The High Cost of Fees

Canyonlands National Park in Utah.

High fees are to be avoided, particularly management fees.  Readers of ITA Wealth Management are well aware of my propensity to keep fees to a minimum and that is why I place so much emphasis on using commission free ETFs.  While most of you are managing your own money, there may be new readers of this blog who are paying for professional management.  What is that costing the portfolio in terms of performance?

Let’s take an example using the following assumptions.  Individuals can plug in their figures using the Bloomberg Retirement Calculator.

Assumptions

• Current value of portfolio equals $1,000,000
• Current age is 35 and retirement is planned for 65, or 30 years away.
• Assumed average growth of the stock market is 8% or close to the historical average
• Fees are 0.9% or what one may pay a DFA advisor
• Annual contributions to the portfolio are $10,000

If no fees are applied, the portfolio can be expected to reach the handsome sum of nearly 11.2 million dollars.  If the earnings are 7.1% instead of 8%, due to fees, we project the portfolio to be valued at nearly 8.8 million or a difference of 2.4 million over the 30-year period.

Scale that figure up to a 100 million dollar endowment portfolio and one is laying out 240 million dollars in fees over the next 30 years.