As Nobel Prize winner William Sharp calculates, the impact of fees over time can be enormous. Using an average actively managed fee of 1.12% versus what 0.06% for the Vanguard Total Stock Market Index Fund, he calculates the investor in the Index Fund will have accrued 38% more wealth over a 30 year time horizon.
Or consider the effect 1/2 a percent or 50 basis points (referred to as bps) can have on retirement in terms of years. Assuming a $2.5 million nest egg, a retirement target of $5 million in assets in today’s dollars, a $125,000 annual savings rate, 2% inflation and a conservative 5% nominal return, an investor could retire in roughly 12 years paying a modest 30bps a year. Paying 75bps, an investor would have to work a full additional year before retiring. Looked at it still another way, our hypothetical investor would have paid his or her advisor over $500,000 within 15 years.