By Grayson and Steve, Your Biblically Responsible Investing Partners
Being a good financial steward is about more than just picking the right stocks or funds—it’s also about understanding the investment fees that can quietly erode your returns over time. In this post, we break down the hidden costs of investment fees, compare fee structures, and share tips on how to minimize them to maximize your portfolio’s growth. Whether you’re managing a modest sum or a million-dollar portfolio, the difference a small percentage in fees can make over time might shock you.
Why Investment Fees Matter
Many investors are unaware of the fees they’re paying because brokerage firms and insurance companies often obscure them. Fees can be tucked away in mutual funds, ETFs, or advisor charges, making it hard to see their true impact. However, even a 1% difference in fees can result in a significant loss over a 20-year period, especially for larger portfolios.
For example, consider a $1 million portfolio. At our biblically responsible, fee-only firm, we charge 60 basis points (0.6%) annually. Compare that to another firm charging 1.5%, a common rate when you factor in advisor fees plus the expense ratios of ETFs and mutual funds. Over 20 years, assuming an 8% annual return with quarterly compounding, the higher-fee portfolio could cost you over $700,000 more than ours. That’s the power of minimizing fees.
Hidden Fees in Mutual Funds and ETFs
Mutual funds and ETFs often come with a variety of fees that can catch investors off guard. Here’s a breakdown of the most common ones:
- Upfront Fees (Front-End Loads): Some funds charge a percentage (e.g., 5.75% for American Funds Washington Mutual) when you invest, meaning only a portion of your money is actually invested. For a $100,000 investment with a 3.5% front-end load, you’d start with just $96,500 working for you, making it harder to catch up even with lower management fees.
- Back-End Fees: These are charged when you sell your investment, reducing your returns.
- 12b-1 Fees: Marketing and distribution fees, often charged annually or multiple times a year, can range from 0.25% to 1%.
- Expense Ratios: These ongoing fees cover fund management and operations. For example, a fund with a 0.55% expense ratio may seem low, but it adds up over time.
Many funds deduct fees daily, which smooths out the visible impact on your portfolio’s performance but doesn’t reduce their long-term effect. Over 20 years, a $100,000 investment with a 3.5% front-end load and modest management fees could lag behind a no-load, low-fee alternative by $300,000.
How to Reduce Your Investment Fees
To keep more of your money working for you, consider these strategies:
- Choose Low-Cost Funds: Seek out no-load mutual funds or ETFs with low expense ratios and no 12b-1 fees.
- Work with a Fee-Only Advisor: Unlike advisors who earn commissions, fee-only advisors charge a transparent percentage of assets under management. Ask if they’re a fiduciary—someone legally obligated to act in your best interest 100% of the time.
- Ask the Right Questions: When evaluating an advisor, ask:
- Are you a fiduciary at all times?
- What are the total fees, including any front-end, back-end, or 12b-1 fees?
- What is the expense ratio of the funds you recommend?
Why Choose a Biblically Responsible, Fee-Only Firm?
At our firm, we prioritize transparency and alignment with your values. As a fee-only, biblically responsible investing firm, we charge just 60 basis points on a $1 million portfolio, significantly lower than the industry average. This approach ensures your investments reflect your faith while keeping costs low, allowing your portfolio to grow more effectively over time.
Get a Second Opinion
If you’re unsure about the fees you’re paying or whether your advisor is truly working in your best interest, we’re here to help. Reach out for a complimentary portfolio review, and we’ll analyze your current investments to ensure they align with your goals and values.
Until next time, may God richly bless you.
Grayson and Steve, Investment Advisors