Financial Planning Fees and Expenses – What You Don’t Know Can Hurt You

 

The last few years have shown us there is little the individual investor can control in the financial world. The economy and financial markets swoon and sway with little predictability. And yet, the one part of the financial world that is in complete control of the individual investor, fees and expenses, garners little attention.

The cost of investments and guidance represent a huge opportunity for consumers. Disregarding the issue can be hazardous to your bottom line. For example, a difference of.25% (yes, that’s one quarter of one percent) in annual expenses on a portfolio can mean the difference between over $100,000 staying in your pocket or ending up in the pocket of someone else. (Based on a $100,000 initial investment and an 8% average annual return over 30 years). Even for the very wealthy that kind of money demands attention.

The fact that these costs are anything but transparent only exacerbates the problem. Most investors are surprised to find that the money they are losing doesn’t even show up on their statements. While most everyone will drive further down the road to save a couple of cents per gallon of gas most aren’t even aware of the money leaking from their future. So, the decision to take control of this part of your portfolio certainly appears to be an easy one. Identifying opportunities and implementing changes can be a little more difficult.

Investors should begin by asking themselves how much they know about what they are currently being charged. Most likely charges are not going to appear in one convenient place. Fees and expenses are usually layered and it is important to remember that nothing is free and everyone will need to get their fair share of compensation. The key word is fair. What is fair? If you are paying more than 1.25% of your net worth per year you are paying too much. The professional you choose to work with should certainly be compensated for their time and expertise. The firm they work for will take a portion of this compensation for the services they offer. Finally, any kind of managed or packaged investment will likely be compensated for time, management and administrative expenses. Mutual funds and annuities are excellent examples of these types of investments.

How do you find out what these costs are? The easiest way is to ask your financial advisor. It should be noted that any advisor that provides anything but a simple, straightforward answer to this question is throwing you a huge red flag. Either they don’t know or they don’t want you to know. In either case you need to start shopping for a new relationship. Focusing on the cost of guidance often overshadows a very important part of the discussion. What are you getting for the money? It is often lost on consumers that their financial life involves much more than simply their investment accounts.

A quality advisor is going to be able to help with issues such as taxes, healthcare choices, employer benefits, estate planning and even household budgeting. The one thing you should not get for your money is conflict of interest. Over 90% of all financial advisors pay is strictly incidental to the implementation of advice or purchase of an investment. Even more concerning are the recommendation of proprietary investments by such advisors. Should you encounter a scenario such as this again, it is probably time to start looking for a new relationship.

So the next time you look at your statement, watch the news or read the paper and feel powerless remember the one area of the financial world you can control. What you pay for investments and guidance is, indeed, the elephant in the room.

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