The Hidden Costs of Investing: How That Low 1% Fee Could Swipe Thousands from Your Retirement Fund

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It’s a deceptively simple question, but one that investors often forget to ask: “How much am I really paying for my investment accounts?”

Can you answer that question?

Investing invariably comes with fees — and financial institutions are not generally known for their transparency, even with their legal requirements for disclosure.

While some investors might know their returns and be aware of a few seemingly innocuous (and pleasingly low) fees to account for the service, a quick look at the small print reveals a world of hidden fees and expenses that bite deep into investor profits.

These aren’t dainty little bites, either. While you may be paying handsomely for what you hope is a market-beating performance from the experts, the reality can be very different as statistically, over 90% of managed funds simply don’t beat the market. But when 92% of 401(k) savers aren’t aware of the full extent of the fees they’re paying, who’s counting? Worse, 72% think they pay no fees at all.

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Fees do, after all, control your future. But do you really want to pay a fee that contributes to a marketing budget? Probably not, but check the fine print, and you may just be contributing a very handsome sum toward those glossy, life-affirming brochures.

Those same glossy marketing brochures will often remind you that the stock market is a great investment vehicle for a secure and financially independent ‘golden years’ retirement. At the same time, they will describe attractive concepts like high yields and earnings stability, all with a low fee, usually around the 1% mark.

For the average person, it’s an attractive prospect. We all dream of a happy retirement where we can finally kick back, relax, and enjoy life on our own terms — and hopefully, without the worry and stress of not having enough money. Investment is clearly the best route to attain this dream, and the idea of having a professional, actively managed portfolio is an attractive one.

However, there’s a sticking point.

Sadly, that attractively low 1% fee likely isn’t the only fee you will be paying. Skip the marketing brochure and look at the jargon-heavy small print, and you’ll discover that 1% fee is just the beginning. On top of the 1%, you may also find hidden fees, with marketing fees, legal fees, administrative fees, and expense fees being the most common.

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These all add up — and each 1% extra you pay costs you ten years of retirement income. After all, every dollar that goes to pay fees is a dollar less to go toward growing your nest egg. The bigger your investment, the more dollars you’re losing.

Fees really do control your future. In 2007, Warren Buffet laid down a 10-year, $1,000,000 bet to the hedge fund industry. He bet that a passive S&P 500 index tracker would outperform a portfolio of five different actively managed hedge funds between 2008 to 2017. While Buffet believed that investment professionals would almost always get better results than amateurs over the years, the bet also underlined his other, more critical belief: that the fees would siphon profits away from those results.

In the end, Buffet argued, the average person might simply do better to simply invest in an index fund. Just one hedge fund manager took Buffet up on his bet. Fast forward to 2017, and the bet was conceded early: Buffet had won.

The numbers tell the real story: over that same period, the S&P 500 gained around 7% a year, compared to the 2.2% of the hedge manager’s portfolio of five funds. On paper, those numbers don’t look all that big. Still, in cold hard cash, the difference is astronomical: Buffet’s low-fee S&P 500 index fund gained $854,000 against the actively managed funds’ $220,000 — a staggering difference of $634,000. The hedge fund manager conceded that the fees were the critical factor in his loss.

Buffet’s bet was clear: that the fees of actively managed funds would cause such losses, damaging the healthy profits from the better performance of active management to the extent that a passive index tracker was a safer bet.

He turned out to be right. So, what if you could simply slice off those hidden fees?

Whatever one might personally think of the banks and investment firms, there is no denying that there is a symbiotic relationship between investors and these institutions. You need them to take care of your money and help you grow your retirement fund without having to constantly work on it, and they, in turn, need your money for the growth of their own business.

Sometimes this relationship breaks down almost irrevocably, such as in the global 2008 financial crash, which flung the United States into recession and ruined many portfolios in the blink of an eye. The crash itself was a culmination of multiple issues within and without the finance industry, ultimately leading to disastrously greedy speculation — which eventually wound up costing US taxpayers $500 billion in bailout packages.

That’s far from ideal — but you can hardly be expected to keep hundreds of thousands of dollars in a sock under the bed for decades (and besides, you need the interest to beat inflation!). And, since the system generally works with only occasional nightmare collapses, the smart investor can win the long-term game in relation to their personal finance goals.

So, where do your hidden fees play into this?

Let me be blunt: you’re probably paying through the nose for a service that has not — and likely will not — significantly improve to match an ever-growing expenditure that scales with your profits. Instead, you’re funding various banking investments that benefit the institution and its shareholders.

…And that’s all down to the magic of compound interest.

Compound interest is the eighth wonder of the world. He who understands it, earns it. He who doesn’t, pays it. — Albert Einstein

One of the biggest surprises for many is compound interest, which is essentially the interest that you earn on interest as well as on your initial investment. Over decades, compound interest multiplies your returns exponentially.

The power of compounding makes it a sensible, safe, and fiscally sound investment strategy — what could possibly be wrong with it?

Over the decades, compound interest delivers even more returns. It’s no surprise that investors love it — but unfortunately, hidden fees come with an opportunity cost of exponentially reducing your compound interest return.

You might think that the more you pay, the more you get — but sadly, as Warren Buffet’s bet with the finance industry shows, that just isn’t true in the finance industry.

For the average investor, that 1% fee compounds to whittle your retirement fund by 33% — or 10 years of retirement. Because this cost is often hidden in the small print and written in dry jargon, it’s easy to lose hundreds of thousands of dollars over the decades — and for what?

In the example chart below, the investor starts with $50,000 in their investment account, doesn’t add a cent to it over 30 years, and averages an annual 8% return.

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It’s easy to be pessimistic about the prospect of change and resign yourself with excuses like “that’s just the way it is.” For hundreds of years, you’d be right — it was either the bank or a discreet sock under the bed.

However, the times are a-changin’ — and this time, the good news is on your side. The internet has opened a whole new world of FinTech (financial technology) and ushered in a 21st-century industrial revolution that puts more power and control into the hands of millions of retail investors.

The Fourth Industrial Revolution is not a one-day-and-done deal; it’s a process of fusion between the digital and physical worlds. It brings good news and bad; Artificial Intelligence (AI) and automation create useful tools for everyday life, such as robo-advisors — but robots are also taking jobs away from people.

In the case of FinTech, the news is almost entirely good if you’re the average investor. That’s to say, an ordinary person with a job trying to save up for a happy, healthy, and secure retirement — and preferably sooner rather than later.

You are already enjoying some of the benefits of this revolution: the ability to invest on your computer or smartphone using apps. Being able to pay bills and do banking at home. Enjoying more access to smarter financial products due to competition.

The list goes on. New and agile FinTech startups are challenging the old ways of banking and investing — and many are winning, simply because old, established institutions are hampered by internal red tape that prevents them from moving fast. Sometimes, institutions are simply resistant to change until it’s almost too late.

This is where retail investors stand now: if you’re unhappy with a financial product, or you come to realize that your investment is not providing you with as much value as you thought it was, then it has never been easier to find something better and switch to it.

The best news? If you love compound fees but would rather not pay fees, then there’s a solution to that, too. If you could save hundreds of thousands and retire a whole decade earlier, would you take that opportunity?

Compoundly started out of exasperation — and anger.

As a securities attorney before I founded Compoundly, dealing with investment fraud was a regular part of my day job. I helped people who had been defrauded by slick-talking real-life Wolves of Wall Street.

One case broke me: a widowed retiree had lost her entire life savings to an unscrupulous broker. The case was open and shut; justice was to be served…

…But then the investor suffered a stroke from the legal and financial stress and dropped the case on her doctor’s advice.

Just like that, an open and shut case can collapse.

The wolf escaped with his ill-gotten gains and left me furious. We all grow up believing that bad guys never win and that goodwill prevail — but evil does prevail — unless people stand up to change things.

Enough was enough — and if the quirks of fate and justice wouldn’t — or couldn’t — change things, then I decided that I would instead.

I channeled my anger into changing the way things were done — which led to Compoundly. I knew that all too often, fees were the real danger for trusting investors even when dealing with reputable financial institutions.

Compoundly was established with the understanding that investing should, and can be simple for the majority of investors. We believe that fiduciaries should lead investors using reason and logic, rather than respond to the emotion-driven tactics of fear and greed. Our philosophy is that all investors should immediately cut their fees — then cut them a little more.

That’s precisely what we do, so you don’t have to. We look at your investments and uncover every single little hidden fee — then negotiate with your provider to eliminate them without ever touching your investments.

As a result, you will save hundreds of thousands of dollars toward your nest egg. With Compoundly, it’s easier than ever to see exactly what hidden fees you’re paying, and how they are impacting your long-term returns, dollar-by-dollar with an intuitive interface that puts you back in control.

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As a result, you save time, money, and energy. Compoundly makes it easy for investors like you to slash fees and gain the full benefit of compound interest for the rest of your life. Additionally, if Compoundly can’t cut your fees successfully, then you can keep your money where it belongs: in your pocket.

Investment has always been the best route for people seeking to grow their wealth and enjoy financial freedom and a happy retirement; the simple fact is that hidden fees you know nothing about maybe snatching that dream from right under your nose.

However, it doesn’t have to be this way anymore. The world is going through one of its great revolutions, challenging the old way that things are done. Now, you can challenge the status quo with the click of a button in the comfort of your own home — and claw back the real value of your investment instead of paying for your provider’s glossy marketing brochures.

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Compoundly is an educational tool only. This is not legal advice or financial advice. Compoundly is not a law firm or financial institution.

Compoundly

We identify and reduce investment fees. Lower fees, more money, happy retirement.

Mario Claudio Lattuga

Written by

🚀 Founder, Compoundly 💼 Securities lawyer ☕️ Espresso enthusiast 📞 Let’s chat - https://calendly.com/mlattuga/30

Compoundly

Hidden investment fees are costing you at least $1,000 a year. Get it back in 5 minutes.

Mario Claudio Lattuga

Written by

🚀 Founder, Compoundly 💼 Securities lawyer ☕️ Espresso enthusiast 📞 Let’s chat - https://calendly.com/mlattuga/30

Compoundly

Hidden investment fees are costing you at least $1,000 a year. Get it back in 5 minutes.

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