Investment Considerations for Your Withdrawal Portfolio PART 2

Last post, we talked about some investment considerations for your withdrawal portfolio. Today, we will continue on the additional ways you can maximize all the benefits offered from your income-producing assets. Today, we talk about fee structures.

Look for a reasonable fee structure
Typically, the higher the fees for given return, the lower the yield to you. In addition, the vast majority of investors don’t know how this impacts them because most don’t know the level of fees they are paying for their investments.

All variable investment products have a management fee. It is how revenues are generated in the investment industry. This fee is a cost you pay for the investment, and potentially for other services such as advisor compensation. Often this fee is not transparent.

The range of fees on variable investments can run anywhere from about 0.25% per annum to nearly 4% per annum, depending on the investment option and advisor compensation. These amounds are deducted from your overall returns.

One of the components in the fee structure is what is referred to as “imbedded compensation.”  This is an amount paid to your advisor or the institution with whol you work. As a consumer what you need to know is:

  • What is the total management expense ratio I am paying?
  • What amount of the fee is for additional benefits or features of this investment?
  • How much of this fee is for service and advice?
  • What am I receiving from my advisor for the fee I am paying?

The const-to-benefit relationship relative to fees and advice/service is more transparent if your institution or advisor is actually adding a fee to an investment option where compensation is not embedded. This is the usual practice where ETFs, pools or F-series mutual funds are used as investment options.

Fees are a fact, and part of investing, but you should be able to answer the 4 questions listed above, and the fees charged to you, should be reasonable for what you are receiving in exchange for them.

Stay tuned for our next post on Engaging a Sustainable Withdrawal Rate.

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