How Fees Impact Your Outcomes

Do fees really make that big of a difference?


Fees could will probably kill your retirement.

More specifically, hidden fees.

You’ve probably heard that phrase, “hidden fees,” tossed around a lot before – but there’s a good chance you don’t really know what it means.

So let’s quickly cover what they are, and then talk about how they’re kneecapping your financial plans:

How hidden fees work

There is (what feels like) an endless supply chain that connects a private or public entity looking for funding with you.

Here’s the most shortened summary of the chain I could think of, as it related to a publicly traded security (think, a company listed on the New York Stock Exchange):

Private or public entity seeking funding


Investment banker #1 (acting as advisor to issuer)


Investment banker #2 (acting as a broker)


Active asset manager


Another broker


Active or passive mutual or exchange-traded fund




Large financial advisory firm and/or turnkey asset management program (TAMP) provider


Risk assessment and management tool provider


Your financial advisor



Are you still with me?


That supply chain has been growing for decades, and each link has been collecting its share of the value. But each link isn’t a line item on the final bill your advisor sends you. You sure foot the bill, though! Hence, “hidden” fees.

And with all the explicit and hidden fees charged by each link in the supply chain, the original issuer and the final holder (that’s you) of a security find themselves paying more than two cents every year on each dollar the issuer raised once.

How they hurt your financial plan

The median financial advisor in the US charges an explicit 1.00% annual fee for themselves. Then they’ll use mutual funds and ETFs as the building blocks of their portfolios, sometimes adding in TAMPs and other third-party providers. That brings the median total fee in the industry – including our favorite hidden fees – up to 1.65% annually for a typical $1 million account.1 1.65% seems like a low enough number, right? Not so much. Let’s say you have a financial plan established over twenty years and need a nominal rate of return of 7% on your investments. Let’s also assume that every financial advisor has the same investment skills, that way we can show the probability of your financial plan failing solely as a function of the total cost – including hidden fees. The chart and table below show the likelihood of your financial plan failing based on the total annual fees you pay:


To show the impact of fees on your financial plan, we did a few things. (And I want to make this as clear as possible: what follows is neither investment advice, nor is it an investment methodology that Lifeworks uses for its clients. It’s just a conventional assumption that makes it easy to single out the impact of fees, as opposed to investment skills.)
  • We assumed all advisors use the same traditional “60-40 portfolio.
    • 60% of the money is invested in the S&P 500 Index
    • 40% of the money is invested in 10-year U.S. Treasury Bonds
  • To calculate probabilities, we assume that the 60-40 portfolios are normally distributed around…
    • An annual average return of 9.14%
    • With a volatility of 12.00%
    • Corresponding to the historical average and volatility of nominal returns on the 60-40 portfolio between 1928 and 2021 – according to data updated yearly by NYU professor Aswath Damodaran2
Again, I want to stress that Lifeworks does not believe that returns are normally distributed, and we certainly don’t construct our strategies based on that assumption. It’s simply a conventional assumption about the distribution of returns that makes it easy to singly out the effect of fees.



  1. 2017 Inside Information Advisory Fees Survey by Bob Veres: