I preach constantly about low-fee investing. The less you pay in fees and sales commissions, the more you’ll save and the longer your money will last. Even small costs add up to huge losses over time.
For example, assume that you put $500 a month into an investment account for 30 years, earning an average of 7 percent. At a 2 percent annual fee, you’ll wind up with about $409,500, as calculated by NerdWallet, a consumer finance website. If you slash that fee to 0.25 percent, however, you’ll retire with about $561,500—that’s $152,000 more! Every penny you pay cuts into your future or current standard of living.
What qualifies as a low fee depends on the type of investment you choose and on how you opt to buy it. Here’s what thrifty investors should be looking for.
The key is the expense ratio, which gathers together all the sales and administrative costs. Index funds—so-called because they track market prices as a whole— charge practically nothing. If you buy a fund that tracks the Standard & Poor’s 500 (S&P 500) index of big-company stocks, you’ll pay as little as 0.03 percent a year at the discount broker Charles Schwab (that’s 3 cents per $100), 0.035 percent at the fund company Fidelity Investments, and 0.04 percent at Vanguard. Index funds will be the lowest-cost choice in a 401(k), along with target-date funds—a mix of stock and bond funds appropriate to your age.
Index funds are called passive investments, as opposed to active funds in which managers try to beat the market by picking individual stocks. Active funds charge an average of 0.75 percent and usually don’t perform as well as the indexed group. Investors have noticed. They pulled $326 billion out of active funds in 2016 and poured a record $429 billion into passive funds, according to Morningstar’s report on mutual fund data.
Traditional brokerage firms
If you need advice, you might go to a stockbroker, aka “wealth manager” or “financial adviser.” But costs are high. For a broker-sold S&P 500 index fund, for example, you could pay as much as 1 percent a year or more. Your retirement account might be invested in high-cost shares of active funds when low-cost versions of the same funds are available. Mutual-
fund advisory accounts could cost up to 2 percent. “Wrap accounts,” invested with institutional money managers, range from 1.1 to 2.5 percent. Investors who don’t trade much could save a fortune by switching to an old-fashioned commission-based account.
You choose a planner for expert and ongoing advice about all of your personal finances. Typical fee:
1 percent for accounts under $1 million, with reductions for larger amounts. Underlying investment expenses might raise that to 1.5 percent or so among planners who don’t take sales commissions, and even higher among planners who do. The fee must include long-term planning. If you’re paying mainly for money management, you’re paying too much.
Jane Bryant Quinn is a personal finance expert and the author of How to Make Your Money Last. She writes regularly for the Bulletin.