Dear Pete
How much does it cost to invest $100,000?
Martha
Oh man, I have to admit I laughed out loud when I first received this question. Don’t get me wrong, I wasn’t laughing because it’s a stupid question, I was laughing because it highlights one of the biggest issues in the financial world. So in order to answer your question Martha, I’ll have to really get into it. Hold on.
If you were to buy $100,000 worth of mutual funds, at least two of the following possibilities will apply:
-You will pay nothing upfront.
-You will pay $3,500 upfront (if your financial professional used loaded funds with breakpoints).
-You will pay $5,750 upfront (if your financial professional used loaded funds and didn’t utilize breakpoints).
-You will pay somewhere between .20%-2.5% of your balance annually to the mutual fund company.
-You will pay somewhere between 0%-5% to sell your investment
-You will pay an annual wrap-fee somewhere between .40%-1.5% to your financial professional for managing your portfolio.
If you were to buy a $100,000 annuity, two or more of the following possibilities will apply:
-You will pay nothing upfront.
-You will pay an annual expense charge somewhere between 1.3%-3% depending on the type of annuity.
-You will pay somewhere between 0%-15% of your account balance to surrender (exit) your annuity.
-You will pay an annual wrap-fee somewhere between .40%-1.5% to your financial professional for managing your portfolio.
If you were to buy $100,000 worth of individual stocks, bonds, or ETFs (Exchange Traded Funds) two or more of the following possibilities will apply:
-You will pay a commission somewhere between $7-$100s per trade.
-You will pay $0 annually to the company you are investing directly in.
-You will pay an annual wrap-fee somewhere between .40%-1.5% to your financial professional for managing your portfolio.
Hopefully this explanation didn’t bring you to your knees in tears, although that would be an appropriate reaction. I did all that to prove a point, which is, it’s complicated. But, truly what you need to focus on are four types of costs: upfront cost, ongoing costs, “change your mind” costs, and the cost of the advice.
Upfront cost: The two types of upfront costs are a sales charge and a trading cost. Mutual funds with an upfront cost are called loaded funds.
Ongoing cost: Different types of investments call ongoing costs something different. Example: Annuities call these fees mortality and expense charges, administrative charges, and sub account fees.
“Change your mind” cost: Reality is you may decide you don’t like an investment you purchased. You will be able to make a change but at a steep cost. A “change your mind” fee for an annuity can be up to 15%!
Cost of advice: “Investment advisors often charge fees for “managing” your money. The fees are based on the value of your investments. As straight forward as these fees may seem, they often elicit many questions of value. A financial advisor may charge you somewhere between .4% to 1.5% of your account value on an annual basis, to help you pick your investments. But what does “manage” your money mean? It can include all sorts of services such as market timing (strangely enough), rebalancing, financial planning services, and tax harvesting. When you choose to pay for investment advice on your $100,000, you are making the decision that expert advice is worth the additional ongoing cost of $400-$1,500 every year. Again, the management fees are on top of the other investment expenses.” (courtesy of the Indy Star)
Unfortunately, Martha it really is as complicated as that, and honestly, there are other fees I didn’t cover. Good luck?
Peter Dunn a.k.a. Pete the Planner® is an award-winning financial mind and a former comedian. He’s a USA TODAY columnist, author of ten books, and is the host of the popular radio show and podcast, The Pete the Planner Show. Pete is considered one of the foremost experts on financial wellness in the world, but he’s just as likely to talk your ear off about bass fishing.
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