What About The Fees?
Have you ever borrowed money from a bank? Like for a mortgage as an example. You needed money because you didn’t have enough of your own and because of that you borrowed theirs.
Now think about the costs associated. You paid an origination fee up front for the privilege to borrow their money.
You also paid an interest rate each year for the privilege to borrow their money.
The house you intended on purchasing was used as collateral. That way if you didn’t pay them back what you borrowed they can foreclose and still recoup their funds through your asset.
In addition to that, they have insurance that will cover all or part of the difference if they cannot get the money out of the asset they repossessed from you.
Now, this article is about Wall Street and their investing fees. So why did it start by describing how a lending transaction works?
Well hear me out here!
Think about when you invest with Wall Street. Yes you’re investing and hoping to get a return and all that, but if we really simplify it what does it come down to?
You’re lending them money. They didn’t have enough of their own money and so they need investors. So you are letting them use their money. They’re giving you “shares”, yes, but that doesn’t really actually mean anything. You gave them your money, just like a loan.
You’re paying the origination fee. With a traditional loan, the borrower pays the fees to the lender. But in this transaction, you’re the one letting Wall Street use your money, but they’ve arranged it so that you pay them a fee called a front end load. Wall Street has arranged it so that even though they are using YOUR money, you’re paying them for the privilege of loaning it to them. How backwards is that? By the way, this fee can be anywhere from 1% to 5.75% off the top from ALL of the money you’re letting them use.
You’re paying the annual interest. After you’ve paid Wall Street their up front fee, they will invest the rest of your money. But they will charge you interest. Again, isn’t that backwards? You loaned it to them and if anything they should be paying you annual interest. This is called an asset management fee and a 1.25% annual fee is pretty average. This fee is charged annually as we have established already, but I want to revisit that. An annual percentage based fee has compounding interest. This means that every single year, you pay 1.25% and it builds just like your account does. This seemingly tiny little fee often adds up to 30% of your overall account balance by the time you retire. So if you have $1 million in your account, that means you probably paid about $300,000 in annual fees to get there.
You have no collateral. Do you know what you’re guaranteed if you give your money to Wall Street? Besides the guarantee that you will pay them fees, nothing. They can’t promise performance and even when they do perform they misreport the numbers to you to make it seem like your money grew more than it did. But remember how with the bank, they can take away your house if you don’t pay them back? You have nothing of the sort with Wall Street. If they can’t pay you back, well that just sucks. You have no collateral, there is nothing backing your money, and you really can’t even take legal action because you signed a disclosure saying you understood they didn’t have to give your money back.
Do you actually make any money? Check this out. Just to keep things simple, let’s say you give Wall Street $1. Now remember, you are going to pay them a front end fee that can range from 1%-5.75%. Let’s average that fee at 3% for the sake of this example. That means it costs you $0.03 to let them use your $1. They are going invest in equity funds. Dalbar states in their performance surveys that over the last 30 years, the average Equity Fund investor made only 3.98% annually on their money. This means that your $0.97 grew to $3.19 over 30 years. Not bad right? But don’t forget, you paid them a 1.25% annual management fee each year. After we subtract out those fees, your $0.97 really only grew to $2.20. Still, you did make money right? Hold up! You haven’t paid your taxes yet. At a 30% rate (very likely in the next 30 years) your $2.20 is only $1.54. It’s still more than you started with…but we forgot about inflation. If we average inflation at 3% per year over that 30 year period, you only have $0.62 left. You started with $1 and 30 years later you have $0.62. You made no money here. But you know who did?
Wall Street. They got paid in fees.
The IRS. They got their taxes.
Central Banks. They make money off of inflation.
Literally everyone made money, but you!
And guess what? None of them will admit this to you. Why? Because you would stop doing it and they’d stop making money on you.
So the next time you look at your retirement account statement or think about giving money to your financial advisor I want you to stop and think about how the numbers will pan out over the next 30 years for you.
Now, real quick, if you’re an investor, you shouldn’t be the one paying the fees. My investors never pay me a few to invest. They never pay me asset management fees. And their money is always secured by real collateral. If you’d like to learn more about how to invest this way, click here.
If you’re a follower and have not read my book “The Blueprint to Financial Freedom” yet, that is the place to start. This book covers the specifics for each level in the various chapters, and you can grab the book for free as my gift.
Click here to get a copy!
The Blueprint to Financial Freedom by Jerry Fetta
To Purpose, Wealth & Freedom,
Jerry Fetta
Jerry Fetta is the CEO and Founder of Wealth DynamX. He is a nationally recognized financial expert featured in Forbes, Yahoo Finance, Fox, Chicago Weekly News, New York Finance, interviewed on over 45 podcasts with world renowned experts, earning endorsements and affiliations throughout his career with names like Kevin O’Leary, Grant Cardone, Dave Ramsey, and Pamela Yellen.
Jerry’s mission in life is to help create millions of financially educated and solvent families achieving greater financial freedom and sharing the truth about money with those around them.
Learn more at www.WealthDynamX.com
(DISCLAIMER: The information in this content should not be considered tax, financial, investment, or any kind of professional advice. Only a professional diagnosis of your specific situation can determine which strategies are appropriate for your needs. Wealth DynamX can and does not provide advice unless/until engaged by you.)
