Would You Drive 20 Minutes to Save $5?


Do you know how much you pay your advisor? 

Or how much your investment portfolio costs you in fees on a monthly or annual basis? Is it too much, not enough or somewhere in between?

Photo Credit: Dave Dugdale via Compfight cc

Photo Credit: Dave Dugdale via Compfight cc

Most people don’t know how much they pay their advisor – and if they do, they are usually only able to articulate it in terms of a percentage, rather than a hard and fast dollar figure.

Mental Accounting

Recently, I read a really intriguing article, which talked about mental accounting. This concept explains that as consumers, we will calculate the cost (or potential savings) when making a purchase based on that particular product or service.

 

For example, if you have a coupon for a dollar off a box of cereal which normally sells for $3, you feel really great about that dollar or 33% savings.

But if you’re purchasing something of a much higher cost or value, you might not attribute the same importance (or feeling) to that same discount on a larger purchase or savings.

The article gave an example of having to make a 20 minute drive to save $5 on a calculator that normally costs $15, rather than the same drive to save the same $5 on a $125 jacket purchase. 68% would make the drive for the calculator, whereas only 29% would do it for the jacket.

It’s the same savings! But your mental accounting (saving one-third of the price for the calculator vs. only 4% in terms of the jacket) tells you that making the drive for the calculator is more profitable than for the jacket. For some reason, the gas to make the 20 minute drive was largely ignored in both circumstances.

How This Applies to Your Portfolio

Let’s say that you have a half a million dollars in a wrap account and your advisor charges you 1.5% (which isn’t uncommon in the industry). 1.5% doesn’t seem like a large amount in comparison to your portfolio, but let’s take a minute to do the math.

 
Photo Credit: Truthout.org via Compfight cc

Photo Credit: Truthout.org via Compfight cc

 

$500,000 X 1.5% = $7,500 per year. That’s no small expense! And if you’re invested in mutual funds, you may still have 12b1 fees that you’re paying on top of that!

A quarter percent can make quite a bit of difference. Let’s say you are only charged 1.25% – your investment advisory expense drops to $6,250 (a $1,250 savings). Or at 1%, your investment expense is now only $5,000 per year – what would you do to save $2,500?

What to Do From Here?

Maybe your advisor doesn’t charge you a percentage of your assets. Maybe you’re not working with an advisor. Or maybe you are and they do.

The bottom line is, do you know your annual expenses when it comes to your investments?

If you don’t, take a few minutes to use our free tool to figure it out right now! What do you have to lose? Or rather, how much do you have to gain?


Comment