Gasoline right at the highway exit is usually cheapest. Drive a few miles toward town and you might see a 10 cent per gallon jump. Ever wonder why?
If you said “competition,” go to the head of the class. Gas stations tend to cluster around knots of highway traffic. The driver near empty on a country lane has to gas up immediately or take the risk of running dry miles from the next fill-up.
Gasoline is gasoline. Where there’s competition, prices are usually low — even identical down to a fraction of a penny. So what gives with investment fees?
A new report shows that the cost difference between low-fee and high-fee financial advisors is staggering — roughly nine times more costly, mostly hidden in fine print.
The lowest cost advisor, according to the data, is Vanguard Group. No surprise there. The firm founded by indexing pioneer John Bogle offers personalized investment advice at a cut-rate price of just 0.38% of assets.
That means an account with $100,000 in investment value costs $380 a year to manage, counting both fund fees and face time with an advisor.
Charles Schwab is comparable at 0.44% ($440 a year) and from there prices begin to ramp up. Personal Capital, which did the research, came in at between 0.87% and 0.97%.
After that, prices really jump. Edward Jones (1.70% to 1.80%), JP Morgan (1.56% to 1.86%), Merrill Lynch (1.33% to 2.33%), Wells Fargo (1.93% to 2.43%), Morgan Stanley (2.42% to 2.92%), then UBS (2.94%).
At the very top of the high-cost list is Ameriprise. Fees at the nationwide financial planning firm can be 2.25% and 3.50%, the report states.
In dollar terms, that means that a portfolio that costs $380 a year at Vanguard could run you as much as $3,500 a year at Ameriprise. (TV advertising is expensive, right?)
Many investors seeing this list will squawk and say, “Well, I’m sure I don’t pay that!”
But are you sure? A lot of well-educated, smart people — folks who know their way around numbers and otherwise manage their finances well — clam up when it comes to asking about investment costs. One survey showed that 61% of us have no idea what we pay. Many in 401(k) plans think they pay nothing!
Stock brokers absolutely love the cost-shy client. If pressed, of course, they will explain some of your fees, a lie by omission that goes like this:
Client: “How much do I pay you?”
Broker: “Me? About 1%, the industry standard. Don’t worry about it.”
You probably do pay your broker a 1% fee based on your assets. What’s missing, however, are the multitudes of smaller fees that you don’t pay the broker directly but you nevertheless do pay.
Mutual fund fees, for instance. Add up all that and paying an additional 1% is typical.
Fees matter. That 2% or 3% taken by your financial advisor and fund managers is based on your total account balance, no matter what happens in the stock market.
Personal Capital helpfully summed up the impact of fees in the report. A typical retirement portfolio that charges 1% costs the investor $334,754 in fees over decades of investing, the company calculated.
The same portfolio at a fee of 3.50% per year, meanwhile, costs $830,931.
The difference is nearly $500,000, cash sucked right out of your retirement plan, quarter by quarter, year after year. That’s not even counting forgone returns.
That fee money instead is compounding away in the retirement plans of your broker and his preferred fund managers, firms that may have paid your broker extra for recommending them over similar but cheaper funds.
Asking for your fees — all of them — is not a sign that you don’t trust your broker. Being afraid to ask, however, is a serious and costly mistake.