Investment AUM Fee Costs: Evaluating a Simple Formula

TL;DR

This paper examines a simple, approximate formula for calculating the cumulative costs of AUM fees over multiple years, providing intuitive explanations, analytical derivation, and discussing its practical applications and limitations.

Contribution

It introduces and analyzes a straightforward formula for estimating long-term AUM fee costs, enhancing understanding of fee impacts in investment management.

Findings

The formula approximates total fee costs as N times the annual fee percentage.

The article derives the formula analytically and discusses its approximation error.

It highlights the formula's practical uses and limitations in financial analysis.

Abstract

How much do financial management fees cost investors? This article studies an approximate formula for the cumulative costs of annual Assets Under Management (AUM) fees. The formula states that an investment paying an annual fee of $\epsilon$% of AUM over $N$ years loses almost $N\epsilon$% of its value, compared to an investment with the same returns paying no fee. The article explains this formula intuitively, derives it analytically, and studies its approximation error. The article concludes with a discussion of the formula's uses and limitations.