What Fees Are Associated With My Investments, and How Do I Find Them?

If you think you’d like to retire someday, it can be helpful to learn how to invest your money. 

One significant and often underappreciated aspect of investing is minimizing your investment fees as much as possible. Investment fees might not sound all that expensive in the short term, but they can significantly impact your portfolio value over decades of returns. 

Here are a few key things to know about investment fees — like how they work, what you can expect to pay and where they could creep up. 

What are investment fees?

Investment fees are the costs you pay to own assets like stocks, bonds and mutual funds. They vary significantly between different asset classes and (to a lesser degree) the individual assets within them.

For example, actively managed mutual funds tend to have much higher investment fees than passive index funds. It would likely cost you a lot more to invest in the BlackRock Managed Income Fund than Vanguard’s Total Stock Market Index Fund.

Common types of fees

You’ll find six general types of investment fees in the modern market. Take a look at how each one works, so you can optimize your investment portfolio’s expenses: 

Expense ratios

Expense ratios are particularly common in mutual funds and exchange-traded funds (ETFs). You’ll usually see them written as a percentage, not a flat fee. They supposedly cover costs your brokerage incurs to maintain your investment, including administrative and management expenses.

Expense ratios aren’t typically deducted from your account like a standard line item charge. Instead, your brokerage will automatically factor an expense ratio into your investment returns on an ongoing basis. 

For example, say you have a mutual fund with a gross annual investment return of 10%. If the asset had an expense ratio of 0.5%, you’d only see your assets grow by 9.5% per year.

Management fees

Management fees are found on assets under the active care of an expert third party like an investment advisor. They’re expressed as a percentage of your assets under management, but (unlike expense ratios) managers usually deduct them quarterly.

For example, say you give $100,000 to an investment advisor who charges a 2% management fee. You can expect to pay $2,000 that year, split into four $500 payments (though the actual fee will depend on the change in asset value during the year).

Commissions and transaction fees

Commissions and transaction fees are the archetypal investment fees that people associate with stockbrokers and investment advisors  thanks to movies like The Wolf of Wall Street.

They’re flat charges that trigger when you buy or sell securities. For example, you might have to pay $25 whenever you want to dispose of some of your shares, regardless of whether you’re selling one share or a dozen. 

Fortunately, commissions are increasingly becoming a relic of the past. Many popular brokerages like Fidelity, Charles Schwab, and Vanguard let their users make trades without commissions, so you can avoid these entirely if you invest strategically.

Annual account fees

Annual account fees are another type of investment fee that you may see brokerages debit from your funds. It’s a way for them to cover the costs of maintaining your account.

These fees are common across all types of accounts, including retirement savings vehicles like 401(k)s and IRAs, as well as taxable brokerage and mutual fund accounts.

For example, Vanguard charges a $20 fee every year for each account you have with them. However, they’ll waive the fees if you sign up for electronic delivery of communications.

Surrender charges

Surrender charges are investment fees that trigger when you try to withdraw your money, especially if you do so prematurely. They’re designed to encourage you to leave your money in the asset instead of taking it elsewhere.

These fees are common with annuities and other assets that pay significant commissions to the people who close the sale. They’re a way for the company to recoup the commission if you don’t leave your money with them long enough to do so in other ways.

As a result, surrender charges usually decline with time. For example, you might pay a surrender charge equal to 5% of your assets if you try to sell within the first year, but only 2% if you do so in the fourth year.

How fees impact investments

Though they’re commonly overlooked, investment fees can have a massive impact on your long-term returns. 

For example, say you have a forty-year career during which you invest $500 every month and earn an average return of 8%. If you had an average expense ratio of 1%, you’d retire with $1,357,507. If you managed to reduce that average ratio down to 0.05%, you’d retire with $1,569,221. That half-percent decrease means you’d have a whopping $211,714 more in your portfolio.

Before you invest in anything, ask thorough questions about the investment costs — like what is a management fee and how high is the expense ratio. You might not know which investments have more hidden costs than others, so it’s important to do your due diligence.

How much to expect to pay in fees

It’s difficult to give a one-size-fits-all answer to the question of how much you should expect to pay in investment fees. Your unique investing strategy, portfolio and brokerage choices can all take you in wildly different directions.

That said, you can use some general rules of thumb to gauge whether you’re on the right track: 

• You don’t need to be paying much (if anything) in commissions or account fees anymore. There are plenty of brokerages that offer commission-free trading and accounts with zero annual fees (or easy ways to waive them).

• As for expense ratios and management funds, consider using an S&P 500 or total stock market index fund as a benchmark. These passive funds generally track the stock market and have fees below .05%. For example, Vanguard’s S&P 500 Index Fund (VFIAX) and Schwab’s Total Stock Market Index Fund (SWTSX) have expense ratios of .04% and .03%, respectively.

• If your net returns are lower than that of the market after investment fees, you might want to reconsider your investing strategy.

How to check your investment fees

Fortunately, checking your investment fees is usually a pretty simple process. If you use a major brokerage like Charles Schwab, Vanguard, or TD Ameritrade, you can look up the investment fees for their accounts and assets on their websites.

If you’re using a smaller brokerage or an investment advisor you can usually make an inquiry and get a comprehensive response. If you’re considering investing (or already have money) with someone who hides their investment fees, it’s probably safer to put your money somewhere else. 

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