Investments Cost Me How Much?

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You want to do the right thing to build wealth and grow your nest egg over time. You’ve seen the graphs that show the sooner you invest, the better off you’ll be in the long-term. You’re ready to get started — but where do you begin? And more importantly, how do you determine how much your investments cost and if that’s reasonable or not?

Investing can feel complicated and overwhelming to the point that some people suffer from analysis paralysis. You can worry so much about answering all the questions and getting them all right before you start that you never take any action at all.

Fortunately, there are a few key things to pay attention to that can make a big difference. Cost is a major factor in determining the right investment moves to make. You can’t predict or control what the markets do, but you can control how much your investments cost you — and the lower your costs, the higher your returns.

Fees Impact How Much Your Investments Cost

There are a number of fees that come with investments and eat into your returns. Here are some of the fees you can rack up depending on where and how you invest your money:

Account fees: Just as some checking accounts and credit cards carry annual fees and others do not, the same is true for investment accounts. Depending on where you invest, you may or may not incur account fees.

Trade fees: Investing involves buying and selling different securities over time. Often, doing so requires a trade fee. That fee gets paid to the company where your investment account resides (called your custodian). If you have an investment account with Schwab and decide to buy shares of Apple stock, Schwab may charge you a transaction cost to do so. That fee gets paid to Schwab, not Apple. And every custodian has a different fee schedule, so be sure you understand how much you’re paying to make those trades. In some cases, the cost can be the same for trading one share or 1,000 shares.

Fund fees: Unlike individual company stocks, mutual funds and exchange traded funds (or ETFs) come with expense ratios. (Don’t worry too much about the differences between mutual funds and ETFs for now — we’ll talk more about those expense ratios in a moment.) An expense ratio is the percentage of your holding that is paid to the mutual fund or ETF. Some expense ratios are high and others are low. Typically, mutual funds have substantially higher expense ratios compared to ETFs because they are actively managed to beat their benchmark. ETFs are passively managed, which means they are built to mimic an index or other benchmark rather than trying to beat it. The former requires more management, more research, and more overhead – which means more costs passed on to you, the retail investor.

Commissions: Your investment advisor may be incentivized to propose a specific mutual fund or annuity product because they receive a commission if you buy it. It’s best to just avoid advisors who work on commission altogether. Good news: this is actually easy to do. Not all advisors operate in the same way — and they get paid in different ways, too, which impacts your bottom line. You want a financial advisor who looks out for your best interests and not their own. This is called the fiduciary standard, and not all advisors are required to apply this rule to their business practices. (Stay tuned for more on this next time.)

Ways to Find How Much Your Investments Cost

You know what fees may add onto how much your investments cost. But now you need to know how to identify and find those fees so you understand exactly how much they take away from your returns.

Unfortunately, it’s not as easy as looking at the price tag of an item as we would in a store. Some investment products are more transparent about fees than others. Important note: The more complex the financial product, the less transparent it tends to be.

Start with these three helpful methods to find information about investment costs and fees you could be paying right now:

Review your statements: While it’s not a good idea to get caught up in the movements of the markets from day-to-day or month-to-month, it is a good idea to review your statements to make sure you understand any fees being charged to you. Some fees are charged quarterly or even annually, so be sure to look at statements from every month to determine how you are charged.

Look up the expense ratios: The expense ratios for holdings in your 401(k) accounts are often found by looking at the list of all available investment options within your account. Usually, there is a column listing the expense ratios as a percentage. So if the expense ratio for your investments is 1.5% and they have a market value is $50,000, then those investments cost approximately $750 a year. Since these expenses are deducted from the Net Asset Value (NAV) of the funds rather than from your account, you won’t find them on any of your statements.

If you can’t find the expense ratios for your 401(k) holdings, and for other investment accounts, a quick way to find an expense ratio is to type the ticker symbol into the quote box on Morningstar. That brings up a lot of information about the fund. You’re looking for the percentage listed under “Expenses.”

One way that I add value for new and prospective clients is by preparing an analysis to show them how much their investments cost annually. You tend to approach investing differently when you know what you are paying in fees and expenses on all of your holdings. It can be difficult, and time-consuming, to calculate all of the fees and costs on your own. Especially when you have multiple accounts, each with numerous holdings. Often, there are similar securities that have lower expense ratios that can be recommended to replace the ones that have higher costs.

Call your custodian and ask: Finally, you can always call your custodian and ask. They should be able to answer any questions you have about fees, including fees that appear on your statement as well as any “hidden” fees.

Keep in mind that not all fees, including expense ratios, appear on your statements.

Digging Into How Much Different Investments Cost You

Not thrilled with what you find when you look at your fees? Knowing how much different investments cost – and how they work – can help you make better decisions around where you put your money in order to grow wealth over time.

Remember that ETFs tend to be less expensive than mutual funds. That’s not a hard and fast rule, so it’s always wise to check the expense ratios to be sure.

And while individual stocks don’t have expense ratios, they do limit the diversification in your portfolio. A stock is an investment in one company, whereas funds own dozens to thousands of companies. From a risk perspective, would you be more comfortable owning Exxon Mobil, or a fund that owns dozens of companies in the energy sector?

Watch out for 12b-1 fees. They make up part of the expense ratio discussed earlier. They’re classified as an operational expense for the fund, but are specifically designated for marketing purposes. If you own a fund with 12b-1 fees, you are paying fees to the fund specifically to help it advertise itself!

Mutual funds with higher expense ratios tend to be actively managed, while funds with a more passive strategy (like index funds and ETFs) come with lower expense ratios. Active managers make bets on what’s going to do well and when, but keep this in mind: 80% of actively-managed mutual funds don’t meet or beat their long-term benchmarks. So your investments cost you more money and underperform as well.

Understanding how much investments cost, knowing what those costs are, and choosing accounts and investments with lower fees can improve your long-term gains significantly. While it doesn’t seem like much to have your portfolio expenses average around 1.5%, that means you have to beat the benchmark by 1.5% just to break even. Said another way, it means that the fees you’re paying are reducing the growth (and growth potential) of your account every year. As you can see in the table below, a $100,000 portfolio with expenses of 1.5% will cost you about $1,500 to own for a year. And that’s just one year. Just imagine if you added up each year’s cost for 10 or 20 years!

If your portfolio value is… Then your investments cost…
$100,000 $1,500
$250,000 $3,750
$500,000 $7,500
$1,000,000 $15,000

Note: Assuming annual portfolio expenses of 1.5% with no change in market value.

The Key Takeaway

Instead of focusing your attention on portfolio performance and returns, consider how much your investments cost and how those expenses impact returns each year. As your account balances grow, even a 0.10% reduction in fees can make a big difference. Especially when the time horizon is measured in many years or decades. The key takeaway: it’s wise to reduce how much your investments cost where possible and invest for the long-term.

About the Author

Charlie Shipman left Wall Street and founded Blue Keel Financial Planning in 2014 to provide independent, fee-only investment management and comprehensive financial planning to professionals, small business owners, entrepreneurs and their families. His goal is to help clients align their finances with the lives they want for themselves and their families. Areas of expertise include: cash flow planning and budgeting, business planning, financial planning, portfolio management, estate planning and risk management. Charlie’s financial articles have been featured on MSN, Yahoo! Finance, Nasdaq, Money, The Motley Fool, Investopedia and NerdWallet. On the personal side, Charlie is an active board member for several community organizations in the town of Weston, CT, where he lives with his attorney-turned-entrepreneur wife, and their two absolutely amazing kids. Schedule a complimentary 30-minute Strategy Session to find out how much your investments cost you each year.


Author: Charlie
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