The cost of financial advice, separated into fees and lost compounding

Two identical portfolios are projected month by month, one at your gross return and one at the gross return minus the advice fee. Alongside the advised portfolio a running total of fees charged is kept, calculated on the balance at the start of each month. At the end, the total drag is the difference between the two final values, the fees paid is that running total, and the gap between them is the compounding those fees would have produced. The table underneath repeats the whole run at five common fee levels, from a quarter of a percent to one and a half.

The fee is modelled as a straight reduction of the annual return on the whole balance, which matches how a percentage-of-assets fee is actually charged but not how a fixed annual retainer or a commission-based arrangement works. Fund costs sit underneath this and are not included, so a comparison against a do-it-yourself portfolio should add its ongoing charge to the picture. Nothing here values the advice itself.

Why is the total drag so much larger than the fees paid?

Because a fee is charged on a balance that would otherwise have kept growing. The euro taken in year one is gone, and so is everything it would have earned for the rest of the horizon — at seven percent over twenty-five years, that is more than five times the euro itself. The fees-paid figure is what left your account; the total drag is what left your wealth, and the gap between them widens with every year you stay invested.

Does this mean advice is never worth it?

No. It means the value has to exceed a number, and the number is now visible. Advice that stops one panicked sale in a crash, structures withdrawals across the three pillars sensibly, or gets an estate arrangement right can be worth multiples of the fee. What this page rules out is the version where nobody asks, because the fee was quoted in basis points and the cost accumulates somewhere nobody looks.

What does a do-it-yourself portfolio actually cost?

For a single broad index fund held at a broker with no custody charge, the ongoing charge plus trading is typically well under a quarter of a percent a year all in, which is the floor this comparison is implicitly drawn against. The total cost of ownership tool prices it properly for a specific fund, broker and country rather than as a rule of thumb.

• TER impact calculator: what an ongoing charge costs over time
• ETF cost calculator: every annual cost of holding one fund
• Contributions versus returns — which built your portfolio