Most folks are savvy about prices, at least when it comes to inconsequential purchases, say, paper towels at the grocery store. Retirement investing advice? That’s more complicated.
Consider paper towels. Brand A is your standby, you’ve used it for years and it gets the job done. But Brand B is new on the market and claims to be the same quality for slightly less money.
Be honest. You look at Brand B and really think about it, don’t you?
You do because money matters. You’re going to buy and use paper towels for years and years and you know it. Why not shave a few pennies off the price now?
You can’t just glance at the shelf, however, and see the price of a money manager. You have to ask questions, and that can feel downright rude.
Yet you must ask. You might be surprised to learn that there isn’t a simple answer. That’s because retirement investing fees come from several directions. Here’s an easy breakdown:
First, consider the fee charged by your financial adviser, if you hire one. It can vary, but this fee often ends up in the neighborhood of 1% or more of your total account value, deducted piecemeal throughout the year.
Add to that another 1.5% in fees charged by the mutual funds that your financial adviser buys on your behalf. Some financial advisers are stock pickers, but many prefer to buy mutual funds with your money and let other managers make the securities selections.
Retirement investing advice, added up
If you ask your adviser to add it up, he or she likely will express the weighted total in “basis points.” A basis point, in simple terms, could be thought of as is “a tiny fraction of 1 percent.”
So, take 1% and cut it into 100 pieces. Each of those tiny pieces is a basis point. Thus 100 basis points is 1% while 50 basis points equals 0.5%.
On a $100,000 investment then, a 50 basis point fee comes to $500 per year. A 100 basis point fee equals $1,000, while 200 basis points comes to $2,000, and so on.
In the example above, for instance, the investment cost adds up to 250 basis points (2.5%) or $2,500 for every $100,000 under management, each and every year.
Answering questions should not be alarming or stressful to a professional money manager. If you can’t find out the true total cost of your retirement investment funds by asking your financial advisor directly, take it as a sign that the news is bad.