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, and significantly increase the chances that savers will run out of money late in life.
The fiduciary rule was supposed to take effect April 10, but the Labor Department has delayed its implementation for 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.
Here’s what to keep in mind:
- 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.
- 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.
- 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.
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.