- You've worked and invested your whole life,
so it's finally time to retire and enjoy it.
Here's the $2.3 million that you have to live off of.
But before I give you this money
that you've worked really hard for,
I actually need to take half of it
and the reason for that is because you've worked with me
over the past 40 years
and you promised me that you were gonna pay me
half of your money.
Now you might think that this isn't fair.
If I take all of that money
and leave you with this,
then you can't retire yet.
You are going to have to either continue working
for quite a few more years
to make up for this loss
or you can retire with way less money
which is going to add an insane amount
of stress to your life.
This is exactly what happens
to millions of average investors every single year
when it comes to the fees that they pay when investing.
But the reason most don't realize it
is because instead of paying a fee
as a lump sum at the very end, like this example,
it's being slowly siphoned out of your account
every month or every year like a leaky faucet.
Over time, those fees add up
to an astronomical amount of money.
In this video, I'm going to show you how different fees
will not only cost you hundreds of thousands of dollars,
but also force you to have to work a lot more years
than you actually have to.
After watching this video,
you should be able to look through your 401(k),
Roth IRA, 403(b), 457 or your financial advisor
and see how much everything is really costing you.
I can sit here with a straight face
and promise you that this video could save you
or your loved ones
literally hundreds of thousands of dollars.
I cannot stress that enough.
I've gotta give credit
to the man who made this video possible, Jack Bogle,
because he taught me how important fees actually are.
This man used to constantly warn people
about the true cost of fees.
Where I think a lot of people get caught up
is not understanding how the total cost of fees
is calculated.
To use a very basic example,
let's use a 2% annual fee for assets under management.
If you invested $1,000 at a 7% return,
then in 10 years, that money would've grown
to a little under $1,700
after paying $267 in fees over that time.
This isn't so obvious to our human brains though
because it's not like we're handing over $267 in cash
to pay for the service.
In the case of an ETF or mutual fund,
the fee is being taken out
through adjusting the net asset value
of what you invested in.
On top of this, the cost is technically more than $267
for the example that we just went through.
The reason is because we need to calculate
the opportunity cost of you not being able
to invest to that money
and add it to the initial $267 fee.
The opportunity cost in this example is an additional $92
because if you would've instead
invested the $267 fee over those 10 years,
then at the same rate of return,
it would've grown to $359.
Once we account for the 2% annual fee
plus the opportunity cost,
you've actually paid 18% in fees, not 2%.
Since most of you will invest
way more than $1,000 over your lifetime,
you can see how this $359 fee
can turn into an even larger amount that you pay in fees.
Fees come in all different shapes and sizes.
Some are based on a percentage of assets
and others are based on a flat fee.
Let's first look at the fees associated
with something like a robo-advisor,
as well as different funds like ETFs,
index funds and mutual funds.
Then we'll move on to our favorite people,
financial advisors,
where I was a little surprised at what I found.
You'll usually see the fees for different funds
range from as low as 0.03% for index funds
to as high as a little under 1%
for actively managed funds.
Here's the reduction in value after 10 years of investing
in a fund with these expense ratios.
Here's the reduction after 20 years,
30 years and 40 years.
What makes it even worse
is that most actively managed funds
underperform a basic index fund.
So not only are you losing money that way,
but also through the high fees as well.
The good news is that if you've been investing
in any of these high fee funds for less than 10 years,
then you still have time to get out
without too much damage done.
To fully understand the damaged high fees cause,
we should look at this data
in a way that our human brains can easily understand.
The first is in total dollar amount lost.
We're going to assume someone invests $1,000 per month
at a 7% average annual return.
After 10 years, the blue bar is how much the investor has
and the gray bar is how much was paid in fees
including opportunity cost.
After 20 years, the fees for the two actively managed funds
are really starting to catch up.
After 30 years, we're starting to get to the point
where what was paid in fees to the actively managed funds
could basically buy a home here in the Midwest.
And hold your breath
because after 40 years of investing in these types of funds,
this is how much you would've paid in fees.
If you would've just swapped those actively managed funds
with that low cost 0.03% index fund,
then you could afford this a beautiful new $550,000 home
in the Columbus, Ohio area.
If you wanna help support my dog, Molly,
and this channel for zero fees,
then hit that thumbs up button and share the video
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I wanna show you these fees lost in one more way
to really help you understand
how it's going to crush your financial security
and retirement.
We're going to take the chunk of money you'd pay in fees
by the end of 10, 20, 30 and 40 years.
Then use the 4% rule to figure out
how much less you'll be able to spend in retirement
based on that safe withdrawal rate.
If you pay any of these fees for 10 years,
then this is how much less you'll be able to live on
in retirement per year.
As I said before, the first 10 years don't look outrageous.
$484 per year is pretty insignificant.
After 20 years, it's starting to climb a lot.
Being able to spend at $2,700 less per year in retirement
is the difference between you being able
to take a nice relaxing vacation on the beach every year
and you having to dump sand
in your backyard to play pretend.
30 years is where it gets really gross.
$9,100 for one of those expensive actively managed funds?
I spend a lot less than that per year
on my mortgage payment for crying out loud.
That $408 per year for the index fund
is looking really nice right about now.
And finally, after 40 years,
we're starting to get to numbers that cannot be ignored.
I don't know what I'd spend a $24,000 on per year,
but I sure as heck wouldn't wanna lose out on that money
every single year
because I just had to invest
in an underperforming, actively managed fund.
As I'll continue to say until I am blue in the face,
fees always have and always will matter,
so you wanna keep them low whenever possible.
Do not let anyone ever try to convince you otherwise.
Before we go through the cost of a financial advisor,
I want to throw this one in real quick
to show you how costly a flat fee can also be
using two very popular
and what I would consider to be predatory companies.
Stash and Acorns investing app
is what we're going to use for this example.
If you don't know, these apps are basically geared
more towards new beginning investors,
which is probably how they're able to get away
with the shenanigans that they've got going on.
They charge a low $3 per month or $36 per year.
Seems pretty harmless, right?
Nope, not at all.
This means that the more you have invested with them,
the less you'll pay in fees.
And on the other hand, the less that you have invested,
the more that you'll pay in fees.
Since these apps are geared more towards newer investors,
it can be assumed that most account balances
are generally low,
which is pretty concerning.
So I did some digging for as much public info as I could
and found that they have about 8.2 million users
and 4.7 billion in assets under management.
I'm sure not all of them are active,
but let's just assume that most of them are
because it's going to give us a general idea
of the fees people are paying.
With those numbers,
the average account balance would be $573.
To be generous, I'm going to bump it up to $650 per account.
At that amount, the yearly fee comes out to 5.5%.
This, my friends, is how you take advantage
of naive investors and profit off of them.
This example is one of many in this video
that is essentially legal highway robbery.
Friends do not let friends use Acorns or Stash, period.
Before we get into how much financial advisors
really cost you,
in the description, I'll have a link to some free tools
where you can calculate your net worth,
as well as a retirement planner.
When you use them, it does help support the channel,
so thank you in advance.
Now, let's talk about the fees
charged by financial advisors,
planners or whatever other names they're going by.
They're all different
because they do different things,
but nothing changes when it comes
to how much you are paying in fees.
So we're going to focus more on that.
I'm going to put on screen
the cost of all of the fees we've talked about so far.
Plus, if an advisor charges one,
1.5 or 2% per year over a 10-year period.
Sometime, the percentage-based advisors
will charge a little less
as your account balance grows.
But let's be honest,
you are still being charged a lot of money
and they're not giving you a huge discount
at the end of the day.
I should also mention
that what these types of advisors charge
is on top of what you pay
for the funds that they put you in.
So if they have you invested
in a ton of actively managed funds,
then you can add that to your bill as well.
When we take a look at the cost over 20 years,
it starts to look really, really bad.
Those yearly safe withdrawal losses
aren't insignificant either.
Think about what you could spend almost $550 per month on
if you were paying someone 2% per year.
At the 30 year mark, we're starting to see someone pay
over a quarter of a million dollars for a 1% fee
and over half a million dollars
if an advisor is charging you just 2%.
And of course, 11, 16 and $20,000 less per year
you have to live off of in retirement
because of these fees.
If you are currently drinking anything,
then please stop for a second
because I don't want you to spit it out
when I go through these 40 year numbers.
Here's how much you're paying an advisor over 40 years
if they charge you one, 1.5 and 2% per year.
Look at this insanity.
At 2%, the advisor is earning more from you
than you have left for yourself.
And you are safe withdrawal rate amount
is reduced by over $50,000 per year.
At the end of the day, the question should be,
what am I actually paying for
if I'm working with an advisor that charges a fee
based on assets under management?
They can definitely bring you value,
so I don't wanna discount what they do,
but are they really bringing you enough value
to make up for the hundreds of thousands of dollars
that you are paying them?
If an advisor laid out numbers like this
to show you their true cost,
then the average investor would probably be asking
a lot more questions.
One of the questions might be,
how would this compare to an advisor
who has a different fee structure?
Oh, well, it's funny that you didn't ask that question
because I already did the math for you.
Now, there are two different ways
advisors will usually charge investors,
either through the model that we just looked at
which is a percentage of assets under management
or through a flat rate fee only model.
I wanted to compare the two
to see if there was ever a time
where it made sense cost-wise
to work with one over the other.
To be clear, when I say fee-only advisor,
I am referring to one that is a fiduciary
to the investor 100% of the time.
If they do not specify this
and aren't willing to give it to you in writing,
then that means that they are not one
and you should immediately stop talking to them
and lose their number.
I'm using the same inputs
that we've covered so far in this video,
$1,000 invested per month
at an average annual return of 7%
over a 10, 20, 30 and 40 year period.
I first need to figure out how many hours
an advisor works on client activities every year.
According to a research study Michael Kitces did,
here are the numbers of hours per client per year
spent on client activities.
I averaged them together
to come up with roughly 13 hours per year per client.
When it comes to how much they earn,
the advisor who charged a percentage
based on assets under management is obvious
because we just went through all the math together.
For the fee-only advisor,
I found that the hourly rate ranges from $150 to $400.
I took the midpoint of $275 per hour.
The fee-only advisor will usually charge a one-time fee
between 1500 and $3,000
to create an initial comprehensive financial plan.
I took the midpoint for this one as well,
which would bring us to $2,250.
Over the first 10 years,
here's the total amount that you'd pay to each,
as well as how much that breaks down to on an hourly basis.
The hourly rate of the flat fee advisor
includes the initial $2,250
broken down to the hourly level
to make it easier to calculate everything.
As you can see, based on these inputs,
the advisor who charges a percentage based on AUM
comes out to being more cost effective.
This can be a little misleading though
because the one who charges a percentage
probably isn't a true fiduciary.
Therefore, they're not making decisions
that are in your best interest 100% of the time.
So for me, I still look at these numbers
and I think to myself,
all right, well, I still don't trust the advisor
who charges a fee based on AUM anyways.
At the 20-year mark is where you start to see
the whole commission based model
costing the investor a lot more money.
Keep in mind that if the investor
invested more than $1,000 every month over that time period,
then it would cost the investor
a lot more money to work with a commission-based advisor
versus a flat-fee fiduciary advisor.
30 years is where the numbers just start to look gross
if you were working with a commission-based advisor.
Paying them $784 per hour on the low end
versus $281 per hour
just sounds wrong on so many different levels.
After 40 years, the investor is paying
the commission based advisor
almost $1,600 per hour on the low end
versus $279 per hour.
This is what legal highway robbery looks like
and why Jack Bogle constantly mentioned
how fees always matter.
To give my very candid, personal opinion,
there's no way in hell that I would ever trust
someone who charges a percentage-based fee.
I'd also never allow any of my family members
to use this type of financial professional either.
I'm sure these individuals are very nice people
in their personal life,
but they are complete scumbags in their professional life,
so this cannot be ignored.
Moral of the story, buy low-cost index funds
or their ETF equivalent.
Self-manage if you can to keep costs low,
but don't be afraid to talk to a fee-based advisor.
Once again, only if they're a fiduciary 100% of the time
and they're willing to give that to you in writing.
Help support my dog, Molly, and this channel
by checking out some of the free tools
down in the description below.
Hit that thumbs up button and share the video
with someone you think needs to know it
so they don't lose hundreds of thousands of dollars.
Done.