So if you have $100,000 invested with a wealth manager, and he charges a 1 percent management fee, then this year you will pay him $1,000, and he’ll invest the other $99,000.
This is easy to understand when it’s just one year. And $1,000 sounds pretty reasonable. But when you keep your money with the same manager year after year, the fees add up. And it’s that part that I suspect investors are very bad at comprehending. Every year, the fee gets charged again. It’s like a little slice is lopped off of your net worth, year after year, whether your investments go up or down. That $1,000 is only the slice in the first year. Whether your wealth grows or shrinks, another 1 percent slice is going to be lopped off of your entire net worth the next year. Slice, slice, slice. Those slices add up, big time.
While most people who read Dollar Bits understand that index funds — inexpensive, broad-based investment vehicles — are the way to go for most people, there are still those who rely on the advice of experts. You may be paying dearly for this advice. Remember, 90% of fund managers under-perform the market. Why pay more for inferior results?