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Do you know how much money you spent in investment management fees last year? Take some time today to gather a rough estimate of this number. If you are invested with a private money manager it is likely you paid 1 to 2% of your assets under management. Commissions for brokerage firm trades are likely in addition to this.
If you are in a mutual fund the average fee is around 1.5% depending on the fund size and objective. For example foreign fund fees are higher due to the additional costs to manage them. Smaller funds also typically have a higher expense ratio because there are fewer fund holders to share the total fees. Mutual funds also include a 12b-1 fee which is a distribution or marketing fee so make sure these fees are included in the total expense number you use. Sometimes it takes some digging around to find the total expenses so it may be simplest to call the fund or advisor you use and ask them for the amount. Most clients do not do this so be prepared to speak with more than one person. You may receive an amount or a percentage and either one will work for an estimate.
If you are invested in an index or ETF fund your fees are likely much lower than those listed above. For comparison purposes the Vanguard Total Stock Market Index Fund (symbol VTSMX) lists the expense ratio as of 12/31/2007 as .15%. A Vanguard representative confirmed today that this is still the current expense ratio. Yes that is .15% in comparison to the 1.5% above. The placement of that decimal makes a huge difference in the amount you pay for fees over time especially after the savings are compounded.
The summary of this fund is listed on the Vanguard website as:
- Invests in more than 3 000 stocks representative of the whole U.S. market.
- Goal is to keep pace with U.S. stock market returns.
- Offers high potential for investment growth; share value typically rises and falls more sharply than that of funds holding bonds.
- More appropriate for long-term goals where your money’s growth is essential.
Notice the goal of the fund; to keep pace with the U.S. stock market returns. This fund was subject to the brutal bear market we just went through like all other funds that hold stocks long however the holders of this fund did not pay a lot for their portfolios to significantly decrease in value. I may have to take back what I said in a previous blog about no free lunches. Ok .15% is not free but it is close to it.
Some active managers and strategies definitely beat the overall market. I would never say that they do not because they simply do. Did yours and how much did you pay last year for the performance your portfolio received for that expense? How does this look over a longer time frame after compounding such as five or ten years?
P.S. Did I mention that index funds are also extremely tax efficient? Check back for a post about this.