What You Should Know About Investment Fees

By Blake Templeton, CEO of Boron Capital, a private investment firm that creates highly profitable investments serving diversified segments of the population.

As in most business dealings these days, investing typically comes with fees. In many cases, you get a common breakdown of the fees and expenses. But what if I told you that there are additional fees worked into your investment that you don’t even know about — and that aren’t required to be shared with you? In addition to that, most investors pay little attention to their fees because they are seen as a small expense, but in reality, fees can cost you significantly more than you have ever imagined.

Now more than ever, it is imperative to know exactly where your money is and where it is going. Understanding every aspect of your investments is the best way to ensure you are getting the most out of your money.

What fees are being taken out of your investment return?

When investing in the public market, you will have fees. Common ones shared upfront include management, distribution and service, and administrative and operating costs. These aren’t so bad, right? After all, you are paying them to help you make the best return on your money. These fees normally range anywhere from 1% to 3% and are taken out annually.

Now, what about those hidden fees? 

Transaction fees are one great example of hidden fees. When you participate in the public market, an exchange happens every time a stock is traded from stockholder to broker and from broker to stockholder. Transaction fees occur every time an investment is bought, sold or exchanged. The fund manager must pay brokerage commissions every time a transaction takes place, and the cost of those commissions isn’t paid by the fund manager, but by the funds of the shareholder. Transaction fees are not in most prospectuses, so they are often hard to find. However, they are contained in the statement of additional information, which is a document that companies have to provide upon request.

Now let’s explore not only the hidden costs, but the cost of fees in general, because It’s probably hurting your portfolio far more than you would have imagined. 

What is the true impact of the cost on you and your money?

The thing investors need to realize is that fees reduce the overall amount of your investment portfolio. Even a seemingly small fee percentage, over time, can add up to a large amount of money that could have been yours. 

Let’s just assume on average that your expense ratio is 1% and transaction fees are another 1.5%, equaling a total of 2.5% of your portfolio taken away. Those transaction fees are actually more than your expense ratio, especially when you consider the average lifetime of your portfolio — and they aren’t even on your statement! 

To show you just how much this 2.5% could potentially cost you, let me break down the math using actual dollars: 

At age 20, you open an account with no fees with an initial investment of $10,000 dollars, with an 8% annual rate of return, compounded every year for 45 years. At age 65, when you are ready to retire, your portfolio would consist of $319,204.49.

Now, let’s take this exact same setup, except this time you pay the “small” annual fee of 2.5%. With this one change, at age 65, your portfolio would then only consist of $111,265.54.

With the 2.5% annual fee over the lifetime of the investment, that is a loss of 65% of your potential earnings. So, those seemingly small fees led to a 65% decrease in your retirement funds. That is how investment fees are stealing your future. 

What can you do to remove the fees from your investment strategy?

Before you invest anywhere, you need to find out how they make their money and any additional fees that may not show up on your statement. Ask for the statement of additional information, and read through it so that you can find out what the investment strategy is costing you. Then you can comparison shop for the right fee structure for your investment. 

In the private market, there is variation in fees, which provides opportunities you might not find in the public market. In the private market, you may still go through brokers and pay some fees. You may also go straight to a firm with its own fees associated with deals. Others charge no upfront fees. It is different in each case, but because it is a private deal — an agreement between the investor and the firm — investors have more freedom to shop, negotiate and find firms that are aligned with their goals.

These opportunities in the private market space include avoiding brokers — unlike the public market. In this space, you can actually partner with people who don’t charge fees at all — their strategy is to make money with you and not off of you. So one consideration is looking for opportunities in the private market with private investment firms that offer little to no fees, where you can help build structures that are in the best interest of everyone involved.

It is extremely important to know your options in both the public and private markets. There are opportunities in each, but I would argue for looking closer at those available in the private market. At the end of the day, you want to know exactly where your money is and where it is going. Gaining an understanding of your investments is an easy way to make sure you’re getting the most out of your money.