving, in the investment strategies that are helping you increase expected returns, and/or other factors. We’ve seen clients even justify paying higher fees because of the friendship they have with their investment advisor, or even because they like the prestige of working with that particular firm. Whatever may be a justification for a given client to pay higher fees, that client should know that premium fees usually come at a significant cost to future retirement outcomes – so it better be worth it.
Saving money on fees to seek higher expected returns is largely why we focus exclusively on investment science in stocks using exchange traded funds, which have an average expense ratio of only about 0.1% (or only $100 per $100,000 annually). As Jack Bogle, the champion of low-cost investing and founder of Vanguard, so wisely said, “In investing, you get what you DON’T pay for.”
Given the high fees, it’s no wonder then that over the last decade, only 36% of large cap equity funds on average annually beat the market, according to Goldman Sachs and Factset. If you are one of those unlucky investors also paying a discretionary management fee, your underperformance would have likely increased even more. Fees can wreak havoc on investment success long-term, so it should be the FIRST thing you care about when it comes to your money.
What’s a “triple” fee? Some advisors, even fee-only investment firms, also must pay brokerage commissions for trades they conduct for you – which is still usually paid from your money. We’ve seen trading fees range from around $4.95 per trade to as much as $49.95 per trade – or perhaps even more. At TruNorth, nearly all of the types of market-based products we use to build our science-driven investment strategies transact commission-free, saving our clients costs related to trading that add up significantly over time.
Watch out for fees – and make sure that in any investment discussion, that you know what you are paying, who you are paying, and why. It’s your money and your future, after all.
THE WEEK IN REVIEW
In economic news, growth in GDP was revised upward to 2.6% for the fourth quarter of 2013, which many economists view as approaching healthier growth levels, with consumer confidence and spending rising to their highest points in about six years. The housing market also continued to show relative strength with inventories of homes for sale remaining low and demand for homes strong.
Stocks (S&P 500) fell 0.5% for the week ended March 28th, ending at 1857 (the S&P 500 is up about 1% year to date) while bond yields fell 2 basis points to end at 2.73%, a decrease of 0.31% in yield year to date.
Have a great week!
Disclosures:
All investing is subject to risk, including possible loss of money invested. Past performance is no guarantee of future results. Index performance is not reflective of an actual investment return as you are unable to invest directly in an index.
TruNorth Capital Management, LLC (TruNorth) is an investment advisor registered in, and regulated by, the State of Michigan. All clients and potential clients have access to important information about our business methods, fees, professional qualifications and all other pertinent business information.
TruNorth Form ADV Part 1
Form ADV Part 1 is a regulatory filing that provides the basic business structure of TruNorth and explains how we are legally registered.
TruNorth Form ADV Parts 2A & 2B
Form ADV Parts 2A & 2B provides details of the services we offer as well as the backgrounds of TruNorth's principals. It also includes information about our fees, investment strategies and how we conduct our business. See below to download Form ADV Parts 2A & 2B.
Click here to access Form ADV Parts 1, 2A and 2B from the SEC website. |
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