Every wealth manager has a theory on where to invest, but their advice and the opportunity to participate will cost you—as we all know, the higher your cost of investing, the lower your overall profit.
Most money managers, private equity funds, and hedge funds charge fees according to the “two-and-twenty” model, meaning they charge an average of 2 percent on all assets under management (AUMs) and an additional 20 percent of the “upside”, or profits earned by the portfolio.
Mutual funds, ETFs, and other lower-cost public alternatives have varying “expense ratios” which represent management fees but do not include brokerage fees or commissions. A relatively “reasonable” expense ratio of 1 percent means that 1 percent of the total assets within the fund each year will be used to cover the fund’s expenses.
Money management fees are high in nearly every case, with servicing fees that usually sit at more than one percent. In most traditional exchange-traded REIT investments, for example, one must pay brokerage fees, and in the case of non-traded REITs, fees can amount to nine percent to 10 percent of the total investment. Minimum investments can range from tens to hundreds of thousands of dollars.
Enter the Internet
However, the internet has put power back in the hands of consumers by providing more direct access to investments so that they no longer need to forfeit large shares of profits to fees. Motif Investing, Wealthfront, and Betterment provide investors with the ability to invest in diversified portfolios with nominal fees.
Crowdfunding is a great vehicle for individuals looking to move beyond the public markets and gain exposure to commercial and residential real estate. Companies like Fundrise provide investors with access to commercial real estate assets for substantially lower fees and lower minimums than other investment avenues can provide.
With Fundrise, anyone in the US can get direct access to diversified pools of commercial real estate assets through our eREITs, regardless of net worth. Because of the efficiencies possible through our direct, tech-enabled platform, Fundrise is able to charge just 1 percent in asset management fees per year and allow minimum investments of $1000.