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1% – “It’s Only Wafer Thin”

You may or may not recognize this line.  I do as the group of guys I hung around with in high school loved to watch Monty Python movies.  Unlike my friends I could not recite the lines of multiple Python movies, however, I do remember a few lines here and there.  One of the most infamous skits was Mr. Creosote dining and the waiter offering him a “wafer thin” mint when he was done.  For some odd reason when I read the below information it reminded me of this skit and what a “thin” item can really do to someone.

I recently saw an article from Motley Fool titled something along the line of “Hard Truths Investors Cannot Get Their Heads Around.”  Honestly, most of the article was pretty boring.  There was discussion of how most of Warren Buffett’s wealth came more recently due to compounding, how much a hedge fund manager spent on two paintings, and more.  What caught my attention was this: “It’s hard to believe with historic average market returns, a 1% management fee will reduce your account balance by almost 40% over a 50-year period.”  Data like this always catches my attention.

Most of us, me included, tend to automatically assume 1% doesn’t add up to much.  1% of a $500,000 portfolio is “only” $5,000.  If your investments grew by 7% for the year ($35,000) you just lost 14% of your growth to that 1%.  If you are “average” paying total investment fees of 2.25% (1% to the advisor and 1.25% for mutual funds) annually your $35,000 growth just dropped to a net of $23,750.  Or, roughly 1/3 of your growth for the year went to pay your fees.  It is when you have lost the opportunity to compound this 1% year after year when most clients realize this 1% did really add up to a whole lot and by then it is too late.  Based on this article over 50 years this loss of compounding results in a 40% reduction in your portfolio results.  This is an eye-opening statement!

Along these 1% lines, people have been asking me about whether there has been any response from the article about my firm in Crain’s recently.  Yes, there has been quite a bit of reaction (I’ll write at some point about the reaction from other advisors).  The first response was from a college student in the Netherlands writing a paper on how clients pay for services.  The most interesting one was an email I received from an attorney who said he has paid over $50,000 in fees to his advisor since 2011 and wanted to talk to me ASAP!  In this case, I would say this investor would like to avoid the disastrous effects of a wafer thin 1% like Mr. Creosote dealt with.

About Dan Johnson, CFP

I am the President and CCO of Forward Thinking Wealth Management, LLC, which is the flat-fee financial planning firm located in Akron, OH, and set up to work virtually with clients across the country. I charge clients a flat fee of $4,800 regardless of asset size. My firm is a solution to what I feel is a broken system where clients pay advisors based on something out of their control - the performance of the market.
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