The expense ratio is your cost of fund ownership
Print This PageIt's no secret that brokers are often accused with charging excessive fees. But the real crime is that most of the fees are hidden. They are either legally not required to be disclosed or they are buried in a document called the “Statement of additional information” which has to be requested from the underlying fund manager. Below is an example of the fees which are visible and those that aren’t.
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Forbes Magazine estimates the average cost of owning a mutual fund to be 4.1% annually (if held in a taxable account) and 3.1% (if held in a 401(k) plan).
Brokers will often say that these minimal percentages will pale in comparison to returns over the long haul. On the contrary! In his article, "The Tyranny of Compounding Costs," author John Bogle (founder of Vanguard) used the following illustration. If an individual made a $1,000 investment at age 20 and received 8% annualized returns, the account balance would grow to $109,358 by age 80. If a 2.5% annual management fee was added into the equation, the ending account balance would only be $26,206. Over the 60 years, these annual management fees eat up a staggering 76 percent of what the investor would have earned with no management costs. Now we all know that nothing is free. But the point is that fees need to be reasonable and not a “hole in your boat” that is draining your performance as the years go by.
Want to know how much you are REALLY paying in fees? Or how much you could lose if we experience another major market correction? A “Cost and Risk” analysis is a great way to quantify how much you have to pay before you can earn a dollar in returns.
