Beneath the Surface: What You Might Be Losing to Hidden Fees

in Financial Planning, Personal Finance Essentials by

Paying your financial advisor an annual fee of two to three percent seems harmless. However, that seemingly small difference could crush your portfolio. Compounded over a lifetime, those percentages can add up to hundreds of thousands of dollars — potentially more than $400,000 according to our latest report “Hidden Beneath the Surface: What You Might Be Losing to Hidden Fees.” That’s your money that should have been available to you for financing your children’s education, purchasing that second home or enjoying retirement, but instead went into the pockets of a financial advisor or product seller.

Many Americans don’t understand how much they pay their financial advisors – and it isn’t their fault. It’s quite common to find advisory fees and expense ratios explained with industry jargon that is nearly impossible to decipher or hidden in the fine print – and then tracing them through your account is another feat altogether. Fees vary greatly not only across different firms, but even within the same organization—and ignoring these differences can be extremely costly. But, it’s not just about the fees, but what you get for them. In the report, we analyzed ten leading advisory firms (Ameriprise, UBS, Morgan Stanley, Edward Jones, Well Fargo, Merrill Lynch, JP Morgan, Charles Schwab, Vanguard and Personal Capital) to determine their associated fees.

Just as importantly, we share three key lessons for any investor to consider:

1. Identifying Fees is Hard

Could you easily and quickly answer what fees, expenses and charges you pay to your financial advisor? If the answer is no, you’re not alone. You might think you’re only paying around 1% in management fees, but truth is, the additional hidden fees you’re paying would make a loan shark blush. What’s more, you’ll probably be digging through pages of obscure terminology to find the fee information you actually want. If you don’t have a laundry list of every single fee your advisor imposes, demand one.

2. Hidden Fees are Often Siphoning Your Returns

Perhaps some financial advisors might be worth the generous fees they charge if they’re able to help their clients achieve their goals. But, for someone who is maxing out their 401k every year of their working career (21 to 65 years old) the total average additional amount lost to fees (1% to 3%) adds up to more than $400,000 over the course of a lifetime – higher than the median price of a home in the United States. Even a 1% difference (i.e. 2% vs. 1%) costs the investor an extra $240,000 in fees over that time horizon. Even worse, that doesn’t fully capture the amount the investor loses in total returns. Because fees are charged along the way, that money doesn’t have time to grow and compound. Using all of the above assumptions, the total amount an investor loses at a 3% fee vs. a 1% fee – including both fees and foregone returns – is more than $740,000 during their lifetime.

3. Consider the Value of Wealth Management vs. Fees You Pay

Humans have a tendency to believe that in life, you get what you pay for. For example, a Michelin-rated restaurant costs a lot more than the food truck outside your office. In March, we issued a poll that discovered 32% of people believe higher fees for investment accounts results in higher returns. While this is sometimes the case, it’s important to look at the whole picture when selecting a wealth management solution. When you go car shopping, you don’t choose a car solely based on gas mileage, you evaluate the car and all of its features in their entirety. Similarly to choosing a financial advisor, you want to select a firm that offers a holistic wealth management and financial planning service. At Personal Capital, we set out to help investors with complex financial needs, or those who want advice that goes beyond answering a couple simple questions to make a few simple mutual fund recommendations. There can be tremendous value in comprehensive financial planning by a fiduciary informed by sophisticated and dynamically updated digital tools. If done correctly, services like tax optimization, rebalancing, and estate planning can add value far beyond the service cost.

A Wealth Management Solution That Works

Managing financial accounts today is much easier than it used to be. Consumers have easy access to financial tools that help them become better investors. With Personal Capital’s free app and dashboard, you can use tools like our Fee Analyzer to discover the impact of hidden fees on your retirement savings. Our Investment Checkup tool allows you to see how well your investments are performing and how they could do even better.

Bottom line: It’s important to understand the range of investment fees you could be paying, the total level of fees charged by various firms, how fees impact portfolio returns over time, and what value or additional services to expect for certain fees. If the industry isn’t going to embrace full transparency, then it’s up to consumers to empower themselves by using technology and asking the right questions. Do your due diligence and make sure you fully understand what the potential associated costs are with your account. A good starting point is asking a financial advisor these three questions. For even more details on the potential impact of fees on your portfolio, download the full report below!

Download the Free Advisor Fee Report

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Jay Shah

Jay Shah

Jay is CEO of Personal Capital. He has over 20 years of leadership experience at privately-held and public financial services and technology organizations, over half that time spent building & running consumer-direct FinTech companies like Personal Capital and E-LOAN.

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Disclaimer. This communication and all data are for informational purposes only and do not constitute a recommendation to buy or sell securities. You should not rely on this information as the primary basis of your investment, financial, or tax planning decisions. You should consult your legal or tax professional regarding your specific situation. Third party data is obtained from sources believed to be reliable. However, PCAC cannot guarantee that data's currency, accuracy, timeliness, completeness or fitness for any particular purpose. Certain sections of this commentary may contain forward-looking statements that are based on our reasonable expectations, estimate, projections and assumptions. Forward-looking statements are not guarantees of future performance and involve certain risks and uncertainties, which are difficult to predict. Past performance is not a guarantee of future return, nor is it necessarily indicative of future performance. Keep in mind investing involves risk. The value of your investment will fluctuate over time and you may gain or lose money.