Investing is a crucial part of building wealth and achieving financial goals. Most investors tend to focus on market trends, asset allocation and investment strategies. However, many investors often overlook the significant role that investment fees play in determining overall performance. Investment fees, while seemingly inconspicuous, can have a profound impact on the returns an investor ultimately receives. Understanding these fees and their implications is essential for making informed investment decisions. 

There are various types of investment fees that investors may encounter, each affecting the performance of their investments differently. Some common types include: 

1. Expense Ratio: This represents the annual cost of managing a mutual fund or exchange-traded fund (ETF). It’s expressed as a percentage of the total assets under management. The only way to completely avoid this fee is by buying individual stocks and bonds, but that can reduce the diversification in your portfolio. If you’ve read my previous articles, that is something you do not want to do! 

2. Sales Load: Also known as a sales charge, this fee is associated with certain mutual funds and is typically paid when buying or selling fund shares. Some financial advisors are using ETFs more and mutual funds less to reduce these fees. In exchange for a larger ongoing fee financial advisors may also have access to Institutional Share Classes of certain mutual funds, which can eliminate or reduce the sales load for the client. 12b-1 fees are a form a ‘load’ which are paid every year the investor holds the fund that has this kind of fee. 

3. Transaction Costs: These fees arise from buying and selling securities within a fund’s portfolio. They include brokerage commissions, market impact costs, and spread costs, and are not always transparent expenses to the investor. 

4. Advisory Fees: Investors who work with financial advisors pay advisory fees for professional guidance. While these fees can provide value through personalized advice, they need to be weighed against their impact on overall performance. 

But while the impact of these fees on investment performance should not be underestimated, one must also be careful not to undermine their own investment success in a quest to reduce fees. If you needed surgery, would you shop around for the lowest-priced surgeon? Would you do it yourself, even if you’re not trained? Or would you look for the best surgeon available? 

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Similarly, your money and your financial future are important. Are you working with the cheapest investment professional you can find, or the best one? Are you doing your investments yourself? In either case, you may be giving up huge results. The world-renowned DALBAR Study for 2023 shows that over the last 30 years the average equity investor trails the S&P 500 returns by nearly 3% per year on average. That’s the difference between having nearly $1.6 million (S&P index) or $721,000 (individual investor) after investing $100,000 for a period of 30 years. A Vanguard study on Advisors Alpha similarly identifies 3% as the approximate value of a good financial advisor. Are you one of the many investors who is losing 3% every year in an effort to save on fees? 

Speaking of fees, what are some reasonable advisory fees that you should expect to pay? While fees can vary, a reasonable fee to pay your financial advisor if you have $500k invested with them may be around 1%. If your portfolio is in the millions of dollars that number can come down substantially.  

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In the end, the smart money is on investing in one of two ways: either by deeply educating yourself to where you become an investment expert, or by working with a good financial professional who charges a fair fee. In either case, you should be looking for investments that are low-cost with a strong track record and good prospects for the future and fitting those into a good evidence based strategy. Being aware of the various types of fees, their implications, and taking steps to mitigate their impact can help you make more informed investment decisions and work towards achieving your financial objectives.  

Whether you or a professional are leading your investments, invest smartly and invest well! 

Larry Sidney is a Zephyr Cove-based Fiduciary Investment Advisor Representative. Information is found at https://palisadeinvestments.com/ or by calling 775-299-4600 x702. This is not a solicitation to buy or sell securities. Clients may hold positions mentioned in this article. Past Performance does not guarantee future results. Consult your financial advisor before purchasing any security.