A typical front-end load fee in the mutual fund industry is 5.75% of the amount invested. Load fees are sales charges assessed when you buy shares (front-end load fees) or when you sell shares (back-end load fees). Some mutual funds charge investors a front-end or back-end load fee. The more a fund trades, the higher the costs, and investors pay these costs in addition to the expense ratio. Managers pass on the cost of buying and selling securities owned by the fund. For example, an expense ratio of 0.50% tells you that the fund will deduct one half of 1% of the amount an investor holds in the fund each year.įunds may also charge a range of additional fees. Mutual funds, index funds and exchange-traded funds charge annual expense ratios, a fee that is equal to a percentage of your total investment in the fund. Two of the most common fees investors pay are expense ratios and advisory fees. There are a host of different fees in the investment industry. Expense Ratio Fees and Financial Advisor Fees If the portfolio had only charged a 0.50% fee, the final value would be $1.3 million, with fees consuming only $216,000 over the life of the investment. It would be worth around $1.1 million, fees having cost approximately $480,000 in total. Seems like a very small amount, right? But over the course of 45 years, this seemly insignificant fee would consume almost one third of the final portfolio balance. Now let’s assume the model portfolio charges an annual fee equal to 1% of its value. If a young investor bought into this model portfolio with a starting balance of $10,000 and then contributed $100 a month over a 45-year career, it would end up being worth approximately $1.6 million before fees-assuming the historical rate of return held over the entire period. According to wealth management firm Index Fund Advisors, it would have returned just over 10% per year since 1928. To get a clear picture of the cumulative impact fees can have on an investment portfolio, you need to take a long-term perspective.Ĭonsider a model portfolio consisting of 80% stocks and 20% bonds. The High Cost of Small Fees Over the Long Term Let’s take a closer look at just how much of your investing dollars fees can consume over the life of an investment portfolio-and what you need to do to minimize investment fees. Moreover, studies have shown that investments that charge higher fees frequently underperform investments that charge lower fees. Yet fees that appear insignificant can substantially reduce your wealth over the long term. But there is one critical part of investing that investors can control: The amount they pay in fees.Ĭompared to the impact of Fed policy on markets, minimizing investment fees might feel like a consolation prize. There are plenty of things investors cannot control-market trends, decisions by corporate managers, Federal Reserve policy.
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