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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 fee | Years invested | Final value (no fees) | Final value after fees | % loss from fees |
|---|
| 2.5% | 30 | $1745K | $875K | 50.0% |
| 1.5% | 30 | $1745K | $1156K | 33.8% |
| 0.2% | 30 | $1745K | $1652K | 5.3% |
| 2.0% | 20 | $673K | $466K | 30.7% |
| 1.0% | 20 | $673K | $560K | 16.7% |
| 0.5% | 20 | $673K | $614K | 8.7% |
Table 2 – Types of fees, amount and strategy to limit
| Fee | How you pay | Max amount | Associated tip |
|---|
| Expense ratio | Percent of total balance, each year | 0.3 % | Use passively managed funds like VOO, TLT, or QQQ instead of actively managed funds |
| Management / advisory fees | Percent of total balance, each year | 0.5% | Most people should completely avoid this fee, e.g. with a 1 time fiduciary fee if expert advice is desired |
| Commissions and transaction fees | Flat fee per trade or percent of transaction amount | $0 | For long-term investors using few funds (recommended) this is typically negligible. If you trade small amounts frequently (not recommended), choose a commission-free brokerage. |
| Front end loads | Percent of investment lost when purchasing the asset | 0 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 loads | Like a front end, but instead the percentage is deducted upon selling the asset | 0 to 5% | |
| Annual brokerage account fees (401k, IRA fees) | Flat amount per year | 0 to $50 | Check 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/yr | Before opening an account check for such fees that would apply to your situation and check competing brokerages |
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