The Impact of Fees on Financial Planning

Is your portfolio more complicated than necessary? I met with a prospective client this week whose current advisor has their IRA in a portfolio that includes the 22 funds shown in the image. In addition, they have two taxable accounts with this advisor that include another 24 funds. Overall, there are 46 unique funds being used across the 3 accounts and the advisor is charging a 1.5% AUM fee for the investment management. This might have seemed like a reasonable fee to them on the surface. There is a lot of perceived complexity, and it looks like it must take a lot of effort to research these funds and make sure an appropriate allocation to each fund is maintained. But here is the dirty, little secret… This portfolio can be recreated with just 3 funds that are rebalanced once per year: 48% Total US Stock Market 19% Total International Stock Market 33% Total Bond Market How do I know this? I analyzed the underlying asset exposures of the portfolio. Here is a breakdown of the process so you can do the same: First, go to Portfolio Visualizer and plug the ticker symbols and allocations into the “Backtest Portfolio” tool on the website. Then, scroll down to the “Exposures” tab and look at the “Asset Allocation” to determine the combined exposure to US Stocks, International Stocks, and Bonds. It's as simple as that. This is the process I used and I then plugged the asset allocations into index funds to compare how the 3-fund portfolio would have compared to the 22-fund portfolio. I was not at all surprised to see that the performance was almost identical. You can see the comparison in the backtest linked in the comments along with a picture of the comparison. But it’s hard to justify a 1.5% AUM investment management fee if you are only holding 3 funds. If you are currently paying someone to manage your portfolio, please go through the process mentioned above. You might be paying a hefty fee for perceived complexity and not actual value. Feel free to reach out if you need help with your analysis. #Investing #Engineers

WSJ - The Fees on These Funds Will Leave You High and Dry Jason Zweig on "One of Wall Street’s most popular trends, many interval funds omit a key detail from their pitch" "A key detail that’s omitted from the pitch: Some of these funds are also designed to harvest fees that mutual funds and exchange-traded funds don’t have the chutzpah to charge. Morningstar, the investment-research firm, tracks 100 interval funds with combined assets of more than $80 billion—up from only 14 with $2.9 billion a decade ago. The funds often leverage their portfolios with borrowed money—up to a third of total assets. About a third of interval funds charge management fees on their total assets, including the money they’ve borrowed. That effectively means, as an investor, you’re paying fees not only on what the fund owns, but on what it owes. The prospectuses of several interval funds say their recent borrowings carry annual interest rates of almost 6% to more than 8.5%. An interval fund that borrows one-third of its total assets could be adding somewhere between 2% and nearly 3% to its annual expenses. Then, on top of that, some managers charge management fees of 1% or more on the borrowed money." All this can push an interval fund’s total annual expenses toward 7% annually.  Imagine a leveraged interval fund could buy a private loan with a yield of 12%. After all costs, barely 5% might be left for you. Charging fees on the leveraged assets can lead to “a misalignment of interests with investors and an incentive to take risks,” Stephen Nesbitt of Cliffwater. https://lnkd.in/e-7qkz5U

The Hidden Costs of Capital Destruction—and How to Protect Your Wealth When it comes to building wealth, one thing can quietly sabotage your progress: capital destruction. This isn’t just about losing money—it’s about the many small, compounding effects of fees, taxes, inflation, and poor investment strategies that chip away at your financial foundation. Here are some key culprits: 1️⃣ Management and Advisory Fees Even a “small” annual fee of 1-2% on your investments can significantly erode your portfolio. Over decades, this adds up to hundreds of thousands of dollars lost—money that could have compounded. 2️⃣ Taxes Capital gains taxes and short-term trading penalties interrupt growth. Frequent buying and selling trigger taxable events, reducing what you can reinvest. Tax-efficient strategies, like long-term holding or investing in tax-advantaged vehicles, can save you from this erosion. 3️⃣ Inflation Even if you’re not actively losing money, inflation quietly reduces your buying power every year. Without investments that outpace inflation, you’re effectively moving backward. 4️⃣ Opportunity Costs Chasing high-risk investments or jumping between strategies prevents consistent compounding. Diversification is important, but over-diversifying or constantly shifting focus can leave you with mediocre returns. 5️⃣ Hidden Costs Transaction fees, account maintenance fees, or penalties for early withdrawals might seem small but accumulate into significant losses over time. The Cost of Interrupting Compounding Compounding relies on time and consistency. Every time your capital is diminished, you’re restarting the growth process from a smaller base. Over decades, this can mean losing out on exponential growth—a potentially life-changing difference in your financial future. How to Protect Your Wealth ✅ Go Low-Cost: Opt for investments with minimal fees. ✅ Think Long-Term: Avoid frequent trades and short-term speculation. ✅ Leverage Tax Strategies: Explore tax-advantaged accounts or investments. ✅ Combat Inflation: Focus on assets like real estate or debt funds, which often outpace inflation. Protecting your wealth requires awareness and action. Every fee avoided, tax minimized, or investment optimized keeps your capital compounding and your future growth efficient. How are you defending your portfolio from capital destruction?

Fees are insidious because the quietly drain your wealth without you noticing. When I personally look at my own investments, I think, "hey, that's pretty good!", because all I can see is the green part. The red part is what could have been, but it's invisible. That's why it's important to be vigilant about the fees that are being charged to your investments. And those big red slices are why I'm always banging the drum of "low fee index funds". Whenever I post something like this I hear someone say "Stop fear mongering, no one is being charged 2%". Here's a little story in response. Last week someone reached out to me and asked if I could help identify the fees they were being charged. They sent me a statement for a brokerage account with about $20,000 in it. Here's what I found. The $20K split across NINETEEN different actively managed mutual funds. The weighted average of those expense ratios was 0.6%. Not HORRIBLE, but not great. But that's not the end. This individual investor was ALSO being charged a quarterly management fee. On an annual basis it added up to 1.38%. Add those together and you get total annual fees of 1.98%. (And don't get me started about the tax inefficiency and underperformance they can expect from the bevy of actively managed funds in a taxable account). The above story isn't a case of outlandish and unusual fraud. It's the status quo for many investors who stumble into a financial advisor's office who offers to manage their investments for them. And you can see by the chart how devastating (yet invisible to the investor) the fees can be. What do you? Learn to invest on your own. No one will care about your money as much as you. And if you do want to talk to an advisor, find an advice-only advisor who doesn't manage your investments for an annual fee. Rather they help you set up your investments and provide advice for a flat fee. p.s. This is why we started Nectarine! To connect investors with advice-only advisors. Link in bio! As always, reminding you to build wealth by following the two PFC rules: 1.) Live below your means and 2.) Invest early and often. -Jeremy #fees #bogleheads #piechart #investments #money