Wednesday’s Word: Expense Ratio

By Abigail Warren, Fall 2017 IAC Student Intern

Investment products incur fees, some of these fees are transaction fees (fees an investor pays per transaction), and some are ongoing fees.  Many investment products have both types of fees.  The product’s expense ratio falls into the category of ongoing fees.  Ongoing fees are regular reoccurring fees an investor pays from the total assets of his or her investment product.  The SEC breaks these fees into four categories: investor advisory fees, 401(k) expenses, annual variable annuity fees and annual operating expenses.  Annual operating expenses are common among mutual funds and exchange-traded funds, or ETFs.   FINRA explains how these annual operating expenses include management fees, 12b-1 fees, and miscellaneous expenses.  Funds express these fees and expenses as a percentage, the fund’s expense ratio.  This ratio represents the percentage a fund charges an investor for annual operating expenses, which a fund directly deducts against the total assets.  Overall, the fees lower an investor’s return, so, even a small expense ratio can significantly reduce the fund’s value over time.  Investors will be in a better position to choose the right product if they understand and ask about the fees associated with each product.  The SEC  provides questions an investor can ask when shopping products.  Further, an investor can find the expense ratio on the prospectus or the fund’s website, and tools such as the tools such as the FINRA fund analyzer can help investors compare funds and associated fees.