In the world of investing, the most popular thing to focus on is the rate of return. A typical investor may ask themselves, “How did I do versus my neighbor or the S&P 500?” Sadly, this is a question a lot of advisors ask themselves too.

While I have a lot to say about this (maybe I will cover this in a future blog post), today I want to focus on something very few investors or financial advisors talk about: hidden cost. Specifically the most prevalent hidden cost, the expense ratio.

Did you know that 99.9% of all Mutual funds and ETFs (exchange-traded fund) have what’s known as an expense ratio?

What Is an Expense Ratio?

The expense ratio measures how much of a fund’s assets are used to cover all of the administrative and other operating expenses of a fund. These expenses include but are not limited to portfolio management, marketing, and distribution.

As I mentioned, most mutual funds and ETFs have expense ratios. They are not bad in and of themselves. In writing this, I hope to leave you with a desire to learn more about the investments you own as well as the underlying cost to own them.

Why Should I Care?

The average expense ratio across all advisor managed portfolios is 0.54%¹. That means that for every $10,000 of money invested, the investor is paying $54. A person with $1MM invested would be paying an additional $5,400 annually on top of the fee they are paying their advisor which is most likely somewhere around 1.0%.

As you can see, this cost can be significant. If you pay that out over 20, 30, or 40 years, you can imagine the impact it could have on your future.