The Heavy Burden of Recurring Investment Expenses and Fees
The heavy burden of recurring investment fees (Part 1 of 2)
Recurring investment costs can significantly impact the long-term value of your retained investment portfolio assets.
Recurring fees, such as asset management fees, 12b-1 marketing fees, and advisory/asset custody fees are charged periodically, as a percent of your investment assets. The relative cost-efficiency of your investment portfolio in the past has greatly influenced whether you have more or fewer assets today. The investment funds that you have retained in your portfolio are net of any annually recurring investment costs and any investment taxes that you have already paid. If your annually recurring investment costs have been excessive in the past, then it is likely that the growth of your personal investment portfolio has already been stunted very dramatically. (See: Pay less to get more)
It may seem odd to need to state this, but your currently retained investment assets are YOUR assets. You should only compensate advisors for delivering superior investment management results compared to what you could have achieved with a very low cost passive index fund investment strategy. Sadly, this is not how the game works.
If you permit it, the financial services industry will assess various percentages for their services against your entire retained investment portfolio assets, through multiple types of recurring charges each and every year. Whether the value of your assets increases or declines in the securities markets has little influence on these fee arrangements. By billing as a percent of your assets, the industry gets paid as long as you still have assets. (See: The investment industry is not your investment partner)
The simple fact that you do have some investment portfolio assets enables the securities industry to assess annual investment fees. As long as the industry’s annual fees are less than 100% of your investment returns, it is at least possible for the nominal value of your investment funds to increase. (Whether the non-inflationary or real dollar value of your assets will increase, after fees, taxes, and inflation are taken into account, is an additional consideration.)
Obviously, any rational investor would rebel at confiscatory charges that approach 100% of their annual returns – with or without inflation. However, the average investor typically pays in total between 2% and 3% of his portfolio assets in total investment expenses each and every year. Because total investment fees charged across the industry keep growing, it seems that the average investor pays these recurring fees willingly, if not either naively or grudgingly. (See: Excessive investment costs are a huge problem for individual investors)
Even though typical annually recurring investment fees are less than average historical returns, 2% to 3% of portfolio assets yearly for total investment expenses will consume a very substantial part of gross market returns. In effect, in an average year the industry’s investment charges allow individual investors’ net portfolio values to appreciate modestly. Your gross returns are trimmed significantly by excessive fees. Typically, investors lose between 1/3 and 2/3 of their gross investment returns every year. These fees hobble, but do not fatally wound all these golden retail investor geese. (See: What have average investment asset class risk premiums been over long periods?)
Tags: investment returns
Personal Financial Planning
- My Treasure Is Taken by My Credit Card Company (
PIRATES OF THE CREDIT SEA - Part 1: My Treasure Is Taken!
Regular readers of The Skilled Investor have already been warned previously of the general dangers of consumer debt and of the risks associated with credit cards. Now, The Skilled Investor has himself become ensnared. In a series of articles, I will: A) summarize my [...])
- How many stocks are needed for a well-diversified portfolio? (Industry rules-of-thumb often state that 15 to 30 stocks are enough for a well-diversified portfolio. This can be very misleading.
Recent studies point out that industry rules-of-thumb on the number of stocks needed for a well-diversified portfolio are simply not adequate. These rules-of-thumb most often state that 15 to 30 stocks are enough. “The Truth About [...])
- American Funds – Income Fund of America – Class A Shares (AMECX) rate a +2 Fund Authority Score (Fund Authority Scores rate mutual funds and exchange traded funds (ETFs) on the most important economic factors that influence individual investors' net long term diversified investment fund performance. The Skilled Investor developed the Fund Authority Score system to provide individual investors with concise and objective summaries of mutual funds and ETFs for comparisons within investment [...])
- The Kind of Financial Advisor You Need (
The kind of financial advisor you need - A Tip from The Skilled Investor
Good or bad, financial advisors are expensive. If you need a financial advisor's help and you carefully select a good financial advisor, the value of the personal finance and investment advice that you receive might easily repay the advisor cost. However, bad [...])
- The Investment Returns You Lose to Investment Sales Loads (VeriPlan automatically tracks returns lost to investment sales loads
Many justifications for investment sales load charges might be offered by financial advisors during the sales process, but once a front-end load is charged, your diminished portfolio will 'forget' about the load charge for the rest of your life.
Loads become 'phantom' assets, which are rarely spoken of [...])
- 10 Lower Cost S and P 500 Index Mutual Funds (10 Lower Cost S&P 500 Index Mutual Funds
Regular readers know that The Skilled Investor advocates a very boring, low cost, broad market, passive index investment strategy. Costs less. Gets the broad market return -- whatever that will be. Narrows the range of outcomes and therefore the risk to your long-term personal financial plan. Takes far [...])
- Determine the Savings You Need for Your Lifetime Financial Goals (You cannot invest without savings. How much savings are enough? ... too little? ... too much?
Currently, the U.S. is experiencing a savings crisis. The net personal savings rate is zero or slightly negative, despite a healthy and growing economy. This situation is a prescription for millions upon millions of future personal financial disasters. (See: [...])
- Financial Industry Product Development and Your Best Interests (
Financial research drives industry product development, but not necessarily toward the best interests of individuals
Personal financial decisions seem to have become very complicated. To add to the confusion, the financial services industry develops an unending array of supposedly innovative new products. However, a large part of the complexity that individuals face results from the proliferation [...])
- Allocate investments across the primary asset classes – Step 5 of 10 Financial Planning Steps in the Right Direction (CLICK HERE TO READ THE SKILLED INVESTOR's OTHER ARTICLES ABOUT THESE "10 FINANCIAL PLANNING STEPS IN THE RIGHT DIRECTION
Appropriately setting your personal investment asset allocation in line with your personal investment risk tolerance is a critical decision for every individual investor.
Because the average risk-averse investor holds the average portfolio asset allocation, this becomes the starting [...])
- Factors Favoring Roth IRA and Roth 401k Plan Contributions – Part 2 (Factors that tend to favor Roth tax-advantaged plan contributions - Part 2
(Continued from Part 1...)
In a recent article, "Traditional versus Roth tax-advantaged plan contributions," The Skilled Investor discussed why the average taxpayer would tend to benefit more by contributing to traditional rather than to Roth tax-advantaged IRA and 401k retirement plans. This follow-up article in [...])
- No Financial Planning Software or Calculator Can Predict the Future (No financial planning software and no investment growth calculator can predict the future
The future is simply not predictable, even with automated financial planning software.
A previous financial article, “The Solution - ONLY follow financial strategies that are scientific, passive, diversified, savings focused, risk controlled, low cost, and tax efficient,” suggested that investors are much better off [...])
- The Quality and Cost of Advice Paid by Investment Sales Loads – Part 2 (
Can you really get free and objective investment advice, when you pay investment sales loads? (Part 2 of 2)
Excessive investment costs and investment expenses are a plague on your lifetime personal financial planning.
Excessive investment expenses are one of the most significant barriers to lifelong family financial security. While financial services industry sales people tell you [...])
- Hitting the Citibank Stone Wall in Polite Conversation (PIRATES OF THE CREDIT SEA - Part 4: Hitting the Citibank Stone Wall in Polite Conversation
This article continues my personal saga of trying to get Citibank to fix problems with their management of my credit card account with them.
For a summary of the overall situation, go to Part #1: My Treasure Is Taken!
For an article [...])
- Investment Valuation and Securities Risk for Individual Investors (
The securities markets provide an evolving consensus of the risk-adjusted value of particular securities.
By understanding how the markets value securities, individual investors can chose more durable investment strategies
Judging the potential usefulness of different investment strategies requires some understanding of what the public securities markets really do. This article discusses how the markets price financial securities [...])
- The Never Do List – Avoid Financial Advisor Frauds and Scams (
Part 2 of the The Never-Do List - 22 Good Ways to Avoid Financial Advisor and Investment Counselor Frauds and Scams
This article discusses things that you should “never do” with a financial planner or investment advisor, and it covers fees, payments, and proprietary investments.
You should never do certain things with a financial planning or investment [...])
Comments are closed.