The 7 Deadly Retirement Sins, Part 6
Paying Too Much in Fees and Expenses
Fees and expenses are those hidden costs that are buried in our investments. In fact, most of the time, investors don’t even know they are paying fees to their advisor or expenses on their mutual funds. It is not uncommon that I sit with a retiree and I ask them what they are paying annually in fees and they tell me, “Oh, no, I don’t pay anything!” I can assure you, there is no financial institution that acts as a charitable organization. In my experience, if you don’t know what you are paying, you are paying way too much.
This is a very common problem among retirees. The average mutual fund charges almost 1.5% annually. This is just for the privilege of owning the fund. On top of that, the average investment advisor takes anywhere from 1%-2%. Let’s take a real world look at these numbers. We traditionally attempt to earn an 8% return annually on the portfolio of a retiree. This gives them a 4% distribution rate, 2.75% inflation adjustment, and 1.25% for fees and expenses. However, what would happen if your fees and expenses were 3% annually? Your return would then be around 5% after costs. This is roughly the same long-term return of a mid-term treasury bond. This could be held with little volatility and no default risk. What is not accounted for then is inflation. This takes us back to deadly sin #1 of our booklet. High fees will create inflation problems.
Solution: First, know what you are paying. Look up the fees of each of the funds you are investing in. If you don’t know how, ask your advisor for the information. Zynergy, my financial planning firm, uses almost exclusively index funds and ETF’s (Exchange Traded Funds) which carry an expense ratio of less than .25%. This is an 80% savings over an average fund. Next, know what you are paying for your advisor. Typically, it is a flat percentage of assets under management or some commission earned from each trade or mutual fund investment. At Zynergy, we typically charge our clients 1% of assets under management. This creates a total cost to our clients of less than 1.25% annually. Obviously, managing our client’s costs affects their return. Our objective is to provide them with the best return so they continue to work with us time and again. Fleecing them with high fees does not accomplish that objective. Know what your loads and expenses are before getting involved in these funds. Ask your advisor if there is a cheaper fund that will accomplish the same objectives.
Be an educated consumer, understand exactly what you will be paying in fees or, like inflation, they will gradually erode the integrity of your portfolio.