Adviser Fee Reality: 1% Fees will cost you $1,000,000

October 31, 2017

Unfortunately, over twenty years or so, the $1 million cost for many is no exaggeration, much of it is hidden by rising markets and lost appreciation.  If you understand one thing about risk, this should be it.  Click on the Fee Illustration that I have prepared and print it out.  I used an 8% straight line growth rate  and a 4% ($40,000/yr) withdrawal rate on a $1 million dollar portfolio over 20 years to illustrate. 

 

I am saving commentary for later posts but the facts are clear.   I have illustrated fee amounts of 1%, 1.5%, and 2% on a $1 million portfolio  Here is  the summary.  With no fees or distributions a million dollars will grow to $5,033,834 compounding at 8%/yr.  With distributions it will grow to $3,056,917. These are the baseline outcomes by which I measure fee impact both with and without distributions.  Here are the results summarized in the two categories, with and without  distributions.

 

Without distributions: baseline growth =$5,033,834

  • A 1% fee will generate $480,075 in fees over 20 years and reduce overall account appreciation to $4,076,035, a $957,798 shortfall from baseline, nearly a million dollar impact.   In short the $480,000 in fees also impacted returns by ($477,723) in lost appreciation.

  • A 1.5% fee will generate $676,662 in fees over 20 years and reduce overall account appreciation to $3,664,880, a shortfall of $1,368,954 from baseline.   In short the $676,662 in fees also impacted returns by ($692,292) in lost appreciation.

  • A 2% fee will generate $848,249 in fees over 20 years and reduce overall account appreciation to $3,293,415, a shortfall of $1,740,419 from baseline.   In short the $848,249 in fees also impacted returns by ($892,169)  in lost appreciation.

 

With $40,000/yr distributions (4%)  baseline growth = $3,056,917

  • A 1% fee will generate $840,000 on distributions and $333,673 in fees over 20 years and reduce overall account appreciation to $2,297,980 a $758,937 shortfall from baseline, over 3/4 million dollar impact.   In short the $333,673 in fees also impacted returns by ($425,263) in lost appreciation.

  • A 1.5% fee will generate $840,000 on distributions and $465,714 in fees over 20 years and reduce overall account appreciation to $1,994,109 a $1,062,808 shortfall from baseline, a $1 million dollar impact.   In short the $465,714 in fees also impacted returns by ($597,094) in lost appreciation.

  • A 2% fee will generate $840,000 on distributions and $577,942 in fees over 20 years and reduce overall account appreciation to $1,722,583 a $1,334,334 shortfall from baseline, a $1.3 million dollar impact.   In short the $577,942 in fees also impacted returns by ($756,392) in lost appreciation.
     

Whether or not  you choose to put your assets into a fee based account, just be aware that using straight line growth, as do many financial plans, is a best-case scenario that's impossible to achieve.  Markets are volatile and while they may average 8%, the impact of volatility and burdens such as fees and distributions always worsens outcomes from these illustrations (click).  Given also that fees and distributions in a volatile market actually lower returns, investors need to determine if more conservative investments with lower volatility might not offer a safer choice if fees could be eliminated. 

 

In general, paying commissions on conservatively managed accounts with low portfolio turnover will greatly outperform fee based accounts. Are the fees worth the results?  Think hard about the benefits of giving anyone a 1%-2% carried interest in your portfolio before saying yes.  The certainty is that the equal outcomes can be achieved more conservatively and that fees require greater risk to achieve the same outcome.

 

 

 

 

 

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Frederick W Rosenberg JD

973-761-8866

27 Village Green Ct
South Orange, NJ 07079
USA

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