Over the past few years I’ve written about the true cost of management fees. Here are links to a few of those articles.
Most of us will eventually face a time when we are not able to manage our own finances. Who will take over and what impact will it have on the portfolio return. Any cost to a portfolio cuts two ways.
- Portfolio management fees require a check or automatic withdrawal from the account. That money is gone.
- Money laid out in fees means those dollars are not available for investment in the portfolio. There are fewer dollars to grow the account.
Assume a Robo Advisor is hired to manage your $100,000 account. Twenty-five (25) basis points or 0.0025% is a common fee. This is a cost of $250 per year, which seems reasonable. Over a 40-year period that is a cost of $10,000 if the portfolio were not to grow.
Here is a problem to work on. Assume at age 25 you are able to save $2,000 per year until age 70. Further assume you are able to grow the portfolio 6.0% per year and the cost to manage the account is 25 basis points, payable at the end of each year.
On your 26th birthday, having invested $2000 on your 25th birthday you now have $2,000 + $2,000 x 0.06 = $2,120. Management fees are 0.0025 x $2,120 = $5.3 leaving $2,120 – $5.30 = $2,114.7 to begin the next year in addition to another $2,000 added to the account. To finish this problem, what is the account worth after 45 years of investing and how much was paid out in management fees? Provide your answer in the Comments section.