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A Guide To Investor Fees

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GreenReeper   Friday, 01/12/18 07:59:13 AM
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A Guide To Investor Fees
Fees are one of the most important determinants of investment performance and something that every investor should focus upon. This article will show why fees are so important, list some of the typical fees investors can expect to pay, and focus on some investment types that generally carry high (and low) fees. (Discover how investment strategies and expense ratios impact your mutual funds returns. Check out Stop Paying High Mutual Fund Fees.) TUTORIAL: Choosing Quality Mutual Funds Why Fees Matter
It is easy for investors to forget about fees when focusing upon other important subjects such as asset allocation or security selection. However, in addition to the overall market movements and an individuals stock picking abilities, the level of fees that investors pay is one of the most important determinants of investor performance.

The following example might astonish you. The numbers below assume that you contribute $3,000 to your retirement account in year one. Each year, as your salary increases, you increase your contribution by $250. So in year two, you contribute $3,250, in year three you contribute $3,500, and in year four you contribute $3,750. You then continue to gradually increase your contributions for the remainder of your career (30 years) and earn an 8% annualized return on your diversified portfolio. Although you earn 8% gross returns, your net return will be reduced by the amount of fees you pay. The higher the fees, the lower the return you actually receive.
The only difference in the investment programs in the chart below is the level of fees - everything else is identical. Look at the difference in the amount that you end up with at retirement, depending upon how much you pay in fees each year. The numbers are nothing short of staggering.

Return Fees Net
Return Account
Without Fees Account
With Fees Amount
Due To Fees
8.00% 0.50% 7.50% $648,118.44 $596,477.60 ($51,640.84)
8.00% 0.75% 7.25% $648,118.44 $572,454.51 ($75,663.93)
8.00% 1.00% 7.00% $648,118.44 $549,551.41 ($98,567.03)
8.00% 1.50% 6.50% $648,118.44 $506,887.81 ($141,230.63)
8.00% 2.00% 6.00% $648,118.44 $468,078.69 ($180,039.75)
Source: From Piggybank to Portfolio
A common retirement goal is to be able to withdraw between 3-5% of an investment portfolio each year during retirement. In the scenario above, if two individuals had invested throughout their careers in a similar manner, but one person had paid 0.50% in fees and the other had paid 2.00%, the difference in their annual income during retirement would be more than $5,000 each year. That means that one person would have $420 less each month on which to live, just because they had paid excessive fees on their investment portfolio during their working years. (If you are investing small amounts regularly into an exchange-traded fund, be sure to do it right. See Dollar-Cost Averaging With ETFs.)

Sample Fees
Hopefully, the above example has convinced you of the importance of fees. While it is not always necessary to aim for the lowest possible fees in a portfolio, it is generally a good idea to select investments and investment providers that fall in the range of those available. With that in mind, the matrix below demonstrates some typical fees. (Note: the fees in the matrix below are indicative and are intended to serve as a starting point for further research and analysis.)
Online Brokers Stock Trade ($) Option Trade ($)
Brokerage 1 8.95 8.95 0.75 per contract
Brokerage 2 7.99-9.99 7.99-9.99 0.75 per contract
Brokerage 3 7.95 7.95 0.75 per contract
Brokerage 4 9.99 9.99 0.75 per contract
Brokerage 5 7.00 7.00 1.25 per contract

ETFs Issuer X Issuer Y

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