Imagine you’re out to eat at a nice restaurant. You order your favorite dish, maybe a steak. With your favorites sides. Your favorite bottle of wine.
The total comes to $100. You tip 20% for a total of $120. You’re satisfied. You head home.
What if the total cost wasn’t really $120? What if that’s what was on the receipt, and on your credit card bill, but you actually paid more. Way more. Maybe $250. The only way you can find this out is by calling your server and asking them to give you the true cost.
Welcome to investing.
This scenario was more prevalent 20 years ago but is still all too common these days.
There are few layers of fees in investing.
First, is the most common and most well known: The advisory fee. Many times it is 1%, sometimes less and sometimes up to 1.5% or 2%. Clients typically have at least some idea as to what they’re paying their advisor.
Next, are the fund fees. Most clients have no idea the type of fees for the underlying mutual funds, ETFs, hedge funds, or private equity funds. Maybe an average of .25? Maybe 1% or 1.5%? A little less or a little more?
Or how about a lesser known cost, tax efficiency. Are your funds realizing a lot of capital gains, or short term capital gains? Creating what’s known as a “tax drag” as your tax bills start to pile up.
The lack of communication and transparency around the true expenses of investing have been eating away at the wealth of investors for decades. Investing is hard, and there are no shortcuts. The best way to be successful is to control what you can control. In order to control something, you need to first be aware of it, right? Why would you begin spending less when you have no idea if you’re spending too much to begin with?
A good exercise for many would be to reach out to your advisor and find out what you’re paying in fund fees. They should be happy to provide this information to you. If you want to get a little more nerdy, you can ask them about the tax efficiency of the funds. If they don’t know what that means then it may be time to re-evaluate.
You may or may not be paying too much in investment fees, but that isn’t my point. This piece is to inspire you to find out how much you really are paying.
Yes, yes, the meal tasted amazing. Don’t you want to know how much it costs?