The difference between the most and least aggressive portfolios is a whopping 0.53% a year…Overlay a simple 1% management fee on the most aggressive portfolio and look again at the returns…you have turned the highest returning allocation into the lowest returning allocation. -Meb Faber
The performance of various asset allocations from a low equity allocation of 44% to a high equity allocation of 74% tend to converge over a long time horizon. Any benefit from a smarter (i.e. luckier) asset allocation are blown away by fees. In fact, subtracting a 1% advisory fee (advisory fees, kickbacks, churning, other hidden costs) from even the best performer resulted in a huge drag on performance:
If your advisor uses average-priced mutual funds or separately managed accounts, the drag on performance over time is even more dramatic:
So how much longer will you be working to make up for your advisory fees and mutual fund fees? You could be working more than a decade longer.
- If you invest $500k in low-cost funds that return 7% over 25 years, you will accumulate a balance of $2.7M.
- If you invest $500k with an advisor that takes 1% annually over 25 years (through advisory fees, kickbacks, churning, other hidden costs), you will wind up with a balance of $2.1M. You have to work 4 years longer to reach the same balance.
- If you invest $500K with an advisor that skims 1% over 25 years (through advisory fees, kickbacks, churning, other hidden costs) and uses mutual funds or money managers that take another 1.25% off the top, you will wind up with a balance of only $1.6M. You have to work 12 years longer just to keep up with your peers!
Click here to learn how to transfer your investment accounts to get out from under the oppressive fees.
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