Understanding and managing the fees in your portfolio is very important because they directly and significantly impact your long term wealth. Here's why.
Our fee calculation covers two kinds of fees - the expense ratio of funds, and the advisory fee that might be paid to manage those funds. We determine the expense ratio for mutual funds and ETFs based on the ticker you hold and our external data source of fund expenses. The advisory fee can be optionally entered on the External Accounts tab in your account settings. You may also pay one-time load fees on mutual funds (at purchase or sale), or commissions on trades, but our calculation doesn’t consider these since these were typically already paid.
Advisory fees are considered high if greater than 0.5% for most accounts. Employer plans like 401(k)s may have additional fees due to record-keeping and plan administration costs, so for employer plans, advisory fees are considered high if greater than 0.6%.
Funds are considered high fee if their expense ratio is greater than a threshold that is based on asset class. To calculate the high fee threshold, we looked at every exchange traded fund (ETF) currently available in the U.S. and classified each into 8 different asset types. We then established a high fee threshold for each asset type by dividing all the ETFs into four quartiles and taking the average expense ratio for all funds in the lowest quartile of funds. The default threshold for funds that do not fall into 1 of the 8 asset types is 0.35%. For example, the Vanguard Target Retirement 2055 Fund, VFFVX, spans several asset classes consisting of US stocks and bonds as well as international stocks and bonds. The fund therefore gets the default threshold of 0.35%.
High fee thresholds:
- US Bonds: 0.15%
- US Stocks: 0.25%
- US Munis: 0.25%
- Real Estate: 0.35%
- International Developed Stocks: 0.35%
- International Developed Bonds: 0.35%
- Emerging Market Stocks:0.50%
- Emerging Market Bonds: 0.50%
If fund fees as a percentage of account balance are less than or equal to 0.25%, fees are considered low. If fees are between 0.25 and 0.5% they are considered moderate. Above 0.5% is considered high.
If either your advisory fees or fund fees are high, your "Total Fees per Year" will be shown as "high" on your External Portfolio page.