Guest Post By Ben Miller, Co-Founder & CEO, Fundrise
Every wealth manager has a theory on where to invest, but their advice and the opportunity to participate will cost you.
And, as we all know, the higher your cost of investing, the lower your overall profit.
Most money managers and hedge funds charge fees according to the “two-and-twenty” model, meaning they charge an average of 2% on all assets under management (AUMs) and an additional 20% of the “upside”, or any profits earned.
Money manager fees are high in nearly every case, with servicing usually at more than one percent. Furthermore, minimum investments can range from tens to hundreds of thousands of dollars. In REIT investments, for example, one must pay brokerage fees, and in the case of non-traded REITs, fees can amount to nine percent to 10 percent of the total investment.
Enter the Internet
Technology can play a major role in disrupting a broken financial system, particularly as it relates to investor fees. Bringing the investment process online can create a more direct, transparent model, which can lower both operating costs and investor fees.
The Internet has put power back in the hands of consumers by providing direct access to investments so that they no longer need to forfeit large shares of profits to fees. Motif Investing, Wealthfront, and Betterment provide investors with the ability to invest in diversified portfolios with nominal fees.
Crowdfunding is a great vehicle for individuals looking to move beyond the public markets and gain exposure to real estate. Companies like Fundrise provide investors with access to curated real estate deals for substantially lower fees and lower minimums than other investment avenues can provide.
Because of the efficiencies of a direct and transparent marketplace, Fundrise is able to charge 30 basis points (“Bps”) per year. (A basis point is .01% or 1/100th of 1%.)
To put it another way:
If you invested $10,000 in a one-year Fundrise investment, you would pay $30 ($10,000 x .003) in fees. On a comparable investment with a money manager, assuming the two-and-twenty model, you would see at least $200 per year in management fees plus an additional 20% fee charged on upside.
This graph outlines how the net returns of real estate investments with similar profiles can vary based on fees:
A savvy investor is one of who unlocks the full potential of passive income, asks smart questions, and succeeds in building a customized portfolio that fits their needs as a result!