Updated August 2, 2022

The Impact of Financial Advisor Fees

When it comes to investing, most people equate success with earning as much return as possible. But investing success isn’t just about maximizing your returns. It’s also about limiting your expenses and fees.

This is especially true if you turn to a financial advisor to help you manage and invest your money. As these fees are recurring, even seemingly small fees can really add up over the years, hindering your money’s ability to grow. 

Below, we discuss the common types of fees charged by financial advisors and walk through a number of scenarios to illustrate just how detrimental these fees can be to your portfolio.

How Financial Advisors Make Money

Exactly how a financial advisor makes money will depend on the types of fees the advisor charges. Typically, these are broken out into four primary groups:

  • Transaction fees: These are the fees that you must pay any time your advisor makes a transaction on your behalf. You may pay a transaction fee, for example, when your advisor buys or sells a security. 

  • Annual fees: Some financial advisors charge a flat annual fee or retainer in lieu of (or in addition to) other fees such as the transaction fees listed above. 

  • Hourly fees: Likewise, some financial advisors will charge an hourly fee dependent on how much time they actively spend managing your portfolio.

  • Percentage of Assets Under Management (AUM): In lieu of the fees listed above, some advisors charge a percentage of the total assets under management (AUM). 

It’s important to note that financial advisors aren’t required to charge only one type of fee. They can mix and match from all of these buckets. If you are considering working with a financial advisor, take the time to truly understand how the advisor is compensated.

Please note: You will pay additional fees if your financial advisor directs your investments into mutual funds or exchange-traded funds (ETFs). That’s because those funds charge their own management fees, which ultimately get passed on to you, the investor. 

All told, it’s not uncommon for investment fees to reach anywhere from 1.5% - 3%per year.

How Fees Impact Your Returns

In order to illustrate just how much fees can impact your returns over the long-term, imagine you decide to invest $10,000 this year. Each year, you invest an additional $6,000 (or $500 per month) and over the course of 30 years you earn an average return of 6 percent per year.

If you managed your investment portfolio completely on your own and paid nothing at all in fees, then after 30 years you would have a total of $562,483 thanks to all of the compound growth that a lack of fees has allowed. But now, let’s see how fees would have reduced your total return if you chose to work with a financial advisor:

1. Investment returns of 6% per year with .25% fees

On the low end of the fee spectrum, if we model that exact same scenario but account for fees of 0.25 percent, you’d have $534,793 after 30 years. That quarter of a percent would cost you just over $27,500 in forgone investment returns.

2. Investment returns of 6% per year with 1% fees

Now consider if we were to bump those fees up to 1 percent, you’d end up with $460,806 after 30 years. In other words, you will have forfeited more $100,000 in investment returns due to fees to your financial advisor.

3. Investment returns of 6% per year with 3% fees

Jump up again to fees of 3 percent, and you’d have a nest egg of just $315,936. You will have missed out on approximately $246,500 of investment returns due to fees—or almost ten times the amount you’d have paid in the first scenario. 

The Importance of Limiting Fees

As you can see from the scenarios outlined above, even seemingly insignificant fees of just 0.25 percent can add up to tens of thousands of dollars in forgone gains over the course of your investing career. 

So what’s an investor to do? Really, there are three potential solutions to the problem:

  • Start with a higher initial investment and higher recurring investments so that you can still meet your financial goals despite the fees

  • Increase the overall risk of your portfolio in order to boost your potential returns and make up for the fees you’ve forfeited (but this is a non-ideal solution)

  • Reduce your fees as much as possible so that you keep more of your money each year, where it can continue to grow

Here at Allio, we believe that sound investment advice and expertly-designed portfolios should be accessible to everyone. That’s why we charge our clients just $1 per month in order to access all of the tools that we have to offer. As you continue saving and investing with us and your portfolio grows, your management fee (as a percentage of assets) will continue to shrink. That means more money in your pocket—where it belongs!

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