Investment Management Fees - A Different Angle

DIY Investor is a proponent of paying attention to investment management fees and seeking ways to reduce them. Fees eat up a goodly proportion of people's nest eggs; and they aren't easy to detect because they are, in many cases, hidden. Fees come in the form of investment advisory fees, expense ratios, trading costs, 12b-1 fees, and the list goes on.

In fact, DIY Investor charges .40% management fees and invests primarily in low cost cost index funds (many of which now have zero commissions) which have an expense ratio of approximately .15%. In contrast, many advisors charge 1% management fees and use mutual funds that have expense ratios on the order of 1.3% and, to boot, are actively traded.

What is the impact on fees over the longer term? DIY Investor looked at this using actual market returns over the past 20 years as reported on the BlackRock table of investment performance. This analysis showed that, for a starting portfolio of $1.0 million, the end result was $857,585 less with a 1%/year management fee compared to a 0% (i.e. do-it-yourself investor) where both the manager and the do-it-yourselfer matched market returns. Of course, if you are convinced that your manager can "beat the market" by more than 1%/year then, by all means stay with the manager.

There is another way to look at the impact of fees using the FIRECalc calculator introduced previously. Click "Your Portfolio."  CLICK TO ENLARGE

This will bring you to a page where, at the top, you can input the cost of managing the portfolio in percentage terms: CLICK TO ENLARGE

Source: FIRECalc

There are a number of built-in assumptions for the results (all of which can be changed to reflect an individual's portfolio) that include starting value of portfolio ($750,000), asset allocation (75% stocks/25% bonds), period covered (since 1871), etc.

The results of changing the management fee, starting with a .25% fee and increasing by .25% increments to 1%, are shown in the table in terms of the maximum and minimum values the portfolio will achieve over 30-year periods for the Monte-Carlo analysis:

The results show meaningful swings in the maximum and minimum values over long periods of what many investors take as minor differences in expenses.


No matter how you look at it - portfolio management expenses are expensive over the long run!

How Long Will Your Money Last?

Running out of money is the number one concern of retirees. The probability of that occurring, and figuring out how much is needed to retire in the first place, has turned into a national past-time with the oncoming so-called "gray tsunami" of retiring baby boomers. At least it has for about 50% of the workforce. Apparently the other half is going to wing it. In any event, there is a neat little calculator for those seeking a ball-park estimate to this question produced by FIRECalc that DIY Investor came across at Free Money Finance.

This calculator starts out very simply and requires a portfolio amount and an assumed spending amount as shown:

Source:FIRECalc

 DIY Investor put in the portfolio amount of $1,000,000 and a spending level of $40,000 to test the 4% rule of thumb. Upon clicking "submit," FIRECalc returns a series of paths graphically. The result is that spending 4% on an inflation-adjusted basis would have been successful, i.e. the retiree would not have run out of money, 94.6% of the time based on 111,  30-year periods .

Just this simple step used in conjunction with expected Social Security, and maybe a possible pension, can start to give a retiree a good idea if his or her nest egg is close to being able to produce the desired income. The FIRECalc tool allows for more sophistication, as well, for those wanting to put in their own assumptions. Just click the tabs on the home page:

CLICK TO ENLARGE