5 Common Investment Fees and Why They Matter

What we’ll cover:

• High investment fees could have a major impact on your portfolio 
• Here are five common fees that you may see when you invest: advisory fee, expense ratio, sales charge, trading fee, and transfer fee 
• While fees are a necessary part of investing, generally speaking, the less you have to pay in fees, the more money you could keep invested

So as you shop for your next investment, it’s a good idea to make sure you understand what fees are at play. Because no one likes to pay more than they have to (or foot the bill for services they may not need).

Stick with us to learn about some of the common fees you may run into and why they matter.

Many investment accounts come with fees

You know that popular saying about how nothing is certain in life except death and taxes? Well, they probably should have included investing fees in there, too. 

You often need to pay a fee to an investment company or professional to help you maintain or manage your account. 

But just because fees are generally unavoidable doesn’t mean you should skip over the details as you flip through that shiny investment brochure. It’s important to know what you’re paying for and how much you’re paying. Fees can add up over time. 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 will depend on your financial institution (e.g., investment advisor vs. broker-dealer) 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 investment) 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. Why is that? One reason is that because these funds are tracking against an index, so there’s less active management when it comes to portfolio transactions.

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

This is another annual fee to pay close attention to. If you invest in funds, like mutual funds or ETFs, you’ll see something in the prospectus called “total annual operating expense” or “expense ratio.” (Yes, a prospectus doesn’t sound like a fun read, but it contains important information about your investment!) 

So what is an expense ratio?

The expense ratio tells you how much it costs annually to run or operate the fund. The ratio 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.”

To help you keep things straight, think of it like this: 

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. 

Still with us? We know this is a lot of information to take in. You’re doing great! Let’s keep going.

3. Sales Charge or Load

You may come across a sales charge or “sales load” if you invest in a mutual fund. This is a fee you pay when you buy or redeem shares in a fund. 

While you generally can’t avoid advisory fees and expense ratios, you may not always have to pay a sales charge. “No-load” mutual funds are available in the market, and you won’t get slapped with a sales charge when you sell shares. 

Good to know: While the SEC does not limit how much a mutual fund may charge when it comes to sales loads, FINRA caps them at 8.5% of the purchase or sale (or at lower levels depending on other fees and charges).

4. Trading Fee

A trading fee is less of a head-scratcher. 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

You may already be familiar with transfer fees. They’re pretty common in both banking and investing. But hey, it never hurts to do a quick refresher. So what kind of transfers are we talking about here?

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.

It may be worth your while to do a little comparison shopping because there are some investment platforms that offer zero fees on certain types of transfers.

Why you should care about investment fees

Investing can be a smart way to put your hard-earned money to work. While fees can be a necessary part of investing, generally, the less you have to put towards fees, the more money you could keep invested. A percentage point here or there in fees may not seem like a big deal at the moment. But fees can really add up over time and eat into your overall returns.

Let’s take a look at an example that the SEC uses to show the potential impact of fees on your portfolio. 

The difference between a 1% annual fee versus a 0.25% annual fee may seem like nothing at first glance. But consider an investment of $100,000 over 20 years with a 4% annual return. In 20 years, an annual fee of 1% can reduce your portfolio value by almost $30,000 when compared to a portfolio with an annual fee of 0.25%. While $30,000 might not seem like much, that’s 30% of the initial investment! That’s $30,000 more you could have invested.   

One way to help keep your fees down is to do some comparison shopping when you’re considering opening a new investment account. Rather than skipping over the page on fees, pay close attention to the details. If you can’t find the fee schedule, don’t hesitate to contact the investment provider.