Impact of Fee's on Your PortfolioSubmitted by Elite Asset Management on April 30th, 2017
Before we explain the impact of fee's on a portfolio let's discuss the types of fee's investors pay, as most investors may not be aware of the various fee's they pay on their investments. Some of them are easy to identify while others are hidden and are not made clear to investors. I've seen them come in many different forms and rarely will you see them explained unless you ask. I've detailed a few below to help make investors more aware of what to look out for.
This should be straight forward however you'd be surprised as to how many investors don't know what they are paying and for what services. I've seen this range from 1.00% to 1.50%, with 1.00% being most typical. You can find out what you're paying your current advisor just by asking.
Mutual Fund Sales Charge aka Load's: From Investopedia: "is a selling commission paid to a financial intermediary and not the fund company. It does not buy increased investment expertise by fund management." These are taken out of your initial investment amount. Which is why if you invest $100,000 you may not see the full $100,000 actually invested into the fund.
Mutual Fund Expense Ratio: Expressed as a percentage of the funds average assets, it's a variety of administrative and operating expenses. Thus lower is better as expenses are taken out of your return. As paying more for a mutual fund does not mean that you'll receive a higher rate of return and in fact by paying more you're guaranteeing that you'll potentially receive a worse return.
Mutual Fund 12b-1: Is an additional marketing fee paid to financial middleman and can be as high as 1%, even No-Load funds can charge up to .25%. These fee's are also taken out of your return.
Looking only at an advisor's fee without paying attention to the other fee's could be the difference between thinking you're only paying 1% but in reality you're paying closer to 2% if not more. If you're investments aren't keeping pace with a benchmark, check to see how much you're really paying in fees.
Below is the impact of fees on your ending account balance over 30 years.
◦Investor 1: $100,000 growing at 7% (minus 3% in annual fees) = $324,340
◦Investor 2: $100,000 growing at 7% (minus 2% in annual fees) = $432,194
◦Investor 3: $100,000 growing at 7% (minus 1% in annual fees) = $574,349
Each investor has the same portfolio with the same investment results, and Investor 3 has over 75% more.
What if over 30 years you average 9% and not 7%?
◦Investor 3: $100,000 growing at 9% (minus 1% in annual fees) = $1,006,266
Combining lower fee's with potentially better returns will significantly impact not only your peace of mind when it comes to retirement, but also you're happiness as not having to worry about running out of money.
Until Next Time.
Very Truly Yours,