Most financial advisors report gross performance because the number is always higher, perhaps two to three percent higher. And, most investors accept the numbers because they do not know they should be asking for performance reports that are net of all expenses. The higher the expenses, the more likely the advisor is to report gross results.
There are several layers of expense that you should be aware of. If you know all of the expenses, you can add them up and deduct them from your performance yourself. Or, you can use a free tool that resides on the Investor Watchdog website (http://www.investorwatchdog.com/) that will obtain expense data for you. Continue reading →
You may not realize this, but if you own mutual funds in your portfolio then you may be paying substantial fees to each mutual fund manager every year, in addition to an annual advisory fee to your investment advisor (An advisor simultaneously collecting both a commission and an advisory fee on the same portfolio is an extremely unethical act known as Double Dipping, please see my earlier post).
Mutual funds charge annual management fees and hidden 12b-1 expenses that can cost you on average about 1.5% a year and many of these funds may not provide you any better diversification than an index fund or ETF that only costs you 0.20%. Imagine if you are paying your advisor an additional 1.5% annually to put you into these funds; your annual investment cost would reach 3% per year. These may not seem like big numbers, but compounded over decades these fees could erode a very large portion of the value of your portfolio.