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Why Fees Matter!

Why Fees Matter!

June 10, 2023

´╗┐Financial planning is finding out where you want to go, where you are now and developing a plan to help you reach your destination. Achieving financial goals is the driving force behind any investment strategy, and asset growth will typically be the most critical element in the process.

We have control over the amount of our investment. We also have control over choosing what financial goals we want to achieve. The one variable in the above chart that we have limited control over is the growth of our investments.
Compounded growth is arguably the most potent investment strategy available, and if tax deferral is also enjoyed, the cumulative growth of your investments over time can be staggering. The investment objective should maximize growth, which involves reduced fees, tax efficiency, and appropriate investment strategies. 

Below is a chart that should illustrate both the power of compounded growth and the eroding effects of excess fees paid for access to the capital markets. Even minor differences in the annual fees of an investment program can have a dramatic impact on long-term accumulated growth: 

¹Assume constant 7.0% return. An annualized return of 7.0% for a specific period will result from varying returns each year, which may have a less or more significant impact on accumulated balances.

Whether the investment is for one million dollars, one thousand dollars, or one hundred dollars, the higher the expenses paid for your investment strategy, the greater the probability that the ultimate growth will fall below what could otherwise be attained through a more efficient, long-term strategy. For example, an investment that earns a 7.0% gross return a year (assuming constant growth) but incurs a 2.0% annual expense rate will net 5.0% a year.

¹Assume constant 7.0% return. An annualized return of 7.0% for a specific period will result from varying returns each year, which may have a less or more significant impact on accumulated balances.

What types of returns are available?

Investment is about risk and return. 
Below is a chart of the annualized returns of major indexes representing various asset classes for 10,20, and 30-year periods. Please note that the index returns are not derived from an actual fund - it is a measure of the weighted average returns for the entire asset class - a benchmark to which comparison can be made with your investments. The returns do not include any expenses which will reduce the investor's net return.


For instance, if your portfolio is allocated 60% to U.S. Equities and 40% to Government and Corporate bonds of different maturities, the expected return from using the relative benchmarks would be as follows:

A Solution

 Higher-than-average fees should only be justified when the returns are expected to be above average. Unfortunately for the individual investor, higher fees generally produce lower returns, dramatically affecting long-term growth.

A solution for long-term investors should include a fee-only adviser — no loads, no commissions (not merely fee-based or part fee and part commission), serving as a fiduciary (and not "buyer beware" with mere suitability requirements), investing in institutional investments as opposed to retail investments (Class A, B, C and so on), and possessing the substantial experience, qualifications, and education.

Please review our website for additional information about our financial planning and investment management services. Please contact us ´╗┐if you have a question or would like to schedule a no-charge consultation.

Investments involve risks. The investment return and principal value of an investment may fluctuate so that an investor’s shares, when redeemed, may be worth more or less than their original value. Past performance is not a guarantee of future results. Diversification neither assures a profit nor guarantees against loss in a declining market. There is no guarantee that strategies will be successful.

See Fee Schedule for Carr Wealth Management, LLC