The Wall Street Journal published a piece last week which posited that investment fees are easy to miss and can be detrimental to your finances.
Unlike cell phone, credit card, or utility charges, which are billed every month, investment fees are largely hidden, often deducted automatically from your assets.
And, they can seriously hinder the net performance of your portfolio.
The graph to the right shows how investments with identical anticipated returns can lead to wildly different yield due to differences in fees alone.
According to the WSJ piece, “Among similar investments, few metrics are as predictive of long-term performance as the fees you pay. The higher the fees, the lower, on average, returns will be.”
We’ve also seen this to be true in the real estate industry.
Often, rates of return are quoted without including fees. Depending on the fee structure, this number might be one to two percentage points* higher than the the real take-home rate of return. As a result, it pays to ask questions to find out whether the number you’re evaluating is gross or net. (More on this here)
This graph outlines how net returns of real estate investments with similar profiles can vary based on fees:
But, what if things changed? As the author of the WSJ piece asks, “What if, like most industries, investors had to pay an actual bill for financial advice and investment management? Imagine if your mutual fund not only underperformed its benchmark (as most do), but came with a bill for $740 a year.”
Tech can play a major role in disrupting a broken financial system, particularly as it relates to fees. Bringing the investment process online can create a more direct, transparent model, which can lower both operating costs and investor fees.
Regardless of your investment preferences, a savvy investor is one of who unlocks the full potential of passive income and succeeds in building a customized portfolio that fits their needs as a result.