Ratios above 1.5% are considered high. In this article, we explore the meaning of the expense ratio, its formula, how it works, and its impact on returns with relevant examples.
First thing's first: there is no such thing as a universally “good” MER. Although it's common to see a 3x MER referenced as “good” (likely a carryover of the 3x benchmark for LTV to CAC Ratio), a good MER is entirely dependent on your business size, what you're selling, your strategy, and your profitability goals.
Bottom Line. A 1% annual fee on a multi-million-dollar investment portfolio is roughly typical of the fees charged by many financial advisors. But that's not inherently a good or bad thing, but rather should hold weight in your decision about whether to use an advisor's services.
In summary, if you're paying for an actively managed fund at a bank branch where you receive support from a financial advisor or planner, you can expect to pay an MER of 1.8% or more. If you open a brokerage account and invest directly in a passively managed ETF, you can expect to pay an MER of roughly 0.25%.
The total percentage of the MER may depend on factors such as the size and success of the fund. The fee typically falls somewhere between 0.5% and 2% of the invested assets. The figure is taken from the final total of each fund's assets under management (AUM).
Management fees, whether paid as a mutual fund expense ratio or a fee paid to a financial advisor, typically range from 0.01% to over 2%. Generally, the range in fee amount is due to management strategy.
Industry standards show that financial advisor fees generally range between 0.5% and 1.5% of AUM annually. Placement of a 2% fee may appear steep compared to this average. However, this fee might encompass more comprehensive services or cater to more unique, high-maintenance portfolios.
A management fee usually ranges from 2% to 2.5% of committed capital and is usually charged every year the fund is in operation.
The 2% management fee is paid to hedge fund managers regardless of the fund's performance. A hedge fund manager with $1 billion AUM earns $20 million in management fees annually even if the fund performs poorly.
In conclusion, the fees you pay for investment products and services will have a significant impact on whether you are successful in achieving your investment goals over the long term. Aim for a “good MER” of 0.25% to 0.75% by investing in ETFs and using a private investment management firm to manage your portfolio.
Therefore, a higher MER is expected — anything around 5.0 or above is considered good. That means ad spend equals 20 percent or less of total revenue. MER is also easy to calculate for different e-commerce periods — revenue generated in the last three months, last six months, etc.
Management Expense Ratio (MER) Definition. Fee charged by the fund manager for managing the assets of the fund. Total cost of managing and operating the fund, expressed as a percentage of the fund's assets.
Generally considered cost-efficient if the expense ratio is below 0.2%, with some options as low as 0.03%.
SPY is more expensive with a Total Expense Ratio (TER) of 0.0945%, versus 0.03% for VOO. SPY is up 28.31% year-to-date (YTD) with +$7.13B in YTD flows. VOO performs better with 28.36% YTD performance, and +$103.99B in YTD flows.
Typically, any expense ratio higher than 1 percent is high and should be avoided. Over an investing career, a low expense ratio could easily save you tens of thousands of dollars, if not more. And that's real money for you and your retirement.
A reasonable expense ratio for an actively managed portfolio is about 0.5% to 0.75%, while an expense ratio greater than 1.5% is typically considered high these days.
The 2 and 20 is a hedge fund compensation structure consisting of a management fee and a performance fee. 2% represents a management fee which is applied to the total assets under management. A 20% performance fee is charged on the profits that the hedge fund generates, beyond a specified minimum threshold.
Understanding Management Fees
Management fees can also cover expenses involved with managing a portfolio, such as fund operations and administrative costs. The management fee varies but usually ranges anywhere from 0.20% to 2.00%, depending on factors such as management style and size of the investment.
While 1.5% is on the higher end for financial advisor services, if that's what it takes to get the returns you want, then it's not overpaying, so to speak. Staying around 1% for your fee may be standard, but it certainly isn't the high end. You need to decide what you're willing to pay for what you're receiving.
One common method is for advisors to charge a percentage of the assets they manage on your behalf. This rate often ranges from about 0.5% to 2% per year.
On average, you can expect to pay between 0.5% and 2% of your total assets under management annually, $150 to $400 per hour, or a flat fee ranging from $1,000 to $3,000 for a comprehensive financial plan.
The management expense ratio (MER) represents the combined total of the management fee, operating expenses and taxes charged to a fund during a given year expressed as a percentage of a fund's average net assets for that year. All mutual funds have a MER.
Gross advisory fee applicable to accounts managed through Fidelity® Strategic Disciplines ranges from 0.20% to 0.49% and gross advisory fee applicable to accounts managed through Fidelity® Wealth Services ranges from 0.50%–1.04%, in each case based on a minimum investment of $2 million.
One of the main drawbacks of managed funds is the management fees and other associated costs. These fees can eat into returns, especially in years when the fund's performance is weak. It's important for investors to weigh these costs against the potential benefits of professional management.