One of the most important factors affecting the success or failure of your investments is also one of the least visible: fees.

When it comes to selecting managed financial investments like retirement plans, mutual funds, exchange-traded funds, annuities, and private real estate investment trusts, it’s essential to know how much you will be charged in fees.

Otherwise, you could own a mutual fund or annuity with great diversification which invests in high quality securities, yet still do no better over 20 years than had you stuck your money into a bank certificate of deposit earning 1%. You could own a private real estate investment trust that owns great properties in AAA locations, yet lose your shirt. All because you didn’t pay attention to the fees.

Let me underscore that not paying attention to the fees is really easy to do. In fact, some of those selling these products often do their best to see that you don’t pay attention. Yet it is imperative to understand, in percentages and dollars, how much you are paying.

The total cost of an investment includes up-front fees and commissions, administration fees, annual management fees and commissions, and transaction fees. This information will seldom be offered, so you need to ask lots of questions. Even when you ask, the salesperson may sidestep the question, not know the answer, or give you the wrong information.

Here are two examples that I was recently asked about.

1. A woman had been advised to put her $1 million 401(k) rollover into a variable annuity sold by a well-known, established financial firm. She was told there were “no fees.” Here is what I discovered with a little research:

1. The upfront commission was 4.00%.
2. The annual fee paid to the advisor/salesperson was 1.50%.
3. The annual administrative fee was $50, and there was an insurance fee of 0.50%. No services were provided other than the administrative tasks of sending statements.
4. The charge for the underlying managers ranged from 0.80% to 1.65%, with an average fee of around 1.30%.
5. There were no transaction fees.

The total first year costs were 7.30%, and the annual ongoing costs were 3.30%. On $1 million dollars, that was $73,000 the first year and $33,000 a year thereafter. You will not build much of a retirement portfolio paying those kinds of fees.

2. A man with a $3 million investment portfolio was told he could reduce his investment costs from 0.75% to 0.25% by changing advisors. He figured this would save him 0.50%, or $15,000 a year. This is what a more complete comparison revealed:

He was paying his current advisor 1.30%, plus a few hundred dollars a year in transaction fees, and receiving full financial planning, which included investment, tax, estate, insurance, retirement, asset protection, and cash flow advice.

The proposed advisor would cost him 1.80%, plus $300 a year in various fees, for investment advice only. This ended up being 0.50% more than his current advisor, not 0.50% less as it originally appeared.

On $3 million, a difference of 0.50% a year equals $15,000. Instead of saving $15,000 a year, he would have actually spent $15,000 more—for greatly reduced services. This is a swing of $30,000 a year, which (assuming an average return of 5.50%) would have decreased his retirement portfolio by about $1 million over 20 years.

Fees matter. Even small-seeming fee differences matter.

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