- Investment funds charge management fees that can range from just a few basis points to well over 1%.
- About a decade ago, I updated my investment strategy to lower fund fees based on advice from investment app Personal Capital, and it saved me an estimated $US300 per year.
- When I plugged that $US300 per year into an SEC investment calculator with an 8% return compounded monthly, it showed me that over a 40-year career, I’d save more than $US87,000 in fees.
Over the course of earning an undergraduate degree and an MBA in finance, I learned a thing or two about investing. I learned all about building diverse portfolios, analysing stocks, and mastering the markets.
While I had done the maths on the costs of investing in funds many times, they often seemed like an inevitable aspect of money management. After all, many of my old classmates went on to work as mutual fund managers, among other investment-related careers.
But after plugging my account into Personal Capital, a online money management platform run by an investment company of the same name, I found I could make some changes that would ultimately save more than $US87,000 over a 40-year career.
Personal Capital analysed my investment fees
When getting acquainted with Personal Capital, I was impressed with the clean interfaces and the variety of tools that let me understand and analyse my investments in just a few clicks. It gave me some ideas on adjusting my portfolio allocation and a breakdown on my investments and showed me how I compared to major benchmarks, among other features.
But the place where Personal Capital had the most direct and measurable impact for me was the Investment Checkup section. Clicking on the Costs tab shows you the fund fees you pay per year in all of your accounts and funds.
Then, the Retirement Fee Analyser has an adjustable calculator that shows you multiple scenarios and what fees could cost over time. Plug your actual fees from the Investment Checkup into the Retirement Fee Analyser to get an estimate of fees including future contributions.
Note that while anyone can use Personal Capital‘s tools for free, its investment services – it offers a combination of algorithmic management as a robo-adviser and human advisers for more personalised management – charge a fee of 0.49% to 0.89% depending on your account balance, with a minimum balance of $US100,000.
Using the list of fees from my Investment Checkup results, I went to work cutting my fees to the 0.08% average I pay today.
Updating my fund strategy based on Personal Capital results
I started building my retirement portfolio through my first employer’s 401(k) plan. When I left, I rolled over my account to a Rollover IRA at Charles Schwab. In addition to my Roth IRA at Schwab, I had a big enough balance that I wanted a professional opinion on how to structure my investments.
I ended up with a diverse portfolio made up completely of funds with no transaction fee at Schwab, something I appreciated at the time. But looking at the fund fees again, I knew I could do better.
I ultimately moved most of the investments into a combination of mutual funds and ETFs from Schwab and Vanguard. I know I could save a little bit more with a bit of work, but I made strides compared to my starting point.
Over the course of my changes, I saved an estimated $US300 per year based on my balances at that time. Of course, I have a larger portfolio today and would be paying even more now. I plugged $US300 per year at 8% into an investment calculator from the SEC, compounding monthly, to see what that would save me over a 40-year career.
The results showed I saved myself about $US87,275, but possibly six figures depending on my performance! That’s an incredible payoff for such a small time investment and up-front cost to change up my portfolio to lower-cost funds.
Don’t underestimate the long-term cost of fees
If saving myself a measly $US300 per year in fees adds up to a nearly six-figure savings, imagine what you could save over time by improving your fee structure. And if you have a professional investment manager, make sure they keep your money in low-cost funds and don’t charge you too much themselves.
If you pay a professional investment adviser $US5,000 a year to manage your money, they had better be good. That compounds to nearly $US250,000 over 20 years and nearly $US1.5 million over 40 years. Investing isn’t that complicated, and you can get a much better deal with most modern robo-advisers like Betterment, Wealthfront, or Schwab Intelligent Portfolios.
Don’t ignore or underestimate the cost of fees in your investments. You could end up losing years of income that can be easily saved with a little fund research and a few clicks.