[Plinker]

There have been many posts on TOTV concerning the AUM (assets under management) fee schedule that many financial advisors are charging. Personally, I have never paid such a fee. During my 30 years as a business owner, I paid my accountant and lawyer by the hour. When I sought financial advice , I hired a fee-only planner and also paid by the hour.

The following example shows just how much money the advisor is pocketing over a 25 year period.
We need to make several assumptions.
1. $100,000 invested for 25 years.
2. 6% annual return.
3. NO AUM fees or other costs. OR
4. 1.25% AUM fee plus 0.75% other fees such as expense ratios and trades for a total annual cost to the consumer of 2%.

Now comes the math geek in me. Here is the formula to calculate your individual numbers:
n
1 - (1 - f) where “f” is total fees expressed as a percent and “n” is number of years. 25
In my example: 1 - (1 - 2%)

Now, get ready to gasp. Here are the results:
1. With zero fees: Account balance after 25 years - $460,000
2. With 2% total fees: Account balance after 25 years - $266,000

You have lost a whopping 40% of your account balance. Obviously, your individual numbers will produce varying results. Try running the numbers with a $1,000,000 portfolio.

Granted, there are people that should seek the help of an advisor but at least you now know how much it is costing you. Also, now you know how they can offer “free” dinners and polo tickets.

This is the rationale why so many people are suggesting very low-cost firms such as Vanguard, Fidelity, Schwab, etc. While not for everybody, it is a great way to build a substantial retirement portfolio.
Fees matter!