Last week, my mom pulled out her 401(k) statements and asked whether she was paying too much in yearly fees.

What I found surprised her. In fact, it made her consider serious changes to her financial plan. Sadly, I wasn't surprised at all by what we uncovered. It's a problem all too common in the financial industry: your advisor posing the biggest threat to your wealth.

The figures on a 401(k) statement bamboozle many soon-to-be retirees. Photo: Flickr user Jorge Franganillo.

First, check the fees
Lots of folks who don't spend all day looking at financial statements get quickly lost when those statements show up in the mail. Sometimes it almost seems as if these documents are constructed for the sole purpose of confusing you. So let's go over the statements you get from the various funds you're invested in.

There are really just a couple numbers to find. The first is the total of all annual fees that you pay. Usually, this number is boldfaced and listed under Total Annual Fund Operating Expenses.

In my mom's case, her fund's total fees equaled 1.14% per year. This means that every year, 1.14% of her investment is taken out by the fund.

But that's not the end of the story. 

The first hidden cost
A different type of charge--for transactional costs--is much more difficult to calculate and not included in the total annual fund operating expenses. This comes from fees that mutual funds have to pay for buying and selling shares of stocks for the fund itself. These costs are much harder to find, and usually found in the "Statement of Additional Information" in a fund's prospectus. Even then, however, they aren't broken down into a percentage of your money being paid in fees.

On of the best ways to find out if a fund might have high transactional costs--they change year to year--is to investigate its turnover ratio: the percentage of a mutual fund's holdings which have been sold--or turned over--in a given year.

This is where a big red flag went up for my mom: the turnover ratio of her fund was 244%--meaning that the entire portfolio had changed almost two-and-a-half times in one year. That could obviously rack up serious costs.

For comparison's sake, Vanguard offers the Vanguard Total Stock Market ETF (NYSEMKT: VTI), which has a turnover ratio of just 4%--that's an enormous difference. Also, its total yearly operating expenses are just 0.07%!

How does this affect the fees you pay?
According to an earlier article by the Fool's own Bill Barker, "Managed mutual funds have an average turnover rate of approximately 85%." So the mutual fund my mom is invested in has a turnover rate 2.9 times higher than the average, while the Vanguard fund's ratio is only one-twentieth the average.

A 2007 study (pdf link) found that average transactional costs for mutual funds were 1.44%. If we take these figures and extrapolate out--which is admittedly an inexact science--we see that my mom's fund probably has transactional costs of about 4.18%, while the Vanguard fund's are only 0.07%.

That brings fees for my mom's fund to a whopping 5.32% versus the Vanguard's measly 0.14%.

The SEC requires that every mutual fund disclose its returns in the following format:

Source: Office of Investor Education and Advocacy.

I like to take the "before tax" number and compare it to the benchmark index returns -- this gives a more apples-to-apples comparison. In my mom's case, the fund she was invested in was an all-equity fund. The 10-year before-tax returns were 8.71%. The average returns of the index -- in this case, the CRSP US Total Market Index -- were 8.62%.

If we think about this for a second. It actually means that my mom's fund has been performing incredibly well. Even after 5.32% of her money was taken out every year for fees, it still beat the index!

If we work backwards, that means that her fund was actually managing an annualized return of about 14% per year!

One more fee to worry about
The last fees, which you'll never see included in a fund's pre-tax returns, are sales loads--which is a charge for buying (front-end load) or selling (back-end load) shares of a mutual fund. These charges can be as much as 8.5%--though they are typically lower.

In my mom's case, no sales load was included, so this wasn't something we had to worry about. But if she did have--let's say--a 5.5% back-end load, it could limit any benefit of the increased returns she had been earning.

The real question she had to ask
What it really came down to for my mom was a simple realization: the fund she was in would only be worth it if it continued to produce results that beat the index by about 5 percentage points every year. That certainly is possible, as the fund itself has demonstrated over the past decade. But did she believe the odds were on her side?

In the end, she thought, "No." For her, it doesn't make sense to pay so much money when it's only worth it if her fund does--by comparative standards--spectacularly well over the long-run. She'd much rather pay a little to earn the index return, and go back to focusing on the more important things in her life.

So why might advisors push us toward bad investments?
There are lots of reasons a financial advisor might convince you to choose a fund with high fees. He or she may genuinely believe that the fund will outperform the index, even after fees. If that's the case, ask for the proof.

Far more often, however, advisors are incentivized to usher you toward certain funds. One of the fees that mutual funds will charge you is called a 12b-1 fee. Ostensibly, these are monies taken from your account to pay for "marketing." But a rather insidious way these fees can be used is to reimburse advisors who bring clients to the fund.

In other words, putting your money in high-fee funds is often good for the advisor -- not for you.

How can you find a reliable advisor?
The good news is there are a few easy ways to find an advisor who would never do such a thing. Most importantly, find an advisor who has taken a fiduciary oath -- which means they are bound to put your best financial interests first.

Usually, these advisors charge a flat fee -- instead of a percentage of assets or a commission -- as a way to ensure that there's no added incentive for them to steer you toward investments that aren't the best for you.

The truth is that there are as many wonderful financial advisors out there as there are bad ones. I believe the best place to start looking is the National Association of Personal Financial Advisers -- a group of advisors who are fiduciaries who charge flat fees. Once you find one you're comfortable with, you can rest assured that they are not a threat to your wealth -- quite the opposite, in fact.