The Department of Labor has a new rule regarding investment advisors to retirement accounts. Starting this spring advisors must act as fiduciaries to their clients. This requires them to act in the best interest of their clients. Current rules allow advisors to give reasonable advice, that is, to give recommendations that are reasonable to achieve their client’s goals. Critics of the new regulations claim compliance costs will increase and these will be passed on to consumers. Advocates of the new rules claim retirement investors will benefit as advisor conflicts of interest will be prevented or at least disclosed resulting in better investment returns.
My local newspaper has a weekly article in the business section by Stephen J. Butler. Mr. Butler is CEO of Pension Dynamics, a firm that helps design and manage employee benefit and pension plans. He is an advocate of the new rules. In an article published October 14, 2016, he states that the standard fee of 1%-2% of managed assets decreases the final pension amount by over 30%. I wanted to check this, so I designed a spreadsheet to calculate the total value of $2000 invested at the beginning of each year for 20 years and 40 years at average compound rates of return from 10% down to 6%. I found Mr. Butler’s claim accurate. In fact, a 1% lower average return from 10% to 9% resulted in a 33% lower total over 20 years (difference/lower total). Below is a summary of the results. This is also good example of the power of compound interest. A lower average return of just1% can make a big difference in final value.

Total value of $2000 invested at the beginning of each year for 20 years.
@ 10% - 194,717.90
@9% - 145,888.60
@8% - 98,845.84
@7% - 87,730.35
@6% - 77,985.45
Total value of $2000 invested at the beginning of each year for 40 years.
@ 10% - 973,703.60
@9% - 736,583.70
@8% - 559,562.10
@7% - 427,219.10
@6% - 328,095.40

Russell Malley
StockCentral Community Leader