Money Club for Young Adults
Fees When Investing
The investment industry is a for-profit industry. Its primary job is to sell you financial products. And collect fees to cover expenses and earn a profit. It is not rational to expect someone to work for free.
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The investment industry's secondary job is to earn you the best risk/adjusted return possible. This is important to remember. You come second.
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How much are we talking about?
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If you have a full service investment advisor you might be paying total fees of 2% per year (their direct fee and the fees you pay on products they put you in).
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Does 2% in fees really matter over time?
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2% per year in fees sounds like a small amount. It is not. ​We run the numbers below.
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What is a potential solution?
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Take control of your investments - decide what you want to do and then execute the trades yourself. To do this you need to be prepared to do the work - to learn the basics and manage your investments over time.
Does 2% in fees really matter over time?
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Let's assume you contribute $7,000 each year for the next 35 years. Over this timeframe, let's assume the stock market delivers a return of 8% per year (a reasonable assumption). If you use a full service advisor, after fees of 2%, your return will be 6% per year.
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Example 1: You use a full service advisor. Your return is 6%
Annual contribution = $7,000
Average annual return = 6% (8% - 2% in fees)
Total value of investment after 35 years = $808,000
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Total contributions = $245,000
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Total investment earnings = $563,000
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Example 2: You invest yourself. Your return is 8%
Annual contribution = $7,000
Average annual return = 8%
Total value of investment after 35 years = $1,290,000
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Total contributions = $245,000
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Total investment earnings = $1,045,000
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Would you rather have $808,000 or $1,290,000 in 35 years time?​
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Total contributions are the same in both examples ($245,000). However, investment earnings are almost 50% less in example 1 compared to example 2. The difference is $482,000.
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Summary: An extra 2% per year compounded over 35 years makes a massive difference to the total value of your investment.
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The story gets even better. Let's assume you executed example 2 in a TFSA account. After 35 years, your total investment earnings of $1,045,000 would be tax free. That is amazing wealth creation.
Example 1​
Example 2
