Liz Weston: Investment fees could leave you old and broke

You want to save as much as possible for retirement. The financial services industry wants to make as much money off you as it can.

That thorny conflict is at the heart of the battle over what is known as the “fiduciary rule.” If implemented, it would require financial advisers to put clients’ best interests first when counseling them about retirement savings. In practice, it typically would prevent financial pros from steering you into a high-cost investment if similar low-cost choices are available.

The differences in fees – often fractions of a percent – may sound minuscule.

Over time, though, higher fees can dramatically reduce the amount of money that investors accumulate for retirement, according to the Securities and Exchange Commission and other investor watchdogs, and significantly increase the chances that savers will run out of money late in life.

Here’s an example from the Big Picture app, which helps financial advisers test investment strategies for retirement plans with historical market-performance data and inflation rates.

Assume you have a portfolio that’s divided equally between stocks and bonds, with the goal to sustain a 30-year retirement. You plan to withdraw 4 percent the first year and increase that withdrawal by the inflation rate each following year. (This “4 percent rule” is widely used in financial planning to minimize the chances that savers will run out of money in retirement.)

You’ll pay fees at every step. Mutual funds charge fees. Brokers who buy stocks and bonds on your behalf charge fees. Financial advisers charge fees. Those costs can dramatically affect your odds of success.

Based on Big Picture’s data, the chances you’ll run out of money in retirement are:

• 9 percent if the annual cost of your investments is 0.5 percent
• 17 percent if your cost is 1 percent
• 29 percent if your cost is 2 percent
• 50 percent if your cost is 2.5 percent

“High fees can cut safe spending in retirement by hundreds of dollars a month for the average retiree, take years off a portfolio’s life or leave retirees with much less in legacy capital,” said Ryan McLean , founder of Los Altos, California-based Investments Illustrated, which created the Big Picture app. “I don’t think investors have been adequately informed on these effects.”

Financial advisers understand the risks of high fees – or they should. But it may not be in their best interests to educate clients if advisers make more money pushing high-cost investments.

The fiduciary rule was supposed to change all that starting April 10, but the Labor Department has delayed its implementation 60 days at the Trump administration’s request. The rule may be further delayed or modified, or it may not be enforced if it goes into effect. So retirement investors should consider themselves on their own when it comes to protecting their nest eggs.

Here’s what to keep in mind:

1. There’s no such thing as a “no-cost” investment. Investors always pay something, either as a direct cost such as an annual expense ratio or an indirect cost such as a reduced return. Fixed and indexed annuities, for example, are often pitched as no-cost investments, but the insurer typically pays the investor less than what the account earns.

2. Lower-cost investments tend to outperform higher-cost ones. Decades of research have shown that lower-cost mutual funds offer above-average returns, while higher-cost ones tend to trail market averages. When it comes to costs, what’s considered “low” or “high” varies by the investment. For example, mutual funds cost an average of 0.61 percent, according to Morningstar. Variable annuities, which are insurance contracts with investments similar to those in mutual funds, cost an average of 2.24 percent.

3. Investment management doesn’t have to cost a lot. Digital investment companies, or robo-advisers , offer computerized investment management for an all-in cost of about 0.5 percent of your portfolio. That includes an investment management fee plus the cost of the underlying exchange-traded funds. Some robo-advisers, including Betterment and Vanguard Personal Advisor Services, offer access to financial advisers for a slightly higher fee.

By contrast, human advisers charge an average of 1 percent for the first $1 million they manage, on top of any underlying investment costs. A 1 percent fee may be justified if the financial adviser offers other services, such as comprehensive financial planning, or keeps an investor from fleeing the market in a panic. But it’s a pretty high toll if all the client gets is investment management.

Ultimately, you’re the one who has to live on what’s left after all the fees are paid. That’s a good incentive for keeping a lid on them.