Investment fees: Why they are critical for your long-term wealth

Investment fees are the costs you pay for accessing financial products and services. These fees cover everything from managing your portfolio to executing trades and maintaining your account. While they might seem small at first glance, their costs can add up over time, potentially eating into your returns.

Every fee you pay reduces the money available to grow your portfolio. For example, a stock portfolio earning 8% annually with 1% in fees will deliver only a 7% net return. Over decades, this difference can translate into thousands—or even hundreds of thousands—of dollars.

Recognising these costs and understanding their impact is essential to being a well-informed investor. Knowing what you're paying for (and why) can help you avoid unnecessary charges and keep more of your money working toward your long-term goals.

Types of investment fees

Sometimes, the way fees are applied to investment holdings is complex and difficult to understand. Understanding the different types of fees can help you figure out what fees are necessary (and worth the cost)- and what fees are not.

Management fees

Management fees compensate professionals who oversee your portfolio. Typically calculated as a percentage of assets under management (AUM), these fees can range from 0.25% to 1% annually. For example, a 1% fee on a USD 100,000 portfolio deducts USD 1,000 each year. While active management may add value, high fees can reduce your long-term gains significantly. For an active manager to beat the market, he or she needs to deliver an excess return greater than the management fee charged.

Expense ratios

Expense ratios are applied to mutual funds and ETFs to cover operational costs. These fees, expressed as a percentage of fund assets, range from under 0.1% for index funds to over 1% for actively managed funds. Even minor differences compound over time, making low-cost options more appealing for long-term portfolios. Generally speaking, passive funds, like mutual funds and ETFs, can be less expensive than actively managed funds.

Trading fees

Trading fees are charges for executing buy or sell orders. Brokers may charge a flat fee per trade or a percentage of the transaction. For frequent traders, these costs can accumulate rapidly, eroding returns. Platforms offering zero-commission trades are a cost-effective alternative, but you should always check for other hidden costs, and be aware that trading costs may take the form of direct fees in commission or unfavourable spreads, which may still be considered “zero commission”.

Load fees

Load fees are sales charges tied to mutual funds. Front-end loads apply when you buy shares, while back-end loads are charged when selling. These fees can reach up to 5.75%. Opting for no-load funds can help keep your returns where they belong- in your account.

Advisory and account fees

Often associated with financial advisors, advisory fees cover portfolio management and planning services. These fees usually range from 0.25% to 1% annually. Account maintenance fees may also apply, typically USD 25 to USD 100 annually. Low-cost platforms and robo-advisors often offer similar services with lower fees.

Performance fees

When returns exceed a specified benchmark, hedge funds or private equity firms charge performance fees. For example, a "2 and 20" structure charges 2% of assets annually and 20% of profits. While these fees incentivise results, they can substantially reduce your net returns if they exceed the threshold amount. Performance fees can be a source of controversy for how they motivated managers to generate income, favouring short-term outperformance over long-term stability.

12b-1 fees

Some mutual funds charge 12b-1 fees for marketing and distribution. These fees, typically ranging from 0.25% to 1%, come from fund assets, further reducing your returns. Avoiding funds with these charges is a cost-saving strategy.

Redemption and transfer fees

Redemption fees apply when you sell certain investments too quickly, discouraging short-term trading. Transfer fees, often charged when moving accounts between brokers, can range from USD 50 to USD 100. Reviewing fee schedules before making changes can help avoid these costs.