5 Common Investment Fees

Many investment accounts come with fees

You often need to pay a fee to an investment company or professional to help you maintain or manage your account. And it’s important to know what you’re paying for and how much you’re paying for those services.

While investment fees are largely unavoidable, if you can keep them to a minimum, that means you could put more money towards your investment. 

How much you’ll pay in fees depends, in part, on your financial institution, transactions, and type of account – specifically, the way it’s managed.

For instance, an investment fund that’s actively managed may come with higher costs (compared to a passively-managed fund) because there’s often more research and day-to-day decisions involved.

On the other hand, passively managed funds, like an ETF index fund, tend to have low fees. One reason is because these funds are tracking against an index, so there’s less active management when it comes to portfolio transactions.

5 common types of investment fees

1. Advisory fee

Broadly speaking, an advisory fee is what you pay to a financial institution or professional for providing certain advisory services. These fees are usually deducted from your account and may include services like:

• Managing your portfolio (e.g., asset allocation, rebalancing, etc.)
• Offering investment advice
• Picking stocks or funds
• Creating a financial plan
• Maintaining the account

Generally speaking, the way an advisory fee is charged depends on whether you’re working with a registered investment advisor or broker-dealer.

Registered Investment Advisor (RIA). If you have an account with a registered investment advisory company, the advisory fee could be charged as an annual flat fee or be based on a percentage of the size of your portfolio (or “assets under management”).

This is sometimes referred to as a “fee-only” model.

Here’s an example: An investment account with $100,000 under management and a 0.35% annual advisory fee means that you would pay $350 in advisory fees per year ($100,000 x 0.35%).

This, of course, is an oversimplified example given that your total assets could fluctuate daily. Keep in mind that on top of the advisory fee, the advisor may also charge separate fees for ancillary services.

Broker-Dealers. With broker-dealers, the advisory fee is generally commission-based. This means that they can be compensated based on the investment products they sell or recommend to you. There are also some brokers who charge a flat fee and can earn commission on certain product sales or trades. 

Good to know: Registered investment advisors, unlike broker-dealers, are fiduciaries. That means they’re obligated to act in the best interest of their clients, which is more stringent than the suitability standard that broker-dealers are held to. This is an important distinction to understand when you’re considering your investment needs. You can learn more about fiduciaries here.

2. Expense ratio

If you invest in funds, like mutual funds or ETFs, you’ll typically see something in the prospectus called “total annual operating expense” or “expense ratio.”

The expense ratio tells you how much it costs annually to run or operate the fund. It is typically expressed as a percentage of the fund’s average net assets. 

Expense ratios may cause confusion for some investors because they sound similar to advisory fees. You may wonder why you’re being charged twice for “operating costs.”

It may be helpful to think of it this way: Advisory fees are the cost of maintaining your overall investment account. Expense ratios are fees that individual mutual funds or ETFs charge for the costs of running that particular fund. These may include administrative, marketing, and management costs.

In short, the advisory fee is an account-level fee, while the expense ratio is a fund-level fee. So if you have an account that invests in funds, you’ll likely have to pay both an advisory fee and expense ratio fee.

4. Trading fee

A trading fee is as it sounds. It’s a fee you pay when a broker or investment advisor executes a sale or purchase for you. This could be applied to buying or selling of stocks, options or ETFs. Trading fees are also sometimes referred to as commissions. 

Some financial institutions charge for trades, while others have zero trading fees. Pay close attention to the institution’s fee schedule, which will spell out exactly how much they charge for certain types of trades or transactions. You can typically find the fee schedule in the prospectus or on the company’s website.

5. Transfer fee

Some investment advisors and brokers may charge a fee if you decide to close and transfer your account to another firm. Fees may also apply if you initiate an outgoing or incoming wire transfer. Again, you can check your account’s fee schedule or contact your account provider for more information.