Low Fees Matter

It is almost impossible to overstate the importance of low fees in investing. A difference of 1% in fees over an investment lifetime can add several years of work to retirement. A difference of 2.25% in fees over an investment lifetime can deplete two thirds of your retirement savings. Understanding this simple fact that low fees matter is critical to your financial success: hundredths of a percent matter in financial fees.

This hypothetical illustration doesn't represent any particular investment nor does it account for inflation. It assumes $50,000 is invested into an account that earns 7% a year for 50 years. The y-axis represents total portfolio value net of all fees, while the x-axis represents years assuming a 7% annual return, across three different annual fee rates. Calculations assume fees are paid on an annual basis in arrears based on a percent of the year-end portfolio value. The differences in account values across different fee levels represents both the amount paid in expenses as well as the "opportunity costs"—the amount you lose because the costs you paid are no longer invested. There may be other material differences between investment products that must be considered prior to investing. Investing involves risks. Performance cannot be guaranteed.

When considering why low fees matter, research shows it is ironically fees themselves that drive underperformance of actively managed funds.

Financial advisors are allowed to receive compensation from funds they sell to you as sales charges. Amazingly, this blatant conflict of interest is legal. These may be disclosed in very fine print where you are likely to miss them. Be aware that this is going on, and you are the one paying for it.

"Do you really want to invest in a system where you put up 100% of the capital and as the mutual fund shareholder you take 100% of the risk, and you get 30% of the return?" ~ John Bogle, on mutual funds.

2.25% in higher fees may not seem like much but consider a hypothetical case where your investments return 7% annually over the next decade. The additional 2.25% in fees would consume over 32% of your returns in the first year! But it gets worse. Because of the compound curse of fees, this 32% won't be making money for you the next year, the following year, and so on. This is how fees compound to erode your retirement savings in a significant way and emphasizes why low fees matter.

"In investing, you get what you don't pay for. Costs matter." ~ John Bogle

The effect of this is a slow grinding away of your assets. You don't want this when you are starting to invest and your asset base is relatively small, as it will face headwinds in growing large. And you don't want this if you are wealthy, as these small percentages equate to huge dollars.

"About the only thing that's changed on Wall Street is that computers have replaced pencils and graph paper. Otherwise, the basics are the same. The investor's need to believe somebody is matched by the financial advisor's need to make a nice living. If one of them has to be disappointed, it's bound to be the former." ~ John Rothchild, Financial Columnist, Time Magazine

And some good news.

Take a look at our fees page. We think our low fees fall in the category of refreshingly good news.

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