The investing business is fueled by fees and intermediaries — mutual funds and stockbrokers — that can eat up as much as half of the wealth that could be achieved in a certain period, writes Jason Zweig for The Wall Street Journal.

When you invest, there are always associated costs that can kill the returns. However, new research shows that intermediaries regularly portioned off one-sixth of the stock gains for themselves. In some cases, they took more than one-third.

Do you trust the markets to take care of your future? In today’s economic environment, having options besides public stock, bonds, and mutual funds may reduce the risk in most portfolios.

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Edward McQuarrie, an emeritus business professor at Santa Clara University, recently conducted a study on how mutual-fund investors have done since the 1920s. He wanted to measure their actual returns, not the theoretical ones.

He measured the returns on a selection of the most prominent U.S. stock mutual funds from 1926 through 1986, when inexpensive, market-tracking index funds became available to many investors. He then deducted the “sales loads,” or commissions covered by investors.

He found that an investment of $10,000 in 1926 in the index, which later became the S&P 500, would have theoretically grown to around $198,000 in 30 years, if all dividends were reinvested.

However, in reality, with mutual funds sales charges and annual expenses, that investment would have grown to under $99,000 over the period. That means that, in the real world, costs were half of the gains.

Over the following three decades, through 1986, fund investors captured just 71 percent of the cumulative wealth generated by the S&P 500.

With the advent of dirt-cheap index funds in the 2000s, Wall Street stopped selling funds that invest in public stocks and bonds. To compensate, it now drives retail investors into private assets, where the costs have barely dropped in decades.

Fred Hubler, the CEO and Chief Wealth Strategist for Creative Capital Wealth Management Group in Chester Springs, agrees that fees in the absence of value are a headwind to performance.

“I love football, and fees are like a penalty on the play,” he said. “When we look at investments for our portfolios, we make sure that the fees are factored into the equation. Ironically, some of the more institutional and alternative investments are not as expensive as some off-the-shelf traditional products.”

Learn more about how fees and intermediaries are eating up a large portion of the return on investments in The Wall Street Journal.

Want to know if you’re on the right path financially? Creative Capital Wealth Management Group’s Second Opinion Service (SOS) is a no-obligation review with one of CCWMG’s Wealth Strategists.

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