The Investing Fee That Makes a $300000 Difference

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My best friend and I are both passionate about investing. We spend several hours a week reading, talking and debating finance topics. But among all financial topics, investing is definitely the most interesting! We recently had a debate about investment strategies with mutual funds (or discretionary investments) Vs ETF investing.

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We both wanted to know what is the real difference in an investor?s pockets between managing his own funds and paying someone to do it for him. We all know that paying high MERs is a big slap to your portfolio growth. But we wanted to put a dollar sign in front of this service offered by investment advisors and brokers.

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I think that doing business with an investment advisor or broker can be a very good idea for most investors. My main argument is that most people can?t really effectively manage a portfolio on their own. They face one of the following obstacles:

-????????? They don?t have sufficient investing knowledge (this is not going to happen after reading my free dividend investing eBook )

-????????? They don?t have enough time to establish an investing strategy

-????????? They don?t have the interest to establish an investing strategy

-????????? They can?t control their emotions and will be tempted to make irrational trades based on greed or fear

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This is very interesting, but it doesn?t tell you how much it costs to have your money managed by a professional.

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How Much Does It Cost To have Your Money Managed?

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My friend and I wanted to know what the real difference is between mutual funds and ETFs. We then ran some calculations through an Excel spreadsheet using the following premises:

-????????? Starting point of $40,000

-????????? Monthly investment of $1,150 indexed at 2% rate of inflation

-????????? Decreasing MERs according to the amount invested (we took a growth portfolio and checked the % charged depending on the amount)

-????????? 0.25% MER fees on ETFs plus $120 in transaction fees per year for rebalancing

-????????? Investment return of 6.50% over the next 30 years

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Here?s what we get if you invest in mutual funds:

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Year	Depart	Return	Invest	MER Fees	$Fees	Transaction Fees	Ending
0	$40 000	$2 600,00	13800	2,37%	$948,00	0	$55 452,00
1	$55 452,00	$3 604,38	14076	2,37%	$1 314,21	0	$71 818,17
2	$71 818,17	$4 668,18	14357,52	2,37%	$1 702,09	0	$89 141,78
3	$89 141,78	$5 794,22	14644,6704	2,37%	$2 112,66	0	$107 468,00
4	$107 468,00	$6 985,42	14937,56381	1,91%	$2 052,64	0	$127 338,35
5	$127 338,35	$8 276,99	15236,31508	1,91%	$2 432,16	0	$148 419,49
6	$148 419,49	$9 647,27	15541,04139	1,91%	$2 834,81	0	$170 772,99
7	$170 772,99	$11 100,24	15851,86221	1,91%	$3 261,76	0	$194 463,33
8	$194 463,33	$12 640,12	16168,89946	1,91%	$3 714,25	0	$219 558,10
9	$219 558,10	$14 271,28	16492,27745	1,91%	$4 193,56	0	$246 128,09
10	$246 128,09	$15 998,33	16822,123	1,75%	$4 307,24	0	$274 641,30
11	$274 641,30	$17 851,68	17158,56546	1,66%	$4 559,05	0	$305 092,51
12	$305 092,51	$19 831,01	17501,73676	1,57%	$4 789,95	0	$337 635,30
13	$337 635,30	$21 946,29	17851,7715	1,49%	$5 030,77	0	$372 402,60
14	$372 402,60	$24 206,17	18208,80693	1,42%	$5 288,12	0	$409 529,46
15	$409 529,46	$26 619,42	18572,98307	1,36%	$5 569,60	0	$449 152,26
16	$449 152,26	$29 194,90	18944,44273	1,31%	$5 883,89	0	$491 407,70
17	$491 407,70	$31 941,50	19323,33158	1,26%	$6 191,74	0	$536 480,80
18	$536 480,80	$34 871,25	19709,79822	1,22%	$6 545,07	0	$584 516,78
19	$584 516,78	$37 993,59	20103,99418	1,18%	$6 897,30	0	$635 717,07
20	$635 717,07	$41 321,61	20506,07406	1,14%	$7 247,17	0	$690 297,58
21	$690 297,58	$44 869,34	20916,19555	1,11%	$7 662,30	0	$748 420,82
22	$748 420,82	$48 647,35	21334,51946	1,08%	$8 082,94	0	$810 319,74
23	$810 319,74	$52 670,78	21761,20985	1,06%	$8 589,39	0	$876 162,35
24	$876 162,35	$56 950,55	22196,43404	1,04%	$9 112,09	0	$946 197,25
25	$946 197,25	$61 502,82	22640,36272	1,01%	$9 556,59	0	$1 020 783,84
26	$1 020 783,84	$66 350,95	23093,16998	1,00%	$10 207,84	0	$1 100 020,12
27	$1 100 020,12	$71 501,31	23555,03338	0,98%	$10 780,20	0	$1 184 296,26
28	$1 184 296,26	$76 979,26	24026,13405	0,96%	$11 369,24	0	$1 273 932,41
29	$1 273 932,41	$82 805,61	24506,65673	0,95%	$12 102,36	0	$1 369 142,31
30	$1 369 142,31	$88 994,25	24996,78986	0,93%	$12 733,02	0	$1 470 400,33

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Here?s the result if you do the same thing with an ETF portfolio:

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	Year	Depart	Return	Invest	MER Fees	$Fees	Transaction Fees	Ending
	0	$40 000	$2 600,00	13800	0,25%	$100,00	200	$56 100,00
	1	$56 100,00	$3 646,50	14076	0,25%	$140,25	120	$73 562,25
	2	$73 562,25	$4 781,55	14357,52	0,25%	$183,91	120	$92 397,41
	3	$92 397,41	$6 005,83	14644,6704	0,25%	$230,99	120	$112 696,92
	4	$112 696,92	$7 325,30	14937,56381	0,25%	$281,74	120	$134 558,04
	5	$134 558,04	$8 746,27	15236,31508	0,25%	$336,40	120	$158 084,23
	6	$158 084,23	$10 275,48	15541,04139	0,25%	$395,21	120	$183 385,54
	7	$183 385,54	$11 920,06	15851,86221	0,25%	$458,46	120	$210 579,00
	8	$210 579,00	$13 687,63	16168,89946	0,25%	$526,45	120	$239 789,08
	9	$239 789,08	$15 586,29	16492,27745	0,25%	$599,47	120	$271 148,18
	10	$271 148,18	$17 624,63	16822,123	0,25%	$677,87	120	$304 797,06
	11	$304 797,06	$19 811,81	17158,56546	0,25%	$761,99	120	$340 885,45
	12	$340 885,45	$22 157,55	17501,73676	0,25%	$852,21	120	$379 572,52
	13	$379 572,52	$24 672,21	17851,7715	0,25%	$948,93	120	$421 027,58
	14	$421 027,58	$27 366,79	18208,80693	0,25%	$1 052,57	120	$465 430,61
	15	$465 430,61	$30 252,99	18572,98307	0,25%	$1 163,58	120	$512 973,00
	16	$512 973,00	$33 343,25	18944,44273	0,25%	$1 282,43	120	$563 858,26
	17	$563 858,26	$36 650,79	19323,33158	0,25%	$1 409,65	120	$618 302,73
	18	$618 302,73	$40 189,68	19709,79822	0,25%	$1 545,76	120	$676 536,45
	19	$676 536,45	$43 974,87	20103,99418	0,25%	$1 691,34	120	$738 803,97
	20	$738 803,97	$48 022,26	20506,07406	0,25%	$1 847,01	120	$805 365,30
	21	$805 365,30	$52 348,74	20916,19555	0,25%	$2 013,41	120	$876 496,82
	22	$876 496,82	$56 972,29	21334,51946	0,25%	$2 191,24	120	$952 492,39
	23	$952 492,39	$61 912,01	21761,20985	0,25%	$2 381,23	120	$1 033 664,38
	24	$1 033 664,38	$67 188,18	22196,43404	0,25%	$2 584,16	120	$1 120 344,83
	25	$1 120 344,83	$72 822,41	22640,36272	0,25%	$2 800,86	120	$1 212 886,75
	26	$1 212 886,75	$78 837,64	23093,16998	0,25%	$3 032,22	120	$1 311 665,34
	27	$1 311 665,34	$85 258,25	23555,03338	0,25%	$3 279,16	120	$1 417 079,46
	28	$1 417 079,46	$92 110,16	24026,13405	0,25%	$3 542,70	120	$1 529 553,06
	29	$1 529 553,06	$99 420,95	24506,65673	0,25%	$3 823,88	120	$1 649 536,78
	30	$1 649 536,78	$107 219,89	24996,78986	0,25%	$4 123,84	120	$1 777 509,62

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The Difference is $307,109 After 30 Years!!!

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As you can see, with all other things being equal, the MERs make a significant difference after 30 years. We also have to mention that if the fund managers can?t beat the indexes, the result will be catastrophic. Fortunately, when you reach a portfolio of $250,000 to $500,000 (the amount depends on the firm), you can access private wealth management with institutional portfolio managers. They are usually able to beat the index over a long period of time. But this is not a certainty. You basically hope that you will pick the right fund managers!

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My Thoughts on Funds

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When you look at the dollar amount, the choice seems pretty obvious. But when you look at statistics showing that most investors sell during bear markets and buy at the end of bull markets, having someone manage your money doesn?t sound like a bad idea at all. I think it is where the real debate is. Can you manage your money or not?

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