Risk-adjusted impact of administrative costs on the distribution of terminal wealth for long-term investment

Date: August 12, 2014

Authors: Montserrat Guillén (Department of Econometrics, University of Barcelona), Søren Fiig Jarner (ATP), Jens Perch Nielsen (Cass Business School, City University London) & Ana M. Pérez-Marín (Department of Econometrics, University of Barcelona)

Published in: The Scientific World Journal (2014)

Abstract: 

The impact of administrative costs on the distribution of terminal wealth is approximated using a simple formula applicable to many investment situations. We show that the reduction in median returns attributable to administrative fees is usually at least twice the amount of the administrative costs charged for most investment funds, when considering a risk-adjustment correction over a reasonably long-term time horizon. The example we present covers a number of standard cases and can be applied to passive investments, mutual funds, and hedge funds. Our results show investors the potential losses they face in performance due to administrative costs.