True to our core values of high returns through low fees, Rebalance and MarketRiders founder Mitch Tuchman discusses with CNN’s Christine Romans how even relatively small fees can rob your IRA of almost 50% of its value over time.
Transcript
Okay, so you think you’re doing everything right for your retirement. You’re investing every year in a diversified portfolio for your IRA, but you could still lose a million dollars before you retire. And it all boils down to the fees — the fees sucking away at your retirement savings and growth.
Mitch Tuchman is the founder and CEO of MarketRiders, and he’s here to walk us through some math he has done about how much you’re paying in fees. Mitch, welcome to the program.
I want to start first with this portfolio you put together. This is for a person who’s 35 years old, contributing $4,000 a year, assuming a 7.5% annual return. By the age of 76 — wow — walk me through what you see here.
If you have a mutual fund portfolio, you’ve got a little bit more than $2 million, right? With an ETF portfolio, you would have had $3 million. So returns lost to fees: more than a million bucks. Why? How is this happening?
What people don’t understand is that when you buy a mutual fund portfolio — and by the way, the portfolio that we used is all Morningstar four-star rated mutual funds — the average fees on this portfolio are about 1.39%. And there are all kinds of hidden fees, but that’s all loaded up.
When you look at these fees and compound them over a long period of time, they literally create such a handicap on your portfolio that you lose a tremendous amount of money. And people don’t really understand this. They think, “Oh, what’s the big deal? One percent on a mutual fund.” Well, when the markets are returning — in our example — 7.5% with bonds and stocks, that little 1.39% is a very big part of 7.5%. And that’s what happens.
You also ran it again with a mutual fund portfolio and an advisor, and found that the losses are even worse. Same example: age 35, investing $4,000 a year into your IRA, 7.5% return. In the end, if you use a mutual fund portfolio and an advisor, you have $1.4 million. The ETF portfolio would have been $3.1 million. Returns lost to fees: $1.7 million.
I should explain what an ETF is, by the way — exchange-traded funds. These typically have much lower fees because you’re just tracking something in the market. It’s not actively managed, right?
Right, exactly. The difference in fees: ETFs tend to be about 20 basis points. Now, the caveat, Christina, is that ETFs are now being bastardized by Wall Street. But I’m talking about Vanguard and iShares ETFs. You don’t really want an ETF if the average in a whole portfolio is more than 20 basis points. They’re about a seventh of the cost of a mutual fund portfolio.
But as you were saying, if you throw an advisor into the mix, the fee goes from 1.39% to 2.39%. That puts a further drag on the compounding of the portfolio. It’s just devastating.
Ally, I know you’ve looked at and studied this before — about fees — and sometimes you think it’s a little overrated, right?
A couple of things. I generally agree with what Mitch is saying. I generally think ETFs are a fantastic tool for most people. But ETFs are a general thing — they’re becoming much more specific. There are many that are highly specialized.
But at some point, Mitch — first of all, not everybody is going to pay 1.9% for an advisor, but let’s take that at face value — the reality is there are some mutual funds and some mutual fund advisors who are real people. They have to travel around the world and really know whether this Czech pharmaceutical company is better than that one, or this Chinese banana farm is better than that one. And if they are going to make me more money than a computer-generated exchange-traded fund is going to make me, why do I care if I’m paying for that privilege? If I’m paying fees and an advisor but I’m actually beating the market every year, there’s nothing wrong with that.
No, you’re right. But Ally, the operative phrase you just said is “beating the market every year.” Most people have a retirement time horizon — even myself as a baby boomer — I’m looking out 10 or 15 years. But most people, if you’re 35, you’re looking out 30 or 40 years.
All the studies show that the mutual fund manager you described — going to look at the banana farm — might beat the market one year, maybe two years. But after five or ten years, the number of people who can keep beating the market consistently is less than 10%.
I think a cool takeaway for everyone here is that you probably don’t know what you’re paying in fees. It might be a really good time to go check right now. If that’s the benefit that comes out of this — if everybody just checks what they’re paying and at least makes an informed decision about it — we’ll be ahead.
That’s absolutely right.
All right, Mitch Tuchman from MarketRiders, thank you so much for stopping by. I really appreciate it.
Yeah, thanks, Christine. Thanks, Ally. Appreciate it.
All right, after all this talk about retirement…
