Broker Check
Time to Review Your Investment Costs - They Matter!

Time to Review Your Investment Costs - They Matter!

April 21, 2022

 Since 2002, the S&P 500¹ has lost value in only two of those years: <37.0%> in 2008, and <4.4%> in 2018. Investors have enjoyed positive market returns  ninety percent of the time since 2002 (S&P 500 represents approximately 75% of total U.S. market capitalization). I have found that positive returns tend to make many investors less concerned about the costs and fees involved in achieving those positive returns. Negative returns, on the other hand, will make an investor pay more attention to the costs incurred since losing portfolio value while paying a bunch of costs to do so seems counterproductive to many investors.

 Probably the most powerful investment strategy that exists is compounded growth - earnings on earnings and interest on interest. The impact of compounded growth on accumulated balances can be astounding. But the impact of larger fees on accumulated growth can also be astounding (see chart below). Maximizing the available long-term investment strategies should include the lowest costs possible provided you have access to low-cost investments.

Does "You Get What You Pay For" Always Apply?

“You get what you pay for” is a common saying when assessing the value of goods or services received. Although the value of a service is typically harder to evaluate, the area of financial planning can certainly apply the age-old proverb as well. The more knowledge and experience the source of your financial advice, the more equipped you are with resources to help you reach your financial objectives. Investment management, probably the most critical step in the planning process, is not necessarily an area where the more you pay for something, the better product or service you will receive. In fact, in most cases, the more costs paid for their investment experience, the less returns an investor will typically receive.

 When it comes to investing in today’s markets, the “you get” part of the “you-get-what-you-pay-for” adage is getting the opportunity to access long-term market returns. The “what you pay” part is the total cost to have access to these market returns. The market returns are already available to investors without the need to pay additional costs. There have been several studies to verify that higher costs produce lower returns, but it is also common sense that the more returns that can remain in your pocket are much more beneficial to you than paying excess fees to somebody else. The long-term impact of lower compounded returns due to higher fees can significantly diminish the accumulated growth over longer time periods. 


Investors A, B, and C each have $300,000 to invest. The gross annualized return (before fees) for each portfolio for the past 30 years is 7.50%. The percentage of the portfolio that is paid in total annual fees for each investor is:

Investor A – 1.0% annual fees, 6.5% annualized net return

Investor B – 2.0% annual fees, 5.5% annualized net return

Investor C – 3.0% annual fees, 4.5% annualized net return

** The 7.5% is the annualized return for the 30-year period. The actual returns each year may be higher or lower than the 7.5% annualized return. No withdrawals or contributions are assumed.  

Investor A, who pays only 1% of his portfolio value in total fees will accumulate considerably more value than Investor B and Investor C, even though each investor earned the same gross market returns. For Investor C, the higher annual expenses can only be justified if the investment returns made up the additional fees. In other words, given the same investment returns, investor C will have to outperform investor A by at least 2% to generate a larger comparable return. 

Types of Costs

Investment costs come in a variety of forms. These costs include all costs associated with your investment strategy, including:

1) Advisor Fees - Commissions, front-load charges, back-end charges, fee-only charges, and other methods that are designed to pay the advisor or broker. 

2) Custodial/Brokerage Fees - General and administrative costs charged by the brokerage or custodian for accounts held at their firms. These costs would include insurance company expenses for managing the various annuity contracts serviced.

3) Mutual Fund Fees - Costs incurred to operate mutual funds including operating expenses, manager fees, and advertising costs.

4) Third Party Fees - Costs incurred to additional service providers who offer various help in investment-related functions such as portfolio management, recordkeeping, stock research, and other miscellaneous roles.

5) Transaction Fees - The costs incurred to buy and sell investments. The more transaction-oriented the investment strategy, the higher the transaction costs in most cases.

 Investing may also incur non-direct expenses but nevertheless can have the same impact on the available long-term market returns. Underperforming the available market returns can be a result of higher expenses and ineffective investment strategies. With inflation at its highest level in 40 years, its imperative that retirees attempt to earn returns that can keep up with inflated prices for items that are major components of a retirees budget - health care, prescriptions, and potential long-term care costs. But in order to keep up with inflation, greater exposure to riskier assets may be needed or portfolios may decline faster and risk dramatic lifestyle changes. The current inflation surge is creating unexpected issues with retiree's planning and investment goals. The prospect of having to expose yourself to a greater level of risk than you thought you would have to at this point can be an uncomfortable situation.

Carr Wealth Management, LLC can help identify the costs associated with your investments. In addition, a portfolio review can be performed to evaluate your holdings and how they are compatible with your risk adjusted goals and objectives. The company has maintained the same investment philosophy for over 20 years, which is to provide clients access to a more efficient way to invest through low-cost, widely diversified, and tax efficient vehicles designed to appreciate over the long-term. Please contact us for a no-charge initial consultation or if you have a question.

Thank you. 

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.