Certified financial planner Wes Moss provides personal finance advice and accessible investment strategies. His guest post appears here weekly.
I recently met with a retired woman who came to see me because she was frustrated and concerned by her portfolio’s failure to keep up with the stock market’s average rates of return. A quick glance at her statements revealed the problem: fees.
The woman’s financial advisor had placed her in several high-priced mutual funds, defined as those with expenses of 1 percent or more. On top of that, her money guy was charging her an annual management fee of 2 percent.
Bottom line: Her portfolio has to return 3 percent every single year just to break even on her fees — this at a time when the 30-year Treasury yields less than 3 percent. So it’s like running a marathon in quicksand.
We’ve talked before in this blog about the pitfalls of fees. But that meeting reminded me some messages bear repeating, over and over again. Please, please, be aware of the fees you are paying, and analyze them closely. Get help with that if you need to. Fees can absolutely devastate your portfolio’s return.
One common fee-related mistake is allowing your financial advisor to put you in C-share class mutual funds. These funds carry little to no upfront expenses, but are loaded with heavy annual fees (more than 2 percent per year on average).
A better option would be to have your advisor buy you “no-load” or institutional share class mutual funds, which are designed to keep underlying management fees to a bare minimum (sometimes cutting costs up to 70 percent). Even when you add in an advisors’ management fee of 1 percent, you’re still saving money from Day 1.
Take a look at your investment statement. If it lists mutual funds with names that end with a capital “C,” you may be paying too much for those investments. Ask your advisor if there’s a cheaper way to own those same funds. If he says no, it’s time to consider getting your financial advice elsewhere.
Quality, custom-tailored financial advice is a valuable service, and those who provide it need to earn a living. At the same time, investors need to watch out for themselves. If the total fees in your current arrangement are much more than 1 percent, you are paying too much.
When is the last time you reviewed the fees you are paying? Do you meet or speak with your financial advisor on a regular basis?
– By Wes Moss, for Atlanta Bargain Hunter