Increasing Investment Earnings through Lowering Investment Costs

Even the best financial advisors can’t predict what the stock market will do, much less control it (If a financial advisor makes such promises, you should run the other way FAST!). But there is something just as important that you can control: Your investment costs.

Since no one can control how much our investments earn, one of the best ways to preserve as much of our capital as possible and keep the maximum amount of  money working for us, is to decrease the costs associated with investing. It may not seem like a lot, but even a 1 percent decrease in investment costs can turn into tens of thousands of dollars in savings over just a few years. One way to visualize this is to look at this investments savings graph, which  illustrates the impact of a "small" difference (less than 1.00%) in investment management fees over a period of only 10 years: over $100,000 MORE paid to the advisor - which is no longer in your account earning money!



I have found the majority of people are not aware that there are several types of costs associated with investing because most of these expenses are "hidden" unless you know where to look!  Although not truly "hidden", costs such as commissions on a stock trade or an expense ratio on a mutual fund are usually taken directly from the account balance, so most people are not aware that they are being paid. Another type of investment expense is the money you pay a financial adviser, which can be fee based, portfolio based, or a commission on sales. 

For additional information see More "Hidden Fees" You May be Paying.

Here is how you can control these investment costs.

Determine how much you are currently paying in expense ratios. Take a few minutes to review  the expense ratio of each investment or fund in your portfolio.  This information can be found in the Fund Prospectus or on Morningstar.com.  You may also ask your financial advisor, although don't be surprised if he or she acts offended that you would ask, or make excuses as to why it doesn't matter.  There are thousands of mutual funds with expense ratios less than a quarter of a percent, so in most cases there is no reason to be paying more than .5%.  Sadly, many funds carry expense ratios of 1% or higher.

Research similar, but less expensive investment options. If you invest in mutual or index funds, you may be able to find a similar, but less expensive investment with another company. For example, let’s say you have a large cap fund with an expense ratio of 1.2 percent. Research similar funds at other brokerage houses (Vanguard and Fidelity are known as low cost providers within the industry) and see what you can find. You may be able to find something with a much lower expense ratio, making more of your money work for your investment portfolio instead of lining the pockets of a brokerage firm or financial advisor.


Trade for less or Trade Less. You may also be able to find a financial institution that charges less for individual stock trades. Compare the price for each transaction to the commissions at discount brokerage firms and see how much money you can save. It may not be worth moving your portfolio if you rarely make trades. But if you are a frequent trader, then you can use more of your money for investing instead of paying commissions.   If you pay someone else to manage your money, be aware of an illegal, but not uncommon practice of "churning" where the commissioned sales person buys and sells in order to earn a commission on the transaction.

You should also note the frequency with which trades are made on your account for individual stocks and ETFs. You may be paying a fee or commission each time you make a trade. The turnover rate of a mutual fund can also increase costs. 

Examine the cost of your financial adviser. You might pay your financial adviser at an hourly rate, on commission, or based on a percentage of your portfolio.  There are pros and cons to each of these methods, and you should ensure that the method you have makes the most sense for your situation.

Before hiring a financial planner or advisor, find out how he or she gets paid. You are not alone if you are currently working with a financial advisor but  have no idea how, or how much you are paying him or her. 

Consider the impact of taxes.  Finally, taxes can take a HUGE chunk out of earnings if tax considerations are not a part of buy and sell decisions.  This is where working with a financial planner who has a thorough understanding of the tax implications of investment decisions can save thousands of dollars.  If your investment advisor does not have such knowledge (CPA's specializing in individual tax and financial planning or Estate Attorneys are generally the most extensive knowledge of tax implications) it is always wise to consult with your tax advisor before making investment moves. 

Reducing your investment costs truly is the easiest way to get a bigger return on your investments. The savings will compound over time, helping you reach your investment and retirement goals sooner.

If this is all "Greek" to you, please visit Ascend Financial.  Ascend Financial helps clients keep more of their hard-earned money through consumer advocacy and education, investment cost reviews and independent financial tax and financial planning.