Management Fees and Lost Growth Potential

In a poll conducted for Personal Capital by Harris Poll, this past March, 32% of respondents said higher fees for investment accounts generally result in higher returns, “a surprising and improper perception the data does not support.”

According to Personal Capital’s subsequent report, “What Americans Are Paying in Advisory Fees,” most academic studies have shown that professional active investment managers as a group “have no ability to outperform broad market indices over long time horizons.” Unless the manager can deliver excess performance, even a small percentage difference in extra fees per year can therefore seriously erode an account’s growth potential.

“If an investor’s primary objective is total portfolio return, then keeping costs low is a crucial component, though not the only component,” the report argues. “While the difference between a 1% annual fee and a 3% annual fee may sound trivial, the impact over time can be staggering. For example, the total additional amount lost to fees in one example is more than $400,000—higher than the median price of a home in the U.S.”

As Personal Capital notes, even a single percent difference—e.g., 2.0% vs. 1.0%—costs a wealthy investor an extra $240,000 in fees over the typical retirement time horizon observed in the survey data.

“Even worse, that doesn’t fully capture the amount the investor loses in total return,” the report suggests. “Because fees are taken out along the way, that money doesn’t have time to grow and compound.”

One example in the report is particularly striking—that of a wealthy investor subject to high fees for an entire savings life cycle: “The total amount an investor loses at a 3% fee versus a 1% fee, including both fees and forgone returns, is more than $740,000.”

The full report is available here.