There appears to be a lack of understanding among investors about some of the fees they pay.
Nearly half (47%) of investors mistakenly think the cost of investments like mutual funds and exchange traded funds generally are included in the fee they pay to their advisor or online investing platform, a study from State Street Global Advisors shows. Among those working with an advisor, the share stands at 60%.
“There are other fees in addition to paying an advisor,” said Brie Williams, head of practice management at State Street Global Advisors. “Depending on the investments, some will have fees associated with them.”
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The older an investor is, the less likely the person is to think the cost of mutual funds and ETFs are included in their advisory fee, the State Street study showed. While 71% of millennials share that incorrect assumption, the numbers are lower among Generation X (51%) and baby boomers (36%).
“We encourage all individual investors to take the time to understand what the expenses they pay are, regardless of whether there’s an advisory relationship or not,” Williams said.
The fees paid for investments and management of them have been falling for some time, generally due to competition from the emergence of lower-cost options. What you pay matters, because it takes a bite out of money that otherwise would be in your account to continue growing. The bigger the yearly expense, the bigger the hit to your earnings over time.
Say you invested $100,000 for 20 years and its annual return was 4%. If you paid 0.25% yearly, you’d have close to $210,000 at the end of those two decades, according to the Securities and Exchange Commission’s Office of Investor Education and Advocacy. By contrast, if you paid 1% a year, that $100,000 would grow to about $180,000.
The median fee paid to an advisor is about 1% of the assets they manage for you, according to NerdWallet. If you use a so-called robo-advisor — online services that provide automated investment management — the fee generally ranges from 0.25% to 0.50%.
For mutual funds, the yearly cost is expressed as an expense ratio, and comes with an average of 0.51%, according to State Street. For ETFs, that figure is 0.2%.
“Whether [fees] are baked into the funds selected as an expense ratio, charged as a brokerage fee on the investment account, or added on as a stock trading commission when the investment is bought or sold, it’s important that an investor take the time to understand the associated costs that they may encounter,” Williams said.
Of course, it shouldn’t be your only consideration.
“While minimizing fees tends to maximize performance over time, don’t let price on its own dominate your decision-making,” Williams said.
If you work with a financial advisor and are unsure how much you are paying overall for their services and your investments, you should ask.
“Ask how they are compensated, what that fee covered and whether there are other costs associated with their services,” Williams said.