When it comes to investing, it's essential to consider the impact of fees on your potential returns. While it's common to focus on the prospects of growth and market trends, overlooking the significance of fees can ultimately hinder the growth of your investments. Most old-time financial advisors charge fees on assets under management (AUM). This old-fashioned model places the wants of the advisor above the needs of the investor and can have a long-term detrimental impact on the investor. Let's explore the myriad of ways in which fees can negatively impact your investment portfolio.

1. Diminished Returns: Fees can significantly reduce the overall returns on your investments. This is especially true as your portfolio grows in the AUM model. As your assets grow through saving, investment, and consolidation, the advisor continues to charge on those additional assets without providing additional services. With modern technology, managing a $1,000,000 portfolio takes the same amount of time and expertise as managing a $2,000,000 portfolio. Paying a fee on that extra million only enriches the advisor, you get nothing extra in return. That cost only diminishes your returns. It significantly impacts the growth of your portfolio, especially over the long term, costing you tens if not hundreds of thousands of dollars.

2. Undermined Compounding: In addition to reducing current returns, these fees can also impede the power of compounding. Compounding is pivotal in generating earnings that are reinvested to generate further earnings. When unnecessary fees are applied to these earnings, the compounding effect is weakened, resulting in a lower overall growth trajectory for your investments.

3. Long-Term Implications: Over an extended investment period, the impact of fees becomes increasingly pronounced. What may seem like a negligible fee in the short term can accumulate into a substantial sum over several decades of investing. This erosion of potential returns can significantly hinder the achievement of your long-term financial goals, underscoring the need for a strategic, fee-conscious approach to investing.

4. Behavioral Influence: High fees can influence investment advisor behavior, leading to impulsive decisions and frequent trading in an attempt to counteract the negative impact of fees. This can result in higher transaction costs and taxes, further exacerbating the overall impact of fees on investments.

Investors play a crucial role in mitigating the negative effects of fees on their investments. By actively seeking out financial advisors who charge for services instead of assets under management, and being vigilant about the costs associated with investment vehicles, investors can take proactive measures to counter the detrimental effects of fees on their long-term financial success. This empowerment is key to successful investing.