Hidden fees are eating away at your retirement savings

As with any product or service, there are fees associated with investing. These fees can affect your portfolio both positively and negatively.

My hope is that by writing this column, I will help you see more clearly your current situation. Let's break down the good news and the bad news.

The good news: Never before has it been as cheap as it is now for good professional money management. The days of paying 2.5 percent to 5 percent for money management should be gone. The ability that investors have to find a terrific money manager for a small fee is better than ever.

In addition to lower fees, investors are now also getting more bang for their buck.

In addition to the regular phone calls, your connection to those managing your money is greater than ever through blogs, websites, social media, etc. If you want to know what your money manager is thinking about the market, you should know instantly by jumping online.

The bad news: The bad news about fees is that people have no idea of the impact they can have on a portfolio. Non-savvy investors are still paying their financial advisors the 2.5 percent plus fee for doing something that can be done much cheaper. Let me visually show you what we mean by looking at three different portfolios.

• Portfolio 1: This portfolio is a commission-based advisor charging 5 percent. This fee includes the cost of managing money, sales, advertising and other expenses. This is an old-school example that unfortunately most broker-dealers still implement today.

• Portfolio 2: This portfolio is a fee-only advisor charging a flat fee of 3 percent.

• Portfolio 3: This portfolio is a fee-only advisor charging a flat fee of 1.5 percent.

For those of you who like visuals, here is the graph of the numbers above.

By looking at these numbers, you should notice the following:

1. The difference after 30 years between Portfolio 1 (5 percent fee) and Portfolio 3 (1.5 percent) is $723,631.

2. The difference after 30 years between Portfolio 1 (5 percent fee) and Portfolio 2 (3 percent) is $329,031.

3. The difference after 30 years between Portfolio 2 (3 percent fee) and Portfolio 3 (1.5%) is $394,600.

4. Lastly, you should know that if you are paying more than 1.5 percent for good portfolio management, you are paying too much.

So what can you do about this? After realizing the impact that a little fee can have on investment returns, find out how much you are being charged by your current advisor. If you are paying too much, find someone else to do the job. As you can see, the difference that these fees can have over time is the difference between enjoying retirement out on the lake fishing or working.

(Editor's note: This column first appeared on Investopedia.)

— By Brett Pattison, portfolio manager and investment advisor at Iron Gate Global Advisors Iron Gate Global Advisors

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