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Investment Fees: What and why to avoid

2018-08-16, Michael Thompson

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Investment Fees: What and why to avoid

One of the easiest ways to maximize investment returns is to avoid excessive fees. Data clearly shows that high fees do NOT imply better returns. Most people underestimate the compounding of fees over time. Table 1 below quantifies the extent to which fees damage long term returns. Table 2 shows a summary of the types of fees you’re likely to encounter (sorted most harmful to least) along with a maximum amount that should be tolerated for such fees, and some associated tips. Invest wisely!

Table 1 - Impact of fees, assuming a $100K investment with a 10% annual return before fees

Annual feeYears investedFinal value (no fees)Final value after fees% loss from fees
2.5%30$1745K$875K50.0%
1.5%30$1745K$1156K33.8%
0.2%30$1745K$1652K5.3%
2.0%20$673K$466K30.7%
1.0%20$673K$560K16.7%
0.5%20$673K$614K8.7%

Table 2 – Types of fees, amount and strategy to limit

FeeHow you payMax amountAssociated tip
Expense ratioPercent of total balance, each year0.3 %Use passively managed funds like VOO, TLT, or QQQ instead of actively managed funds
Management / advisory feesPercent of total balance, each year0.5%Most people should completely avoid this fee, e.g. with a 1 time fiduciary fee if expert advice is desired
Commissions and transaction feesFlat fee per trade or percent of transaction amount$0Use commission-free brokerages (e.g. Robinhood), or choose ETFs that your brokerage provides commission free (e.g. Vanguard funds purchased via Vanguard).
Front end loadsPercent of investment lost when purchasing the asset0 to 4%If you know you will hold an investment for a long period of time this may be advantageous IF it replaces an otherwise annual percent fee
Back end loadsLike a front end, but instead the percentage is deducted upon selling the asset0 to 5%
Annual brokerage account fees (401k, IRA fees)Flat amount per year0 to $50Check before creating a new account, but this amount may be insignificant if you’re investing large sums of money over $100K
Inactivity fees, paper statement fees, …Various types$50/yrBefore opening an account check for such fees that would apply to your situation and check competing brokerages

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