When people think about investing, they usually focus on one thing: returns. Will the market go up? Should I own more stocks? Is now a good time to invest?
Those are all important questions, but there’s another factor that deserves just as much attention, one that’s entirely within your control: investment fees.
Unlike market performance, investment fees are predictable. You know what you’re paying before you invest, and every dollar spent on fees is one less dollar working toward your financial future. While a 1% difference in annual costs may not seem significant, over time it can have a dramatic impact on the amount of wealth you accumulate.
Why Fees Matter
Imagine two investors who each start with a $1 million portfolio. Both earn an average annual return of 8% before fees over the next 30 years. The only difference is what they pay to invest.
One investor pays total annual investment costs of 1%. The other pays 2%.
After 10 years, the lower-cost investor has approximately $176,000 more.
After 20 years, that gap grows to more than $660,000.
After 30 years, the difference approaches $1.9 million.
Nothing about the investments changed. Neither investor took more risk or earned better returns. One simply kept more of each year’s gains invested, allowing those dollars to compound over time.
That’s why investment fees deserve far more attention than they often receive.
Understanding Investment Fees
When investors think about fees, they often focus only on what they pay their financial advisor. In reality, that’s only one piece of the puzzle. Your total investment costs may include several different types of fees.
Management fees compensate the financial advisor for ongoing investment management and financial planning services. These fees are typically based on a percentage of assets under management.
Expense ratios are built into mutual funds and ETFs. They cover the cost of operating and managing the fund and are deducted automatically before returns are reported.
Sales loads are commissions charged when purchasing or selling certain mutual funds. While much less common today, they still exist and can reduce the amount of money that actually gets invested.
Revenue-sharing or 12(b)-1 fees are ongoing payments that some mutual funds make to advisors or brokerage firms. Because these fees are embedded within the fund’s expenses, many investors don’t realize they’re paying them.
Each fee may seem modest on its own. Together, however, they determine your total investment cost, and ultimately how much of your investment return you actually keep.
Looking Beyond the Fee
While investment costs are important, they shouldn’t be the only factor when choosing a financial advisor. The quality of the advice you receive, the services provided, and the relationship you build over time all play an important role in your long-term financial success.
If you’re evaluating a financial advisor, it’s worth looking beyond the price tag. We explore this topic in more detail in our latest article, 10 Reasons to Hire a Financial Advisor, where we discuss the many ways a trusted advisor can help clients beyond simply managing investments.
The Bottom Line
Investment fees may not be the most exciting part of investing, but they are among the most important. Markets will rise and fall, and no one can consistently control investment returns. However, understanding what you pay and ensuring those costs are reasonable is a decision every investor can make.
The goal isn’t necessarily to pay the lowest fee possible. It’s to make sure the value you receive justifies the cost. If your advisor is helping you make better financial decisions, avoid costly mistakes, optimize taxes, and stay disciplined through changing markets, those services may be well worth the fee. But every investor should understand exactly what they’re paying and why.
If you’re not sure what your total investment costs are, ask. Request a complete breakdown of every fee you’re paying and understand the value you’re receiving in return. A simple conversation today could have a meaningful impact on your long-term financial future.
If you’d like a second opinion on your investment costs or want to better understand how your portfolio is structured, connect with us.
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Pittenger & Anderson, Inc. makes no representation, and it should not be assumed, that past investment performance is an indication of future results. Moreover, wherever there is the potential for profit there is also the possibility of loss.
Pittenger & Anderson, Inc. does not provide tax, legal, or accounting advice. This material has been prepared for informational purposes only, and is not intended to provide, and should not be relied on for, tax, legal, or accounting advice. You should consult your own tax, legal, and accounting advisors before engaging in any transaction. Additionally, the information presented here is not intended to be a recommendation to buy or sell any specific security. To learn more about our firm and investment approach, check out our Form ADV.
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