Barbara A. Friedberg Blog | What Is A Robo-Advisor Fund Management Expense Ratio? | Talkmarkets
Wealth Media, CEO

Barbara A. Friedberg, MBA, MS, former portfolio manager, is committed to investment + money education across multiple platforms. She owns Barbara Friedberg Personal Finance.com which is dedicated to improving investment knowledge and wealth as well as Robo-Advisor Pros.com, a non-biased, ... more

What Is A Robo-Advisor Fund Management Expense Ratio?

Date: Thursday, February 9, 2017 6:17 PM EST

Don’t Fall For High Fund Management Expense Ratios

Most robo-advisors have an advertised management expense ratio (MER) fee. This is the percent you pay to the automated advisor to manage your investments. It ranges from zero with WiseBanyan to between 0.49% and 0.89% for the Personal Capital Advisors specialized service. Yet, there’s another fee that every investor who buys a mutual or exchange traded fund pays, whether they’re investing in a robo-advisor or not. This is the fund’s management expense ratio.

When investing with a robo-advisor who places your money in exchange-traded funds (ETFs), you’ll also pay fund’s management expense ratio. If you’re a DIY investor who buys mutual and exchange traded funds on your own, you’ll also pay the expense ratio. This fee goes directly to the fund company, never to the robo-advisor.

Robo-advisor exchange traded fund management expense ratio-what is it?

What Is a Fund Management Expense Ratio?

Many investors think the only number that matters when investing is the rate of return on your initial investment.

If you’re a mutual fund or exchange traded fund investor, it’s important to understand the expense ratio of your fund.  I’ve owned the Vanguard total Stock Market ETF (VTI) for many years. This index fund attempts to match the investment returns of the entire U.S. stock market for an extremely low fee.

The Vanguard Total Stock Market ETF has a rock bottom expense ratio of 0.05% of the total amount you invest. So, if you invest $1,000, you’ll only pay $0.50 to the fund manager per year. As of December 31, 2016, the average annual 5 year return for this fund was 14.63% just a hair under the fund’s benchmark return of 14.64%. And this return is calculated after the expense ratio is deducted.

The VTI ETF expense ratio compares well with the average ETF expense ratio of 0.44% or $4.40 in expenses for every $1,000 you invest. If you invest in an index mutual fund, instead of an exchange traded fund, and pay the average, you’ll pony up 0.74% for your expense ratio, according to the Wall Street Journal.

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