Saving an Extra 1% in Fees Adds Up to Big Dollars

Investment professionals are well, professionals when it comes to spewing advice about how saving more of your income can result in huge differences when it comes to building your investment nest egg.

But why don’t they ever equate the same illustration to investment fees?

Photo Credit: Alan Cleaver via Compfight cc

Photo Credit: Alan Cleaver via Compfight cc

Because that means they’d have to gear the conversation towards fees in the first place – and who wants to do that? They’d have to highlight the fees they charge you versus the ones that are associated with the investments they are recommending for your portfolio and rationalize the potentially multi-layered fee approach.

Everyone Needs to Get Paid

I’m not asserting that investment professionals shouldn’t get paid – because they absolutely should. We all need to earn a paycheck, and there are many additional facets (and expenses) that go along with being a RIA. What they make in commissions doesn’t necessarily hit their 1040, in the same way, that your paycheck might.

But advisors should get paid in part (in my opinion) based on performance and controlling things like investment-related fees and taxes. Compliance regulations doesn’t necessarily make it that easy to choose or implement how to do this – it’s much more involved of course. This is how hedge fund managers get paid though, and it does make some sense, doesn’t it?

The Rich Get Richer

And just because you have more (or less) money with your advisor, doesn’t necessarily mean that they should make more. It can sometimes be a case of the “rich getting richer,” when it comes to advisors giving their bigger clients a break when it comes to things like wrap fees due to their account balance. They might do this to increase their chances of landing that business.

Photo Credit: FutUndBeidl via Compfight cc

Photo Credit: FutUndBeidl via Compfight cc

Or brokerage houses rewarding their higher-tiered clients by waiving their custodial or brokerage account maintenance fees. What about the rest of us? What about those of us that are trying to build up wealth by scraping as many dollars as we can into a pot to save for our future? Why should we get penalized based on our account balance?

Compounding Fees Work the Same Way

Compounding interest when it comes to your investments is a good thing. That’s not the case when it comes to the fees assessed to your portfolio, however. That compounding of fees works against us, much like loan or mortgage interest does.

If you’re getting charged a percentage based fee on your portfolio, as your investment accounts grow, so do the compounded fees that are being assessed. These fees will take away more and more from the growth of your portfolio as the balance increases – meaning that your advisor or the brokerage house is making more and more as your portfolio grows.

In Conclusion

So just like the magic of compounding works in our favor when we save a little bit more of our income, it can work in our favor when our fees decrease on the investment management side. Saving more of your income isn’t the only way to boost your retirement savings – so is managing the fees inside your portfolio and your rate of return.

Do you know how your accounts stack up? Are your fees, risk tolerance and performance appropriate? If you’re not sure, find out right now by using our tool!