Let’s say you’ve done well in life. You did what you were supposed to do: you saved all your life, invested, and accumulated $1 million. You’re ready to retire and looking to hire a Financial Advisor to help manage your investments and keep you on track with your financial plans throughout life.
Advisor Fee: 1%
You call around and find that the average Financial Advisor charges 1% per year (National Average, PriceMetrix.com). Many people believe that is the only cost. There are additional costs for the investments.
Mutual Fund: 1.25%
According to Morningstar, the average mutual fund charges 1.25% a year. I have yet to see a firm show this charge being deducted on a statement, but make no mistake, if you own a mutual fund there is a fee being deducted by the fund manager (called the expense ratio).
Total Cost: 2.25%
So using the average cost of an Advisor and a Mutual Fund, you’re “all-in” at 2.25% per year.
How to Reduce Costs:
ETF Cost Reduction: 1%
Let’s say your Advisor uses low cost index funds, ETF’s (Exchange Traded Funds) instead of Mutual Funds. The average cost of ETF’s that we use at Stockbridge charge a 0.11%, a full 1.14% less than the average Mutual Fund. So what does this amount to in cost savings over 25 years, and a 7% return?
$1 MILLION!
Actually it’s $1,066,235 LESS in FEES. $1 million grows to $3.2MM using the average fees (1% Advisor, 1.25% mutual fund), but grows to $4.3MM simply by reducing costs.
Control the Controllable
While we can’t control the market, we can control fees. The effect of reducing costs could be $1 million for every $1 million you have invested. OR, you could simply buy 5 Lamborghini’s and drop them off in your Financial Advisor’s parking lot for them. It’s up to you.