As we mentioned in a previous post, the fee that an investment advisor charges is a critical piece of information, but doesn’t tell the whole story. The overall fee drag of a portfolio can sometimes—seemingly intentionally—be harder to determine, but it is a far more important number.

We recently transferred in an account for a client from the wealth management division of one of the major banks. We usually hold this bank in pretty high regard, but we were irritated by what we saw.

Mr. Big Bank Advisor’s management fee was 1%, which is a common rate and not a concern on its own, but upon closer investigation, the account was full of expensive mutual funds.

While all mutual funds (as well as exchange traded funds and other pooled investment vehicles) have an annual “expense ratio” to pay the fund company for managing the fund, there is a wide range in the fees charged. Fortunately, expense ratios have been trending lower and there are many competitively priced funds in the market with the average equity index ETF only charging 0.15% per annum.

The annual expense ratios of the mutual funds in this account ranged from 0.58% to 1.29% with a blended average of 0.99%. Sometimes higher fees can be justified, such as investing in less liquid assets or certain investment strategies, but we are very skeptical of selecting higher cost products to invest in easily accessible and liquid markets like US or international stock markets.

So, while the manager’s “sticker price” management fee of 1% may seem reasonable, the annual expense of this account was actually about 2%. At BRCM, we are very cognizant of total fee drag and aim to keep total fee drag to around 1%, or less, for all our accounts.

And while 1% savings might not immediately seem like a big number, over time it becomes very meaningful:

If you have any questions about this blog, or other questions about your finances, please contact Blue River Capital Management at 503.334.0963 or at info@brcm.co.

This information is intended to be educational and is not tailored to the investment needs of any specific investor. Investing involves risk, including risk of loss. Blue River Capital Management does not offer tax or legal advice. Results are not guaranteed. Always consult with a qualified tax professional about your situation.