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Management Fees Are Harmful for Your Profits

Management Fees Are Harmful for Your Profits

If you invest in a fund that’s professionally managed by an investment manager, chances are you’ve incurred a dreaded management fee. Management fees are simply charges that the investment manager imposes on an investor for managing the fund. The purpose of a management fee is to compensate the investment manager for their time and expertise in selecting stocks and managing the portfolio. Often the fees can include other charges such as investor relations fees, administration costs, and service charges. If you're not careful, though, these fees can erode your savings at a far higher rate than they should, leaving you short of your retirement goals.

How Much Are Management Fees?

Management fees are based on assets under management of the fund, and can be as low as .10% or in excess of 2%. Usually the difference in fees is due to the investment method used by the fund’s manager. The more actively managed a fund is, the higher the management fees that are typically charged. Hedge fund managers, for example, are notorious for the high fees that they charge. Their fee structure is commonly referred to as "two and twenty" because it consists of a flat 2% of total asset value and a 20% share of all profits.

Are They Worth It?

More often than not, no.

While active fund managers will tell you that they understand how to select stocks that will outperform the market based on inefficiencies that they can find and stock mispricings, they are simply assuming that you do not understand how to invest. Additionally, according to decades of Morningstar research, higher-cost actively managed funds usually underperform in all respective categories.

Nobel laureate William Sharpe once concluded that active fund managers underperform passive fund managers because of simple arithmetic. In order for active fund managers to beat the market by just 1%, for example, they would need to achieve an excess return of more than 2% just to make enough to cover the average 1.19% percent management fee.

Why Are They So Dangerous for Your Retirement?

Management fees compound over time and eat into your profits more as time passes. Additionally, management fees directly correlate with the size of the portfolio. The larger the portfolio and the longer the time, the more an investor pays. Just take a look at this table with a hypothetical $25,000 investment, with $10,000 added to the account every year, a 7% average annual return, and 1.02% management fee. This example is also over the course of 40 years:

What You Can Do Instead?

One alternative to high-fee fund management is doing your own investing alongside an investment club. You can look at an investment club as investing in a fund with all the upside of a research community with no cost downside. The club takes groups of likeminded individuals and pools their money to invest. The goal is exactly the same as managed funds - make as much money as possible. However, investment clubs bring together like minded individuals with your best interests at heart and zero management fees. As seen in the charts above, management fees have a significant impact on your overall return - especially for high net worth individuals.

SureFire Capital’s Investment Club is an exclusive, invitation-only group of 1,100 Accredited Investors in which high net worth, family offices and institutions share their most trusted investment fund managers. Their diligence team conducts extensive research on thousands of managers each year and only shares the best and most promising opportunities with members. There is no charge to join the investment club. Whether you join SureFire or some other club, you are going in the right direction of properly aligning interests for your life savings.




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