Would You Fork Out Half A Million Dollars In Fees For Investment Advice?

Credit: Simon Cunningham

According to an article on Forbes, investors are giving up about 40% per year in their investment returns as payment for investment advice. Do you know how much more those investors can potentially earn if they became their own investment advisor? Here’s a little experiment to answer the question.

First, some ground rules: 1) You are currently 30-years old; 2) You have a sum of S$50,000 set aside for investing; 3) You are also planning to add an additional $5,000 a year to your portfolio till your retirement age of 62; 4) Any investment advisor you hire can earn only market-like returns. The last ground rule is not unreasonable given that the majority of professionally-managed mutual funds fail to beat the market.

Now, what is the difference in your final portfolio sum if you had used an investment advisor (who scalps 40% of your returns each year and who helps you earn only market-like returns before fees) as compared to investing in a simple, low-cost passive index fund like the SPDR STI ETF (SGX: ES3)?

Investment return table

If you had invested passively into an exchange traded fund like the SPDR STI ETF, which has a long-run return of roughly 7.2% per year since 2002, your investments can grow to more than a million dollars after 32 years (assuming the same rate of return of 7.2%).

On the other hand, if 40% of your investment returns each year are paid to an investment advisor who generates the same returns as the SPDR STI ETF before fees, your final pot is nearly half of what you might have otherwise. In other words, you would have left nearly half a million dollars on the table for someone else.

Although learning about investing may be complicated, time consuming, and just downright boring to some, is it really worth half a million dollars to pass the job to someone else?

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The information provided is for general information purposes only and is not intended to be personalised investment or financial advice. Motley Fool Singapore contributor Stanley Lim doesn’t own shares in any companies mentioned.