The fees involved in the financial services world are notorious, yet few of us are able to wade through the jargon. Quite frankly, there is a lot of BS that traditional financial firms throw our way to hide the true price we’re paying. In turn, most of us don’t realize how much costs are actually costing us. Today, we’re going to quantify this Cost of Costs, and help you avoid the crippling effect fees can have on your financial outcomes.

First, a little background. The Cost of Costs is a foundational framework at Financial Convergence - any kind of costs involved in your future planning are robbing you of future income. This isn’t just our belief - it’s simple math.

Let’s look at an example. We call it the Triplets’ Tale. Manny, Moe, and Jack are 35 year old triplets. Each have $100K invested, and assuming an 8% rate of return over 30 years, there is only one difference between each of them: the costs they are paying! Manny’s actual costs are 3%, Moe’s actual costs are 2%, and Jack’s actual costs are 1%. What is the impact of these costs (or fees) to their future?

The answer? Staggering! At the end of the 30 years, Manny has $432,194; Moe has $574,349, and Jack has $761,225.  Look at the difference between Manny and Jack. Jack paid 2% less in fees, and now has $329,031 more than his brother. That is 76% more - or nearly double the money!

Another way to look at this is to consider how long the money is expected to last (glide path). Assuming all three brothers start drawing income from that money at age 65, Manny’s money is expected to last him until age 73, Moe’s until age 78, and Jack’s until age 95. Paying 1% more in fees costs you approximately 5 years of income, and 2% more in fees takes away 10+ years.

Now, let’s take this a step further. What are costs (traditional mutual funds and financial firms) taking away from me in terms of future gains? In a recent Forbes article, “How much do mutual funds really cost?” , Kenneth Kim concludes that a plurality of people are paying above 5% in actual real costs. Quoting Kim now:

That is a staggering 78% of potential gains you just lost!

So how do you count the cost? You’re busy with the kids, business, soccer games, and all the rest. When you get the investment statement in the mail, you throw it in the drawer. There’s no judgment here, but here lies what we call the “Ostrich Problem.” When we act like the Ostrich, we have our head in the sand, and pretend that there are no predators in our environment. It’s the “If I can’t see them they can’t hurt me” approach. The solution is not necessarily pleasant, but it is simple.

The first step is to become aware of where you really are by calculating  your actual rates of return . There is an investment rate of return, which is what the entire mutual fund or particular investment made. By industry standard your financial institution must share with you. What is not mandated is that you see the Investor’s Rate of Return (your actual rate of return as an investor). What you are actually making on your money or the real rate of return.

So how do we figure this out? First, we identify how much money we put in, find the current balance, and then determine the amount of time the growth took. Was it over 1 year, 5 years, etc.? You need these 3 components to figure out what’s really going on with your money. For example, we have a client with a 529 plan (College Savings). His account statement showed a $7K balance. When he came in for our annual meeting, I took the analysis a step further and found out how much money he had initially invested. His statement said that he had an 8.25% investment rate of return. Once we did the math, it was actually 4% (Investor Rate of Return). Then he asked me the most profound question - what happened to the other 4.25%? I said nothing for 30 seconds, and it dawned on him: “That’s what it cost me to have that investment.” It cost him 50% of his returns, and he thought he was paying less than 1% in fees.

The math doesn’t lie. Understand the cost of costs, because costs are costing you more than you think.

So what are costs costing you? Have you ever heard yourself or someone around you say, “It takes money to make money?” Is it possible that a statement or belief like that has unintended consequences? Consider this for a moment: that statement insinuates that costs are part of the process, so questioning them becomes a lower priority. Therefore, we don’t really count the costs. We simply pay them and write them off as part of “doing business.” When you realize that it doesn’t have to be this way, the question then becomes: What kind of costs are there? And how can you control or eliminate them?

Most people who own mutual funds don't really know the costs.  There are 17 potential costs in any given mutual fund.  Most think that what is disclosed on the literature is all that they are paying.  That marketing costs know as 12b1 fees are all that is required to be disclosed.  In other words that fee is on 1 of 17 possible real costs that you will see on a disclosure document.  It becomes very complex and tedious to figure out fund by fund what you are actually paying.  There is a much easier way to get a handle on what you, not the fund, is actually making.  We would be happy to help teach you how to calculate your investor or actual rate of return.  We think it is wise to advise you at this point that it is not what prints out on your mutual fund statement. For a no obligations lesson on how you can calculate your Actual Rate of Return not the funds rate of return, select the Learn How  button below and fill in the information.  

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