Investing is one way to make your money work for you and build wealth. Putting your money in the market is always a risk and there are no guarantees. However, there is one variable you can almost always count on: investment fees.
The investment products and services you use often come at a cost, and while potential gains may justify this cost, it’s important to know exactly how much you’re paying in added fees.
Spoiler: most investors don’t.
A recent study released by the FINRA Investor Education Foundation found that 21% of investors do not think they pay any kind of fee for investing, and 17% say they don’t know how much they pay in fees. Among mutual fund owners, nearly 38% believe they do not pay any mutual fund fees or expenses.
For investors who do have a pulse on how much they’re paying in fees, they may deem that the cost is worth the possible reward. As the old adage says, “you have to spend money to make money.” But how much do you actually have to spend and how do you reduce those costs?
Investment fees can hurt your overall returns
In many cases, investment fees are tacked on as a small percentage of the funds in your brokerage account. It can be easy to skim over these fees and decide that a small percentage or fraction of a percentage point isn’t significant, but over time, this can translate to thousands of dollars.
According to a report by the SEC, over the course of 20 years, an initial investment of $100,000 can be reduced by $10,000 if the investor is required to pay an annual fee of 0.50%. For portfolios with a $100,000 value, a 1% annual fee can reduce that value by as much as $30,000.
“The average investor pays from approximately 1.5% to 2% annually,” says Stuart Boxenbaum, CFP®, investment advisor and president of Statewide Financial Group. “So the math is pretty simple. If this average investor has a $300,000 portfolio and is paying 1.5% per year, that adds up to $4,500 a year, which equals $375 [per] month.”
What’s more—this annual fee doesn’t account for other kinds of fees investors are responsible for when they buy and sell different assets. And prior to the Tax Cuts and Jobs Act (TCJA), some common investing fees were tax deductible, but that’s no longer the case.
5 common investment fees to be mindful of
The fees associated with your investment account may vary, but there are a few common fees you’ll likely encounter should you decide to open an investment account.
- Management or advisory fee: When you put someone in the driver’s seat of your investment account, they’ll work to make important investment decisions, rebalance your portfolio when needed, and ensure that your investments align with your financial goals. This comes at a cost. Your advisory fee is the percentage of your portfolio that you pay to the advisor or financial institution that is managing your account.
- Trading fees: Sometimes referred to as commission fees,this kind of fee crops up when you buy or sell an investment. The exact amount you can expect to pay may vary depending on the asset you’re buying or selling and how many trades are executed per month or year. Not all financial institutions will charge you trading fees, so it’s important to pay close attention to your brokerage’s fee structure to determine whether or not this type of fee will apply.
- Expense ratio: Investors who put their money into mutual funds or ETFs may encounter this fee. Your expense ratio is equal to the fund’s total annual operating expenses, including management fees, distribution fees (also known as 12b-1 fees), and other expenses, expressed as a percentage of your average net assets.
- Sales charge (or load) fees: Similar to a commission fee, this type of fee is charged when investors buy (front-end load) or redeem (back-end load) shares in a mutual fund.
- Transfer fees: If you decide to transfer your investment account funds or initiate a wire transfer, you’ll likely be charged a fee for doing so. According to our research on automated investment accounts, this fee can range anywhere from $0 to $100.
How to keep investment fees at bay
Reducing your investment costs may be as simple as reviewing your own investment decisions and making a few adjustments. If you’re considering investing or have already built your portfolio and want to protect your returns, consider the following
- Review your statements: “Any investor, new or experienced, will get statements from the management company or custodian at least quarterly, but often as monthly. The fees are disclosed right on these statements,” says Boxenbaum. Be sure to review your monthly statements to get a better sense of how your brokerage’s fee structure could be impacting your overall returns—this might influence how much you’re setting aside to invest over time or give you enough reason to consider switching brokerages.
- Pump the brakes on your trading activity: Trading fees can add up depending on the number of trades being executed. “One way the investor can keep the costs to a minimum is by using a portfolio that is less aggressive, where not a lot of trading takes place on a regular basis,” says Boxenbaum.
- Get by with a little help from a robo-advisor: Robo-advisors are platforms that offer automated investing and wealth management services based on the use of mathematical algorithms. The good news: they tend to be less costly than human investment advisors. This may not be suitable for investors with larger, more complex portfolios, but for new investors with less experience who are hoping to invest at a low cost, this could be one way to start.
The takeaway
Investment fees can significantly eat away at your overall returns. Not being conscious of how much you’re paying in fees could lead you to make misinformed decisions about your investment account and long-term investing strategy. Take the time to shop around and compare fees across financial institutions before you make a commitment.
Frequently asked questions
Are investment fees tax deductible?
Investment fees and the costs associated with managing your investment accounts that produce taxable income are considered miscellaneous itemized deductions and are no longer tax deductible.
How often are investment fees charged?
The frequency at which you can expect to pay a fee will depend on the type of fee. Some fees are ongoing and may be charged monthly or annually. Other fees may only be charged when a transaction takes place or you buy or sell a certain type of asset.
What is a normal investment management fee?
Management fees typically range from 0.20% to 2.00%. This will vary depending on your financial institution, your portfolio balance, and more.
