Portfolio Inefficiencies: How Hidden Costs Detract from Your Performance At Linden Thomas & Co., we often liken a portfolio to an onion – there are countless layers of inefficiencies that many investors, particularly those in pooled funds, don’t see until they start peeling back the skin. These inefficiencies may be small individually, but they compound over time, quietly eroding returns. For affluent investors it’s essential to understand and minimize these hidden costs to maximize portfolio performance. 1. Expense Ratios: The Cost of Management Every mutual fund or ETF has an expense ratio, which covers the cost of managing the fund. While a fraction of a percent may seem insignificant, over time, these fees can eat into your returns. For example, a 1% expense ratio on a $2 million portfolio could cost $20,000 annually. The exhibit below (Exhibit 1) illustrates the potential magnitude of a 1% expense ratio on a hypothetical $2 million portfolio with an 8% annual rate of return over 10 years: Exhibit 1 (source: Linden Thomas & Co) 2. Advisor Fees: Paying for Advice or Performance? Many investors pay an advisor 1% or