An expense ratio is the operating cost of a stock or asset fund, in percentage, charged by a financial institution for administrative, management, advertising, and all other expenses related to the fund. This is calculated by dividing a fund’s operating expenses by the average dollar value of its assets under management (AUM). The largest component of operating expenses is the fee paid to a fund’s investment manager, adviser, or manager. Expense ratios commonly contain a “12b-1 fee,” which is appropriated for fund advertising and promotion (0.75% distribution and 0.25% shareholder servicing). 12b-1 fees are already factored into a fund’s expense ratio, which FINRA limits to a maximum of 1% per year for the investor. Although expense ratios are typically small percentages, they can have significant fee implications for an investor over time as one’s account balance increases in value.

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