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Quote of the Week: Expense Ratios – And Exactly How Much They are Costing Investors

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We have heard a ton on the importance of low cost mutual funds and ETFs recently. Here is part of a speech from Jack Bogle, where he reveals exactly just how much investors pay in expense ratio fees. (His answer will surprise you)

This quote comes from a speech by Jack Bogle back in 2007:

 

The first dream is to design a new industry in which we give our investors a fair shake in terms of costs. In my 1977 speech, I boldly predicted that investors would come to focus far more heavily on fund costs, evaluating “total price-or total cost-effectiveness over time, including any initial sales charges and fund operating and advisory expenses.” Alas, by my 1987 talk, I could only grade myself with an “F” on that prediction. Over the decade then ended, the expense ratio of the average equity fund had risen from an average of 0.96 percent to an estimated 1.38 percent, a 44 percent increase in unit terms. This increase came despite the fact that total industry assets had grown from $37 billion to $588 billion, and the dollar amount of annual fund costs had risen 4000 percent, from $232 million to $4.2 billion.

Of course, I stubbornly held my ground, predicting in my 1987 talk that our pricing structure must change. I challenged the industry “to regain our bearings, and return to the principles that got us to our present eminence in the first place.” Alas, when I next spoke to NICSA in 1998, equity fund expense ratios had continued to rise, if far more slowly, to 1.43 percent. However, with industry assets rising to $3.5 trillion, the dollar costs borne by fund shareholders had soared from $4.2 billion to $27 billion.4 I awarded myself another “F”! Yet I didn’t give up: “Despite my 20 years of unfulfilled expectations, I’m confident that the excessive costs paid by fund investors will at last begin to decline.”

Today, a near-decade after that speech, the outcome is unequivocal: “yes,” and “no.” No, because while equity fund expense ratios on average seem to have leveled off, they remain 50 percent higher than 30 years ago, despite the staggering increase in assets under management. With industry assets now at $10 trillion, compared to $37 billion in 1977, fund costs now run at some $75 billion a year, (including sales charges but excluding portfolio transaction costs), more than 30 times the costs of $232 million in 1977. It seems obvious that the staggering economies of scale that come with the management of other people’s money, rather than being shared with shareholders, have been arrogated by managers to their own benefit.

 

 

You can view the entire transcript of Jack Bogle’s speech here: https://personal.vanguard.com/bogle_site/sp20070220.htm 2007

 

When Bogle made this speech back in 2007, investors as a whole were paying $75 BILLION per year in expense ratio fees (not to mention how much more it “cost” them by underperforming the market).

 

Sadly things have only gotten worse since Bogle’s 2007 speech. Based on a couple of other sources of data (here: http://www.icifactbook.org/pdf/14_fb_table01.pdf and here: http://www.icifactbook.org/fb_ch3.html ) there are more than $17.3 trillion of assets in either mutual funds or ETFs, at a weighted average expense ratio of 0.74%.

 

avg expense ratio

Chart from: http://www.icifactbook.org/fb_ch5.html#decline

 

That means today (2014), investors will pay more than $128 BILLION in fees in order to invest in their mutual funds and ETFs!

 

That should be an extra $128 billion in  investing accounts just like yours!

 

Compound that $128 billion over the next few decades and you can see why the mega-yacht industry is sure to remain strong.

(For those who are curious, $128 billion compounded at 5% for 30 years is $558 billion. And that’s just the fees paid from 2014!)

 

A half of trillion dollars in lost wealth due to investors picking expensive mutual funds and ETFs from this year alone! It’s no wonder we having a retirement savings crisis on our hands.

 

How Much Does That Extra Expense Ratio Cost You? Now You Can Find Out With Our Expense Ratio Calculator:


See our page here for more on our Expense Ratio Calculator

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