While wealth can grow over time, so can the charges accompanying your investments. The fees involved with investing can dig into the potential of your returns and are a leading determinant of an investment’s yield.
Why Are Investment Fees a Big Deal?
Underestimating the impact of investment fees is common. It’s easy to overlook fees as investors attend to other topics like asset allocation and security options. Whether they’re embedded as an expense ratio, included as brokerage commission when you buy or sell, or charged by a financial planner, it’s vital that you’re aware of the fees you’re paying. These charges reduce the earning potential of your investment. Even minor fees quickly accumulate over time and can result in a difference in your return.
How Fees Affect Your Profit
Suppose you invested $100,000 into an account that charged a 2% annual fee guaranteed with a 5% annual return. While 2% sounds minimal, it can make a noticeable difference in your profit. If you hold onto $100,000 for 30 years, a 2% annual fee could result in $80,000 less revenue than the same investment paired with a 1% annual fee.
This example illustrates the importance of being informed of the charges linked to your accounts. You must know these expenses and be prudent in finding securities that help meet financial goals with the lowest fees. Take time to do the research and shop around for funds with smaller costs. While this is not necessarily an easy task, there are resources and financial advisors available to make this process more straightforward and less arduous for you. (For more from this author, see: Fee-Based vs. Commission-Based Advisors.)
Know Your Investment Strategy
Prior to examining the assortment of fees connected to your accounts, assess the basics of why you’re investing and what planning strategies match your targets. Ask yourself essential questions like: What are your ultimate retirement goals? Are you aware of your own risk tolerance? Are your investments housed in suitable accounts, such as 401(k)s or single retirement accounts?
Answering these basic questions can influence the amount you pay in fees, so it’s important to utilize these questions as you determine your savings approach. From there, stick with your investment strategy and stay committed to your plan.
Find an Advisor Who’s Worth the Money
There are a multitude of financial planners out there. It’s vital you take the time to find an advisor who matches your approach and your targets. Find a financial advocate who is willing to take the time to design an investment plan that draws out the details of your future wealth. Find a professional you can rely on to guide you through allocating your portfolio, who will purposefully plan your retirement spending and routinely update you on your financial status relative to your overall goals.
This is not information a customer should have to ask for. It’s a financial planner’s job to provide you with these details. This should occur before you commit to doing business with them. It should be a red flag if this type of conversation isn’t happening. Start asking questions that will offer insight into the ins and outs of different investments and what each investment will cost you. (For more from this author, see: Finding the Right Financial Advisor for You.)
It might be helpful for your advisor to itemize your expenses in different ways. For example, you could receive a breakdown of your fees shown as a percentage and as a dollar amount. This will help give you a better picture of where your money goes. In the end, fees and cost become insignificant if you’re paired with a financial advisor who doesn’t fit your standards or the expectations you envision for your future.
Other Variables to Consider
Working diligently to reduce investment fees will make you more likely to capitalize on your returns. At the same time, you don’t want fees to dictate all of your financial decisions because there are many variables to consider. This includes your age, income level, financial goals and risk tolerance, as well as how much you want to be involved in the decision-making. While you want to keep your costs low, you also want to place your money into a lucrative account that best suits your situation and your goals.
Todd Wilhoit contributes articles for Investopedia.com. See this one and more here.