Investors almost always work out the rate, the tax and the horizon. The fee, almost never: 1 % a year looks like a rounding error next to an 8 % return. It is in fact the most expensive line in the portfolio, and it gets more expensive every year.
Why 1 % is not 1 %
A fund's or a broker's fee is charged on the assets, not on the profit: every year, on everything you hold, including the gains of all the previous years. So it does not take its own percent - it takes a share of the entire compounding over the whole term.
The arithmetic of «1 % × 20 years = 20 % of the profit» fails twice over. First, the money taken stops working for you. Second, the figure that matters is measured against the final sum, not the profit, and there the share is different again.
An example: 100 000 ₴ at 8 % over twenty years
| Fee | Final sum | Eaten by the fee | Share of the final sum |
|---|---|---|---|
| none | 492 680 ₴ | - | - |
| 0.2 % - an index ETF | 473 486 ₴ | 19 194 ₴ | 3.9 % |
| 1 % - a typical fund | 403 874 ₴ | 88 806 ₴ | 18.03 % |
| 2 % - active management | 331 020 ₴ | 161 660 ₴ | 32.81 % |
A 1 % fee took 88 806 ₴ - almost as much as you put in to begin with. Against the profit that is 22.62 %: nearly a quarter of everything the portfolio earned went to a manager who added not one hryvnia to your sum.
The money looks like it is all still there: 403 874 ₴ on the account, everything grew, all is well. The loss is visible only against a portfolio with no fee - and no statement ever shows you that comparison.
The longer the term, the bigger the share
| Term | No fee | With a 1 % fee | Eaten by the fee | Share of the final sum |
|---|---|---|---|---|
| 10 years | 221 964 ₴ | 200 966 ₴ | 20 998 ₴ | 9.46 % |
| 20 years | 492 680 ₴ | 403 874 ₴ | 88 806 ₴ | 18.03 % |
| 30 years | 1 093 573 ₴ | 811 650 ₴ | 281 923 ₴ | 25.78 % |
Over thirty years a 1 % fee takes a quarter of the final capital. Same rate, same fee - only the time changed, and time is working against you here rather than for you.
The same thing in months of your life
There is a way to feel the number without percentages. A portfolio with no fee reaches 492 680 ₴ in twenty years. With a 1 % fee, reaching that same sum takes 275 months instead of 240 - 35 months, close to three years, longer.
A 1 % fee is three years that you pay for with your own time.
If you contribute every month
Regular contributions soften the picture a little: money added in year ten does not sit there long enough to be charged twenty times over.
5 000 ₴ a month for twenty years at 8 %:
- contributed: 1 200 000 ₴
- with no fee: 2 945 102 ₴
- with a 1 % fee: 2 604 633 ₴
- eaten by the fee: 340 469 ₴ - 11.56 % of the final sum and 19.51 % of the profit
- reaching the same sum takes 17 months longer
The share is smaller than for a lump sum, but 340 469 ₴ is more than a quarter of everything you paid in over those twenty years.
What to do about it
- Ask about the total cost, not the return. In a fund that is the TER - the total expense over a year, not just the management charge. Entry and exit fees, dealing charges and custody come on top.
- 0.2 % against 1 % is not «slightly cheaper». Over twenty years the gap is 69 612 ₴ for every 100 000 ₴ invested: 473 486 ₴ against 403 874 ₴.
- The fee is the one number in investing you know in advance. The return is a forecast, inflation is a forecast, the exchange rate is a forecast. The fee is known to the kopeck and charged with certainty.
- Compare it against the tax. Tax is charged on the profit once; the fee is charged on the whole capital every year. Over a long term the second one is the larger payment.
Check it on your own figures
The investment calculator has a «fund or broker fee» field. Put your own in and the card will show what it eats over your term:
- 100 000 ₴ at 8 % over 20 years with a 1 % fee
- the same with a 0.2 % fee
- 5 000 ₴ a month for twenty years with a 1 % fee
The gist
- The fee is charged on assets every year, so it takes a share of the whole compounding rather than its own percent of the profit.
- 1 % a year over twenty years is 18 % of the final sum and almost a quarter of the profit. Over thirty years it is a quarter of the final capital.
- The same loss told in time: 35 extra months to reach the same sum.
- The fee is the only part of the result you know in advance and can reduce by a decision rather than a forecast.