Learning about investing is very important in terms of the amount of fees you can save if you manage your own investments, or you see an expert financial planner annually. I will provide three different examples. The examples will apply to both workers and retirees. The key is to notice that being able to avoid asset management fees, which can be 1% or more of your total assets, will exponentially affect your portfolio value over the long term. Let’s take a look at the specifics.

I will cover topics related to younger investors later. However, I will start with an example focusing on retirees. The first example will be basic to lay the groundwork. Most Financial Advisors (FAs) will charge a fee based upon the total assets under management you have. Although your fee will vary, we will use 1% for purposes of discussion. (In reality, most fees will be greater than this per annum. Additionally, even if your FA charges you 1%, the fee will be collected quarterly at 0.25%. Thus, the APR is 1.0%, but the fee you actually pay is slightly higher on an APY basis). Let’s build a scenario to illustrate how fees affect your long-term balance in your portfolio. Here is the illustration to elucidate my point: assume that you have $1 million to start with, your FA charges you 1% on the total assets under management, your portfolio only grows 1% per year, assumed inflation is 3%, the long-term historical investment return on the S&P 500 index is 7.25%, and you have a 20-year relationship with your FA. When it comes to the end of the year, your FA will charge you 1% of assets under management which is $10,000. At the end of the second year, your FA will charge you 1% of assets under management so you will pay another $10,000 (remember we are assuming that your portfolio only grows enough to pay the FA’s annual fee). Over the course of your 20-year relationship with that FA, you will pay $200,000 in fees ($10,000 * 20). I am using a 20-year relationship because, when you retire at age 65, actuarial table say that most people will live to 85 which is 20 years after retirement. What could you have done with that $10,000 annual fee if you did not need financial advice? Well, there is an opportunity cost of paying your FA. You could have taken that $10,000 and simply invested it each year in an S&P 500 index ETF or mutual fund earning 7.25% per year. If you had chosen that route, you would have approximately $421,300 at the end of 20 years. Now that amount in 20 years is a future value, we need to discount that future amount back to present day dollars by using an expected inflation rate which was defined above as 3%. That future sum is worth $233,275 in today’s dollars ($421,300/(1+3%)^20). That is how much money you are choosing to forgo, as an opportunity cost, to let an FA manage your investments. Think of it in these terms. You are paying your FA a 23.3% fee ($233,375/$1,000,000) once you shake his/her hand to assist you in retirement. Not a bad deal for the FA, but it represents your choice of not learning how to invest and/or not trusting yourself to make investment decisions.

The second example is still devoted to retirees but more realistic. Here is the illustration: assume you retire now and are 65 years old, you have $1.5 million, you need to withdraw $75,000 in year one for expenses, your FA charges 1% per year on total assets under management, your gross investment return is 6% per year which is 5% net, the long-term historical investment return on the S&P 500 index is still 7.25%, the assumed rate of inflation is 3%, and you need to increase your annual withdrawals by the rise in inflation each year. Okay, now that we have laid down the groundwork, how does the example work? Your investment portfolio will earn $90,000 with the 6% gross return but your FA will charge you $15,150 as an annual fee and you need to withdraw $75,000. Thus, at the beginning of the next year, you will start off with $1,499,850. The next year you earn 6% or $89,991, withdraw $77,250, and your FA will charge you $15,126. Therefore, you end that next year with $1,497,465. That process will repeat each year until age 85 when you sadly depart this earth. This scenario is related to the first example because you could have taken the annual 1% fee from your FA and invested it in an S&P 500 index fund earning 7.25%. At the end of the 20-year period, you would have $577,960 as a future sum. In order to think about things in today’s dollars, we need to discount that future sum back to the present. If one does that calculation, it equates to $320,000 in today’s dollars ($577,960/(1+3%)^20). In this scenario, you are forgoing that amount by having a 20-year advisory relationship with your FA.

Now you may not feel comfortable learning about investing. However, you can think about things in a different way. In the scenario I laid out for you above, your ending portfolio would be $807,680 if you choose to pay a 1% annual fee to an FA. When you die and pass away with an inheritance, your beneficiaries and charitable organizations will get that money. The $807,680 is equivalent to $447,200 ($807,680/(1+.03)^20). The $320,000 present value savings by taking charge of your own investments will add that amount to your ability to give away from your estate. Your estate is 71% bigger.

What if you are just starting to save for retirement? Well, learning about investing applies to you as well. Let’s lay out a scenario for a 35-year old: assume you would like a $75,000 annual lifestyle at retirement in today’s dollars, you end up with $3 million at retirement when you are 65 years old, your investment return in retirement is 6% gross, you pay a 1% annual fee to your FA, the long-term historical rate of the S&P 500 index is 7.25%, and assumed rate of inflation is 3%. Well, if you want that $75,000 lifestyle when you retire, you will actually need roughly $182,000 in 30 years ($75,000 * (1+3%)^30). When you retire, your $3 million portfolio will grow by $180,000 in the first year, you will withdraw $182,000 for living expenses, and your annual fee to your FA will be $29,980. Now we are going to stick with the same 20-year relationship with your FA. If you took that annual fee and invested it in an S&P 500 index ETF, you would have a future sum of $981,880. If we discount that sum back to the present (meaning when you are 35 years old), the present value in today’s dollars is $223,975 ($981,880/(1+.03)^50). Therefore, you have 30 years to learn about investing if you are 35 years old in order to save that opportunity cost. Remember this does not include any attempt to take control of your investments prior to retirement.

Now I know that FAs will be bouncing around and ready to give you the counter arguments. With that being said though, you should approach your investments as wanting to have an FA help you learn. It should not be an exercise where he/she tells you how much you don’t understand and can’t control your emotions. If you look at the first example, your annual fee is $10,000 in the first year. If your investment does not increase at all and there is no recommendation from your FA to reallocate your portfolio, he/she will get a $10,000 annual fee in year two as well. Your FA will tell you that you are paying for access to top-notch investment research, extensive financial planning, estate planning advice, and tax advice. Now this is definitely true, and that FA has a point in terms of what his/her firm provides. But let’s drill down a bit. Will your FA provide you with a GIPS-audited composite that shows how his/her portfolio recommendations are beating the financial markets? (A GIPS-audited composite uses the investment performance returns of an FA’s clients and shows how they perform against proper benchmarks. When I refer to proper benchmarks, I mean that small-cap mutual funds should be compared to the Russell 2000 or S&P 600 indexes and not the S&P 500 index simply. Do NOT let your FA compare apples to oranges). How complicated are your financial planning needs? If your estate is below $5.12 million, it is not subject to federal taxation right now. Do you need to give money to charities via a Charitable Remainder Trust or some other legal structure? Or can you deal with the charity directly? Could someone at H&R Block do your taxes?

I suggest that you look at the financial advisory landscape as a continuum and not binary. It is not either manage your own investments or turn it over to an FA. There are options in between. Here are the two most important ones. The first option is to learn about investing yourself but retain an expert Certified Financial Planner to assist you in reviewing your investment portfolio annually and during market turmoil. You can find an excellent Certified Financial Planner and pay around $250 per hour for a two-hour annual review. Yes, you pay $500, but you escape paying $10,000+ if you have an FA at a full-service brokerage firm. Here is the second option. If you have a more complicated financial situation, you can still manage your own investment portfolio and do even better than using the services from you full-service brokerage firm. You can set up your investment portfolio in year one with an FA and pay the $15,000 from our second example. During the second year, you could choose to go to one of the top legal firms in the nation and pay $1,250 per hour for a five-hour estate plan agreement, you could get your taxes done and structured by a Big 4 international accounting firm for $5,000, and you could go to a Certified Financial Planner recommended by Goldman Sachs or Morgan Stanley, or JP Morgan and possibly pay another $5,000. Using my example and rationale, you would get the best legal, tax, and financial planning advice in the entire nation. It would cost you $16,250. Well, your annual asset management fee at a full-service brokerage firm would have been a bit over $15,000. Would you rather get legal/tax/financial planning advice from your local team of FAs? Or would you rather go to the best in the nation? Now chances are you do not really need to go to those lofty outside experts, but I only use that to illustrate the point that you could use your opportunity cost savings from doing your own investing to hire the best in the business for your other needs. If you look at it in these terms, how does your current FA and firm stack up? Your FA will tell you that you have the benefit of coming to one centralized location. I would counter that the observation that your FA and his/her team cannot draft legal documents or fill out tax returns. They can only advise; you still will have to pay a lawyer and accountant separately.

I just provide this information as food for thought. If you view the decision of learning how to invest through this paradigm, it shines a different light on the situation. Now the financial services industry does not present things in this manner. This paradigm focuses solely on you and your financial interest. If you do decide to use a FA, ask him/her what their fee is in dollars not percent, what services and advice you get for that annual fee, and whether or not they have a GIPS-audited composite which shows that his/her investment recommendations have done better than you just using a passive investment strategy and just selecting ETFs or index mutual funds. Remember that, when choosing whether or not to manage your own investments, the pros/cons of fees need to be viewed as it relates to your best interest monetarily aside from the financial services firm.