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The Fee Bite and “The Sweater Guy”:
Time to Disinfect Your Retirement Savings Account

It’s easy to call it “friction” or write it off as “the cost of doing business,” but the fees we pay to maintain our investment accounts are worth a careful look. Taking a closer look at the various parasites eating away at your retirement account may well allow you to save more money in the end, investing and compounding savings you would otherwise pay in fees.

If you employ a wealth manager or broker to handle your account, you especially need to pay attention since unlike some fees, these are something you can control. Do you know exactly how much he or she charged you last year, compared to your return? While having someone else worrying about how you allocate your investments is probably worth something to most people, you have to ask yourself how much value are you getting in exchange for that bite out of your savings?

Take a listen by clicking on this short clip from Stacey Tisdale’s Real Money interview with Jonathan Satovsky and think about what’s being said. [Click to view the full news story.]

On one hand, Jonathan sounds like a guy who’s had success identifying the long-term potential of stocks, and who would prefer his clients “buy and hold,” or “set it and forget it.” After all, it’s his job to make you money, so why not just let him do it.

But on the other hand, time is money for a guy like Jonathan (or as we started referring to him, the "sweater guy”)—and not necessarily money for you. He can afford to wait—whether his stock pick works out or not. His clients pay him a percentage of funds under management every year, typically 1% to 2.5%, no matter how well he does. And the longer he can convince his clients that his strategy is the right one, the longer he doesn’t necessarily have to worry about making clients money. When Mr. Satovsky complains about a client wanting to trade the stock he’s put him in after thirty days, what he’s really complaining about is his client’s attentiveness to his results, and their awareness that the fees he is charging need to show their worth.

Examples help.

Suppose Larry and Lorraine are both 35 with $150,000 in their retirement accounts. Larry’s got a “sweater guy” who (let’s be charitable) charges him “only” 1% a year on his account, while Lorraine has shopped around for and found a new breed of fixed-fee advisors charging $600 per year. If the two advisors average a generous 10% return for their clients, one would assume that Larry and Lorraine would both be in fine shape. Indeed, after five years, their balances have grown to roughly $229,000 and 238,000 respectively, promising both investors a secure enough retirement in the long run. But by the time they reached retirement age (65), all those years of paying extra fees instead of being able to reinvest that money, Larry has amassed $1,900,000 compared to Lorraine’s $2,500,000, or nearly $600,000 less than Lorraine due solely to the more than $200,000 extra paid to the sweater guy.

A similar scenario can be found in Samuel Asare’s recent article for WomensJournal.com. Arielle O’Shea provides a detailed list of fees many investors may not be aware of. If you want to calculate your own costs, you can use a link like Personal Capital’s free Investment Checkup Tool, or here’s a good one from Buyupside.

Recall that our above example pegs the “sweater guy’s” fee at 1%. But, what if it’s more? And what if he’s falling short of Lorraine’s 10% return? Do you have confidence your “sweater guy” can outperform over the long run to earn their extra fees? In the example above, Larry’s advisor would have to outperform Lorraine's by nearly 10% just to break even on fees.

Whatever you do, make sure the calculation of additional savings from lower fees includes the compound effect of investing, every year, what would otherwise pay for the “sweater guy’s” next trip to Cabo.
 

Kevin L. Coppola, President, Compass Investors, LLC

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