The calculator
Over 30 years, a 1.00% annual fee removes $691,806 — 22.8% of what the same portfolio would have reached with no fee. In year one alone the percentage fee costs $2,500, against $132 for the flat subscription.
Figures are nominal. Enter a real return for today's dollars.
Why the number is so large
The fee is taken from the whole balance every year, and the money taken would have kept compounding. That is why 1% often costs a quarter or more of the final balance — the full study. Type your own balance into this investment calculator with fees to see the gap in dollars.
Working the fee out by hand
Investment management fees are quoted as an annual percentage of assets and usually billed quarterly, so the arithmetic for one year is: multiply the balance by the annual rate, then divide by four for each quarterly bill. A 1% fee on $250,000 is $2,500 a year, billed as four payments of $625. Add the funds' own expense ratios, which are deducted inside the fund rather than invoiced: a 0.20% ratio on the same balance is another $500, so the total cost is 1.20%, or $3,000.
Repeating that for a second year is where the headline rate stops telling the truth. The fee is charged on the new, larger balance, and the dollars taken in year one are no longer compounding. That second effect is most of the gap after a couple of decades, which is why the total above is far more than the annual rate times the number of years.
Flat fee vs a percentage
A percentage fee grows as you succeed. A flat fee does not. With the figures above, the percentage costs $2,500 in year one and more every year after; the flat subscription totals $3,960 over 30 years. See AUM fee.