Understanding Investment Fees: Are They Eating Your Returns?

Here's something you might not know. Did you know that your investments actually have a price tag on them?As I was preparing for the show, I thought about, you know, a lot of people don't know this. And I found some amazing statistics. Listen to some of these. 21% of investors believe they pay no fees on their investments.You may be one of those people right now listening, Ralph. What do you mean I'm paying for my investments? Yes, we're going to get to that in a minute. Listen to this.Another 17% don't know how much they pay in fees. So 21% don't know that they're paying fees. And 70% don't know how much their fees are. And 87% say they're aware of the fees.But the term expense ratio has no idea what that means. 30% say they completely understand it. Similarly, this is an interesting statistic as well.83% had heard of basis points, but only 25% completely understood those in one survey. Listen to this. 73% of investors didn't know how much they paid in investing related fees last year.And 64%, here's the truly tragic statistic of this. 64% didn't know how to check what fees are being charged.Well, that's what I talk about on today's show because you've got to, this is so mission critical.As we work through this series of investments, it is mission critical that you understand how to find these fees, how to and really how to negotiate them. I got a listener question. So fellow wrote this.He said, ralph, I know I'm paying something for my investments, but I don't really understand the fees. Are they really a big deal? Let me just tell you right now, they are a huge deal. Investment fees might look small, but think about this for a second.Maybe 1% or 2% here and there, but over time. So we're really going to drill into on today's show. Over time they can quietly eat away at your returns and cost you thousands of dollars.Yes, you heard me right. Thousands of dollars. That's what I'm going to cover on today's show.This is Financially Confident Christian, your daily dose of gospel grounded insight and faith driven tips to help you break the cycle of financial shame with confidence. Thank you for joining me on the show today. My name is Ralph and I've worked with hundreds of clients working with their investment portfolios.And the truth is, and this is really a sad truth, I have found that these fees are draining their growth over time. And here's the problem. A lot of people didn't even realize that they were paying them and how much they were losing.If you've been listening to this series, you know, I don't actually sell investments, but I've been working with clients to help them shift into some lower cost options that save them significant money without changing their goals. Here's a really broad example of what I'm talking about, of just what these fees cost you over time.Because it's one thing to say, okay, Ralph, I get it, somebody's got to make money in this. But you got to understand the impact of this. And I'm going to start with a quote. This is from Jack Bogle. I mentioned him the other day.Jack is the president of Vanguard. And Jack had this brilliant quote. He said, in investing, you get what you don't pay for. I thought that was great. Think about that for a second.In investing, you get what you don't pay for. So let me tell you about my client story. Client had an expensive mutual fund. Listen to this.And you're going to understand what this is just in a couple minutes. But this mutual fund had a 1.5% expense ratio.So basically what that means is that whatever the value that fund was, 1.5% of that was going for an expense. Well, I worked with him and I was able to find him an investment that switched to.05%.And listen, that saved him thousands of dollars over the years without sacrificing performance. And I'm going to show you some actual numbers here in a few minutes. But that's what we need to talk about on the show today.So here's the main parts of what we really need to drill into. A lot of people don't understand when I start talking about expense ratios. What is an expense ratio? Let's start there.An expense ratio is basically the annual fee for running the fund. If somebody's going to be a professional money manager, they, they are going to charge a fee to run that fund because they have work to do.They have to go and look at the different investments, decide on the trades. There's a lot of work that goes into this. But even 1%, if they're charging a 1% fee versus a 0.1% makes a huge difference over the decades.So that's where it starts. The first thing you've got to really understand is what are the expense ratios?So if you're looking for an investment, one of the things that I counsel clients on almost every day in my practice is what I what is the investment expense. What are the expense ratios? Because it's easy to hear from a friend. Oh, Ralph, I've got this investment idea. This thing is soaring, dude.You gotta buy into this. It is so important that you understand so that you can compare apples and apples and not apples and grapefruit. So it starts there.Think about the example we talked about. Just that little bit of a change can save you thousands of dollars.Another big number that we have to understand is what's called a load or commission. Now I'm not gonna get into into super complicated things because with this 30 day series, my goal was to really give you a 30,000 foot view.But loads and commissions are what they charge at the front end. So in other words, what I'm saying here is some funds, when you buy into them, they charge you a fee to buy or sell.That I'm going to tell you right now, my personal advice is watch out for these and avoid those if possible. I don't like those, so that's just my personal bias. But I don't like those. So that's the second thing. Loads and commissions.Another thing is advisor fees. And let me just tell you right now, I've seen these things make huge impacts on people. It's one thing to pay for advice.A lot of brokers charge an advisor fee. You're paying them for advice. You're paying for the intellectual property.I do another show called Grit and Growth Business and I was talking the other day as I was recording a show about pricing. Everybody is entitled to make money at what they do. But the key to today is know what you're paying for and is it worth it?It's fine to get professional advice. People pay me for professional advice.But as part of understanding the fees you're paying with your investments, understand what you're paying for and ask yourself that difficult question, am I getting value for this? The other thing you've really got to think about is the long term impact.Like I mentioned a few minutes ago, a small 1% fee can mean losing hundreds of thousands over a lifetime of investing. I might get to an example here in a second because you're not going to believe this number.The good news in all of this, that's why I did this show today. There are low cost funds available, you just need to look. So look at this. Let's talk about this example. Let me pull up my notes here.Here's the example. If you have $100,000 invested, so that's your investment. It's a lot of money. But let's just say over time you've accumulated $100,000. You.And let's say it's growing at 4% annually. And let's say you're going to do that for 20 years. The final value of that investment depends heavily on the fees being charged. So think about this.So like I said, $100,000, 4%. I know it's tough to do math and audio podcast, but just bear with me here a second because it's so important that you understand this.$100,000, 4% for 20 years if the annual fee is 0.25%. So a quarter of a point, that ends up being that you'll have $208,000 at the end of that investment. So again, $100,000, 4% annually over 20 years.The final value, it comes down to the fee. So at a.25, you have a $208,000. That's pretty good, right? 0.25 is a good rate. Let's say we double that to 0.5.That same investment, a hundred thousand dollars, 4% annually, 20 years now, all of a sudden, because we've doubled that fee. And listen, the fee is only a half a percentage now, we've dropped to $198,000.If you're doing the math, you just lost $10,000 in a quarter point change. Well, listen to this one. A lot of people don't realize this. They said, oh, 1% fee, that's no big deal. Well, think about this.With a 1% fee again, a hundred thousand dollars invested at 4% over 20 years. Listen to this one. When I saw this, I was like, wow, this is amazing. 1% fee, that hundred thousand dollars grows to $179,000. Now do the math for you.We started 208 for a quarter point fee. Now we're down to 179. That is $29,000. See, a 1% annual fee can reduce your returns by 30% over 35 years versus a scenario with much lower fees.That's why this is so important. That's why I felt so compelled to do the show today. And that's why you really got to understand what are the expense ratios?Because that annual fee eats at your savings. $29,000 is a lot of money. Are you paying a load or commission at the front end? What are you paying in advisory fees?You've got to know what these things are. And listen, it's okay to say to your broker, what are you charging me?It's okay to go to the HR person if you're covered by a 401k plan and say, what are the fees associated with this? I'm going to tell you right now, the HR person is probably going to be like, I have no idea. Keep digging deeper.Don't just accept, oh, I don't know, go find the answer. Because the long term impact I showed you, the numbers are huge. And there are other options out there available when.I always want to ground this in scripture. So I found this verse from the book of Proverbs, chapter 27, verse 23.And it kind of hits close to home for me because I raise Black Angus cows here on the farm. It makes sense here in a second, but this is what it says, Proverbs 27, 23. Be sure to know the condition of your flocks.Give careful attention to your herds. Now you can understand why this was so imperative to me. I got 10 black Angus cows out there in the pasture. I've got to pay attention to them.I need to understand the details. Well, investments work the same way. You got to pay attention to the details because the fees matter over time.Like I showed you that math, just that between 0.25 and 1%, $29,000 difference. It's all in the details. And it's all about those details always. Well, how about we pray together now? Lord, we come to you today.We just thank you for the wisdom that you give us, Lord, and even the small things in our life to make a huge difference. And Lord, we're just so grateful for the resource that you entrust us with, Lord, and we really want to be good stewards of that, Lord.So help us to understand these things. Help us to dig in deep and really study what are the best investments for us so we're not wasting the resource that you give us, Lord.Give us courage to make those changes and courage to ask the questions that might seem a little awkward at first because most of us are not financial experts. Lord, help us to have the courage to do that so that we can really prepare for the long term and really see the blessing that you put into our lives.And we just ask this in complete confidence in the name of Jesus, Amen. So my one action step for today, I always want to give you an action step for today. Now's the time to comparison shop.Look at the details, look at just one investment that you owned, find its expense ratio, find the fees, write it down, how much you're paying for, and then do some comparison shopping, Go look at other options, talk to other people, talk to other brokers and compare it to some lower cost alternatives. Because in the end you might just give yourself a super boost of thousands of dollars if you pay attention to this.One of the things I would love to do for you. I'd love to give you a copy of my book. I just finished writing my third book. It has been a true passion project of mine.I took 30 years of the advice I'd been giving people, the individual meetings that I had, and I summed it all up in this book. It's called how to Become a Financially Confident Christian. Kind of goes along with the name of the show, but I want to give you a free copy of that.You can download a copy absolutely free, no questions asked. Just go to this website, FinanciallyConfidentChristian.com/becomingI'm going to give you that again because truly I want you to download this book and share with as many people as you want. That's very cool with me. Go to financiallyconfidentchristian.com/becoming and download a copy of the book today.You are going to find it is going to be an amazing tool to help you finally break that cycle of financial shame and live in financial confidence. So as I sum up today, those fees may look small. You hear 1%, you hear a half a percent, you hear a quarter percent.But just like we talked about compounding the other day, that compounding against you over time will cost you money in the long run. So you got to understand that. Know the expense ratios. That is truly a key part of stewardship and so many people you can amaze your friends.You can say, I learned something on Ralph show that I had no idea about. And cutting cost is a simple way to improve those returns so that you can be faithful in the small details.Because over decades, like I Talked about in 20 years, make that money, maximize it for yourself. They make a huge difference. Now tomorrow on the show, I'm going to go beyond the traditional 401k.One of the things I've realized in my practice as I'm starting to see people get older, hey, I'm getting older myself. And that retirement window is getting closer and closer every year. I hate to say that, but it's so true.We have to understand how to invest beyond that 401k because it's not going to be enough for retirement. I'm not trying to alarm you, but tomorrow I'm going to unwind that a little bit.I'm going to give you some other ideas of how to really grow your investments beyond that 401. It's going to be a great show today. I have confidence in you. But more important than any of those things, God has confidence in you.God wants you to be successful in your finances. So go today and be that financially confident Christian that I know and God knows you can be. Stay financially savvy out there.God bless you and you have a great day today.