Invest with Confidence: Mastering Investment Fees

If you have just started managing your own investments for the first time in your life, it can be overwhelming.  The investment industry has a lot of jargon of its own and it can be confusing if it’s not something you ever learned.  However, you can manage your investments and it’s not as difficult as you may think.  There are a couple of important concepts to understand when it comes to managing investments.  

We have reviewed asset allocation and diversification in recent blog posts and today I will cover investment fees.  In this post, I will discuss the various kinds of fees that you can be charged related to your investments and how to ensure you are not paying more than you need to.  Understanding fees, in conjunction with asset allocation and diversification, will help you start to manage your investments with confidence.

Why Understanding Fees Matters

It is important to understand how fees are charged on your investment accounts as there can be multiple layers of fees and they are not always transparent.  If you don’t know where to look for fees you can end up paying thousands of dollars that you don’t need to and that will hinder your investment growth over time.

In my experience as an advisor, most people have no idea how much they are paying for their investments.  I have had countless prospects who are working with advisors at other firms tell me they don’t know how much they are paying in fees or don’t think they are paying anything.  If you are working with an advisor, the advisor must be getting paid somehow.  Whether they are charging you explicitly or getting compensated behind the scenes based on products they sell you, rest assured they are being paid.  Even if you are investing on your own, there are fees related to your investments and they can vary widely.  You need to understand how to find them and how to control them so that you don’t pay more than you need to.

Common Investment Fees

There are several ways that you can be charged for your investments, and they can be layered.  The primary kinds of fees include:

  1. Expense Ratios
  2. Transaction Costs
  3. Advisor Fees

Expense ratios are fees charged by mutual fund companies for investing in their funds.  As discussed in my blog last week about diversification, mutual funds can be an efficient way to diversify your portfolio without having to research and buy thousands of different investments, however there is a cost related to this convenience.  Mutal fund expense ratios are not explicitly charged to you in a bill, rather they are built into the fund.  It would be great if there was a standard expense ratio, but fees can vary widely so it’s important to check the expense ratio before purchasing a specific fund.  If you look up the fund’s page online, you should be able to find the expense ratio.  I have included an example below from the Vanguard International Stock Fund, where you can see that the expense ratio is 0.11%.

Transaction costs are another type of fee you can be charged.  A transaction cost is a fee that you are charged every time you buy or sell a security or fund by the company that is completing the trade for you.  These kinds of fees have come down in recent years and have even been eliminated for certain types of securities at certain companies.  Again, this is something that you should easily be able to find by looking at the website of the firm where you are holding your investments.  They should clearly outline what fees they charge for what kinds of trades.  Keep in mind that there can be fees for both buying and selling.

Finally, you want to consider any advisory related fees.  This could be for working with a financial advisor or a robo advisor and can be charged in a variety of ways.  In some cases, advisors are compensated by selling you certain investments and then getting paid by the company that issues the investment.  In this case, you will never see the fee directly, but it is built into the cost of your investment.  However, the advisor should be able to tell you how they are getting paid and in what amounts.  Other advisors charge the customer for their services directly.  This is generally done as a percentage of the assets the advisor is managing for you and should be visible in your statement.  Again, the advisor can tell you what the percentage is and how it is paid.  Keep in mind that advisor costs are generally in addition to transaction costs and expense ratios. 

How Fees Impact Your Investments

As you can see, there are multiple layers of fees you can pay.  And those fees add up.  Expense ratios can range from 0.03% to well over 1%.  Advisor fees vary as well but are generally in the 1% – 1.5% range.  While 1 – 2% might not sound like a big amount, it can result in hundreds of thousands of dollars less in your pocket over a lifetime. 

Using a simple example where markets return 10% a year each year (which they generally have on average), if you invest $10,000, it will grow to over $340,000 over 40 years.  However, if you are paying 2% of your return in fees, you will effectively earn 8% per year and your portfolio will only be worth around $172,000 at the end of that 40 years.  Not paying attention to the fees you are paying can have a drastic impact on how successful you are as an investor.

Strategies for Fee Management

The first step in managing your investment fees is understanding them.  As we have discussed, there are several layers of fees that can exist with investment accounts, and you need to fully understand each.  Once you understand where the fees are hiding, you can take steps to reduce them. 

Many of the larger brokerage firms have drastically reduced or eliminated transaction fees, especially on their own products (i.e., it’s free to trade Vanguard funds at Vanguard and Schwab funds at Schwab).  Be aware of this and try to buy funds from the same company where you hold your accounts.

Even if you are buying funds from the company that issues them, they will still have expense ratios.  Make sure you research the expense ratio before you buy any fund, and always look for less costly options.  Index funds tend to be very low cost.  You can find funds with expense ratios that are between 0.03% to 0.25% which would be at the low end.  Contrast this with active funds that can have expense ratios of 1% -2% or more.  Choosing passive index funds will keep you at the lower end of this range.

Finally, make sure that you understand the fees being charged by any advisor you are working with.  Your advisor should be able to clearly explain the fees they are charging.  If they are not upfront about their fees, that is a red flag that you will want to be aware of.  Advisory fees are not necessarily a bad thing as a good advisor can save you tens of thousands of dollars over time by helping you avoid mistakes, but you do want to understand what and how you are paying for the services.

Taking Control of Your Financial Future

Now you understand how fees can impact your investment strategy and how you can manage your fees.  Combine this knowledge with what we have learned about asset allocation and diversification, and you have a good understanding of the basics of investing.  With this knowledge you should feel confident moving forward and starting to manage your own investments.  And if you still feel like you need more help, you can reach out to a qualified advisor to guide you.

If you are interested in learning about how I can help you take charge of your finances as a newly single woman, please contact me at  or schedule a free 20-minute consultation.

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