Advertisement
investing

How Much Are You Paying for Your Portfolio?

The difference between an expense ratio of 0.66% and 0.08% may not sound like much, but it can easily mean thousands of dollars lost to fees and expenses over the course of a decade.

The greatest value financial advisers offer is the quality of their advice, the way they help their clients manage their emotions and their investment intelligence. Their next greatest value? Helping to reduce internal investment costs without negatively impacting portfolio returns.

Over the past 20 years the financial services industry has experienced a boom in product innovation. Many of these developments provide investors with the ability to greatly improve their long-term performance simply by cutting underlying investment costs. For instance, if you own a large-cap U.S. stock mutual fund, odds are you are paying roughly 1% in internal expenses plus hidden trading costs for the fund … and you may be subject to considerable dividend and capital gains distributions, further reducing your net after-tax return. If, however, you owned any one of the large-cap ETFs (exchange traded funds) that has similar holdings and portfolio characteristics, you would be cutting your internal expenses by over 0.75% while essentially owning the same portfolio.

Advertisement - Article continues below

For illustration purposes, take the Growth Fund of America (ticker: AGTHX), which has over $162 billion in assets and a very reasonable 0.66% expense ratio. This is a solid fund with a decent track record and a terrific investment for smaller accounts (below $50,000) where trading costs and other outside factors can greatly impact performance. Comparing this fund to the iShares S&P US Growth ETF (ticker: IUSG), the informed investor will quickly notice that its 0.05% expense ratio represents a much better value and significant cost savings.

Advertisement
Advertisement - Article continues below

Both investments have similar return, risk and volatility patterns, which is why I chose to compare them. However, over time – say the past 10 years – the difference in expense ratios compounds significantly, costing the investor thousands of dollars. In this example, the 61 basis points savings in expenses compounded at the net return of 7% by the Growth Fund of America over a decade (according to Morningstar data) for a $100,000 investment amounts to over $13,000 in additional net returns for the investor.

As a financial professional with over 20 years portfolio management experience I have learned that there are very good reasons to own all sorts of products to implement your investment strategy. And while there are bound to be times when selecting a higher-cost investment makes absolute sense (variable annuities immediately come to mind), generally speaking investors are well served to research and select lower-cost investments.

This column is the fourth in a six-part series on investor education.

  • Column 1 – Understanding your goals
  • Column 2 – Why benchmarking to the S&P 500 is not a good strategy
  • Column 3 – Investors: Focus on Cash Flow, Not Returns
  • Column 4 – How much are you paying for your portfolio?
  • Column 5 – 5 critical questions to ask your financial advisor
  • Column 6 – ‘Senior Inflation’ the not so silent retirement killer
Advertisement

About the Author

Oliver Pursche, Investment Adviser Representative

CEO, Bruderman Asset Management

Oliver Pursche is the Chief Market Strategist for Bruderman Asset Management, an SEC-registered investment advisory firm with over $1 billion in assets under management and an additional $400 million under advisement through its affiliated broker dealer, Bruderman Brothers, LLC. Pursche is a recognized authority on global affairs and investment policy, as well as a regular contributor on CNBC, Bloomberg and Fox Business. Additionally, he is a monthly contributing columnist for Forbes and Kiplinger.com, a member of the Harvard Business Review Advisory Council and a monthly participant of the NY Federal Reserve Bank Business Leaders Survey, and the author of "Immigrants: The Economic Force at our Door."

Advertisement

Most Popular

Medicare Basics: 11 Things You Need to Know
Medicare

Medicare Basics: 11 Things You Need to Know

There's Medicare Part A, Part B, Part D, medigap plans, Medicare Advantage plans and so on. We sort out the confusion about signing up for Medicare --…
September 16, 2020
5 Unfortunate Estate Planning Myths You Probably Believe
estate planning

5 Unfortunate Estate Planning Myths You Probably Believe

These all-too-common misconceptions can steer your estate plans in the wrong direction right from the start. Here’s how to overcome them and tips to b…
September 17, 2020
Election 2020: Joe Biden's Tax Plans
taxes

Election 2020: Joe Biden's Tax Plans

With the economy in trouble, tax policy takes on added importance in the 2020 presidential election. So, let's take a look at what Joe Biden has said …
September 18, 2020

Recommended

Bonds: 10 Things You Need to Know
Investing for Income

Bonds: 10 Things You Need to Know

Bonds can be more complex than stocks, but it's not hard to become a knowledgeable fixed-income investor.
July 22, 2020
Insurance for Long-Term Care at Home
retirement

Insurance for Long-Term Care at Home

In the wake of COVID-wracked nursing homes, increasingly more people are looking at options to age in place with long-term care insurance.
September 17, 2020
A Step-by-Step Guide to Being an Estate Executor
retirement

A Step-by-Step Guide to Being an Estate Executor

Whether you’re planning ahead for your own heirs or have been asked to serve as an executor of an estate for someone else, it pays to understand what …
September 17, 2020
Medicare Basics: 11 Things You Need to Know
Medicare

Medicare Basics: 11 Things You Need to Know

There's Medicare Part A, Part B, Part D, medigap plans, Medicare Advantage plans and so on. We sort out the confusion about signing up for Medicare --…
September 16, 2020