Charles Ellis, author of “Winning the Loser’s Game: Timeless Strategies for Successful Investing” and chairman of the Whitehead Institute, doesn’t think much of investment fees as they are currently structured. The reason? Although clients might think investment fees are low, when they’re based on investment returns as opposed to assets under management, they’re shockingly high.
“When stated as a percentage of assets, average fees do look low—a little over 1% of assets for individuals and a little less than one-half of 1% for institutional investors,” Ellis writes in Financial Analysts Journal, the publication for Chartered Financial Analysts. “But the investors already own those assets, so investment management fees should really be based on what investors are getting in the returns that managers produce.”
Think of it as taking a car in for repairs; he argues that investment fees are akin to paying the mechanic for simply having the car, not for the actual improvement in performance.
“Calculated correctly, as a percentage of returns, fees no longer look low,” he explains. “Do the math. If returns average, say, 8% a year, then those same fees are not 1% or one-half of 1%. They are much higher—typically over 12% for individuals and 6% for institutions.”