How Much Will You Pay in Advisory Fees Over Your Lifetime?

Understanding the Long-Term Impact of Advisory Fees

Although seemingly small percentages, advisory fees can have profound impacts on your long-term financial health. While you benefit from the power of compound interest in your investment portfolio, the same compounding effect acts to your detriment when it comes to your advisory bill. Often more than you realize. In this article, we provide a simplified example that quantifies these effects over an individual's lifetime.

The Compounded Impact of Advisory Fees:

Starting with a portfolio of $1 million at age 35 and an advisory fee of 1% paid annually, let's assume your portfolio grows by 7% every year.

At age 35, we assume the following:

• Portfolio: $1,000,000

• Growth: $1,000,000 x 7% = $70,000

• Fee (Paid at Year End): ($1,000,000 + $70,000) x 1% = $10,700

• Ending Balance (Net of Fee): $1,059,300

Repeating this process annually, we calculate the degree to which your portfolio grows and fees accumulate. Assuming no incremental additions or subtractions (an assumption that is unlikely to happen in reality), the final result is:

• Portfolio Value (Net of Fee): $10,017,489.

• Total Fees Paid: $1,627,101.

• Total Fees Paid as % of Portfolio: 16.2%

Are you happy with this outcome? Well, it depends. On one hand, you 10x'd your portfolio value over your lifetime - an impressive feat that few actually achieve. But on downside, you paid $1.6 million dollars to achieve this wealth accumulation. Although your advisory fees were only 1% annually, the cumulative amount grew to represent 16% of your total portfolio value by the end of this experiment. With the compounding of investments comes the compounding of fees.

Shelling out nearly two million dollars in advisory fees over four decades is no trivial matter. This is why we obsess over our client's advisory fees at Financial Advisor Review. But our philosophy is not to avoid fees altogether - as we believe most of our clients would have a challenging time achieving a 7% annualized return without the guidance of financial professionals along the way. Instead, we focus on achieving maximum value for the fees our clients pay. Whether that's through superior investment capabilities, or expanded financial services. When we observe the ratio of "fees-to-value" is out of line, we work with our clients to either negotiate fees with their current advisor, or help them find a more aligned firm.

The impact of this process helps tilt the compounding back in your favor. Running the same analysis as the above, if our hypothetical client had been charged a reduced rate of 50 basis points (or 0.50%) instead of 1%, they would have saved $695,803 in advisory fees over 40 years. This demonstrates the importance of understanding and potentially negotiating fee structures.

Conclusion

The expertise of a financial advisor can prove invaluable in navigating the complex world of investments. However, understanding the compounding ramifications of advisory fees is crucial. Even a slight reduction in current fees or future fee structures can result in significant long-term savings. At Financial Advisor Review, we actively negotiate fees on your behalf with advisors. Because we believe that while expert advice has its value, overpaying for commoditized financial services is one of the most costly mistakes you can make in your lifetime.

Informed decisions today can lead to a more prosperous tomorrow. Let's journey there together.

Disclaimer: This hypothetical scenario is provided for illustrative purposes and doesn't account for potential variables like changes in fee structures as your assets grow, additions, withdrawals, or unforeseen financial events. Always engage with a financial professional when basing decisions on such projections.