Fees do Matter

Active management means there is a manager or management team that manages the money according to the terms set forth in a prospectus. That manager has to get paid as well as the company that he works for as well as the broker who sells the fund or the advisor that purchases it for your account and monitors it. In the early eighties, those fees were as high as 5% off the top of your investment. They have come down but they sneak other fees on the back end (deferred sales charges) or the middle (12B1). With passive funds, there are no managers so they are much cheaper. Their strategy is to mirror a certain index. For example, Vanguard’s 500 Index Fund tracks the performance of the Standard & Poor’s 500 Index, a widely recognized benchmark of U.S. stock market performance that is dominated by the stocks of large U.S. companies.

Actively managed funds can have expense ratios over 3%. The average U.S. diversified stock mutual fund expense ratio 1.42%, but no more than 600 no-load U.S. stock mutual funds offer .95% or less according to Morning Star.

Why should you care over such a small spread? Take this example. If you had a nest egg of $250,000 and you put it into one of the lowest cost S&P 500 funds, the sum would turn into $4,877,444 in 30 years, assuming a 10.5% gross return each year in line with the broader market’s historical average. If the fund returns 10.45% or just .05% less a year, you would end up with $4,811,615- about $66,000 less. That’s a lot of groceries, folks.

Fees do matter so check your funds to see if their expense ratios are about average or lower. If they are higher, make sure you are being compensated with higher returns to make up the difference.