Click to enlarge. Source: Personal CapitalPersonal Capital, an online advisory firm, just released a report showing how much money investors lose paying fees to financial institutions, and why they would benefit from the Department of Labor’s proposed fiduciary rule for financial advisors.

An average $500,000 investment account held for 30 years, for example, would pay roughly $500,000 to $1 million in fees, depending on the institution, according to the report.

Personal Capital based the study on the accounts of more than 150,000 customers that use its service, which includes a free financial software service as well as a separate fee-based advisory service.  The data came directly from clients’ accounts at 11 financial institutions; it was not self-reported by investors. Personal Capital calculated the average advisor fees and the average mutual fund and ETF expense ratios for each of the 11 brokerages.

TD Ameritrade had the highest average advisory fee, at 1.53%. USAA had the lowest, at 0.82%. The average was 1.20%.

With regard to expense ratios of mutual funds and ETFs, Ameriprise had the highest average, at 0.99%; TD Ameritrade had the lowest, at 0.49%. The average was 0.70%.

Once both sets of fees were added together, Merrill Lynch led the pack with an average fee of 1.98%; USAA placed last, with a total average fee of 1.06%.

“The results are pretty stunning, ranging from just over 1% to almost 2% on people’s retirement income, and that can have devastating results, overall, “ says Bill Harris, co-founder and CEO of Personal Capital. “Underfunded retirement is probably the largest un-talked about financial crisis that this country faces.”

The report illustrates these conclusions by comparing a sample $500,000 account held for over 30 years among 11 different financial institutions. A client with such an account at Merrill Lynch client would pay $936,000 in fees over those 30 years; a USAA client would pay $502,000.

“The seemingly trivial price of fees, compounded over decades equates to massive losses,” according to the report.

The study assumed a 7% rate of return. A $500,000 account would be worth about $3.8 million in 30 years, not adjusting for inflation.

Harris says, “As these fees come in little pieces — some advisor fees, some trading and management fees, some embedded fees in ETFs — brokers tend to try to obscure them. People just don’t know.”

Harris supports the DOL proposal that would require brokers to put the interests of their clients first, ahead of their own. “It’s hugely important that consumers move from brokers who are essentially salespeople to true advisors, RIAs, which is what we are,” says Harris, a former CEO of PayPal and Intuit.

When asked if Personal Capital’s latest study is therefore self-serving, Harris minces no words. “It is self-serving for us. We offer low-fee investments. Our strong philosophy is that people and companies should have low-cost investment alternatives and complete transparency to what they’re doing and to what’s getting paid. …But it’s also the right thing for consumers to know.” For its advisory accounts, Personal Capital charges investors a 0.89% fee for accounts up to $1 million (the minimum account size is $100,000), which is less than the 1% that many other advisors charge. Fees are lower for larger accounts, bottoming out at 0.49% for accounts of $10 million or more.  

Total charges will never exceed 0.99% because, says Harris, the firm buys a well-diversified sample of individual stocks, not mutual funds or ETFs, for clients’ equity portfolios and low-cost ETFs for fixed income and alternative investments. Customers who use only the firm’s financial tracking software pay nothing.

Personal Capital currently has $1.5 billion in assets under management and tracks about $160 billion among the 800,000 users of its free financial tracking software service.

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