Join the Project!
Everything you need to be smarter with your money, delivered weekly.
Anyone who knows me knows that I love a deal. I’m definitely not cheap, but it drives me nuts to pay more than I have to for something. I’m the person who looks around the airplane and wonders who paid more for their seat and who paid less.
Needless to say, I go out of my way to avoid paying excess fees. I loathe paying banking fees, I hate being charged penalty fees, and I will always pick up the phone to dispute a late payment fee.
But when it came to investing, I found understanding the fees to be a little confusing. There are so many different types and they vary based on the type of investment that you’re making. I also didn’t realize how much these fees really add up over time. The first brokerage account I ever opened charged $7 for trades. It didn’t really occur to me that paying $7 to make my $150 trade wasn’t the best use of my money.
Because I hate being in the dark and not understanding exactly how my money is being used, I did a little more research into what all the different fees are called, when I’d see them, when it makes sense to pay them, and when it’s better to just say “thanks, but no thanks” to a fee.
While fees aren’t exactly exciting to talk about, it’s good to know just enough so you’re not like the poor guy on the plane who has paid 3x’s more than everyone else and has no idea.
Fees aren’t the only thing you should pay attention to, but they are a good thing to know since they take away directly from the return that you make. Sure, sometimes it’s worth it to pay more in fees. But it’s never worth it to blindly pay fees without knowing how much you’re paying and why.
This is part of a 4 part series on investing:
- Why Should I invest?
- What’s the fee? We hear about fees all the time. What should you really look for?
- Options to DIY it: the pros, cons, and how exactly to get started
- When should you bring in a professional? And how much do they cost?
How much do fees actually matter?
A lot. You invest your money to earn a return, and fees eat away at that return. While fees shouldn’t be the only thing you’re concerned with when you are investing your money, you will want to make sure you understand exactly what you’re paying and why.
Let’s say you invest $50k in a fund that has an expense ratio of 0.75% annually. The fund increases an average of 7% annually. After 25 years, you’ll have $227,611 – hooray!
But let’s say you invest in a fund that performs similarly with average increases of 7% annually but the expense ratio is only 0.05%. After 25 years, you’ll have $268,219. That’s $40k more, just because you’ve paid less in fees.
So while fees aren’t the only thing that matters when you invest, you should invest knowing exactly what you’re paying and make the decision as to whether that extra fee is worth it.
Ok got it? Now here’s where I think a lot of us get confused. What exactly are all of these fees? And when can you expect to see them?
I’ve got you covered. Here’s a quick rundown of some of the common fees and when you can expect to see these pop up:
What it is: These are the costs of running the fund that your money is invested in. Some funds are much cheaper to manage than others. Expense ratios will be shown as a percentage of your investment. An expense ratio of 0.25% means that for every $10,000 that you have invested, you’ll pay $25 annually toward the management of the fund.
Expense ratios can vary greatly. Actively managed funds (where you have a person who is managing the fund) can have expense ratios of 0.5% or higher. Passively managed index funds (where the investments in the fund track an index, like the S&P 500) have lower fees.
**active, passive, what? Need a refresher? Read this quick pocket guide to investing.
When you’ll see it: You won’t get a bill or see a direct charge for these fees. Instead, these fees are deducted from the return you get on the investment.
You will be able to see what the fee is before you invest. For example, if are looking at purchasing an S&P 500 ETF from Vanguard, you’ll see the expense ratio listed as part of the information about the fund. The expense ratio on the fund below is 0.04%. If you have $10,000 invested in this fund, you’ll pay $4 annually.
What it is: In order to buy or sell a stock or a share in a fund, you’ll likely be charged a transaction fee. These fees can range from a few dollars to $50. Not every transaction will be charged a fee – there are options for investing without transaction fees, or with low transaction fees. For example, investment app Robin Hood doesn’t charge a transaction fee. Vanguard doesn’t charge a transaction fee if you’re investing in a Vanguard ETF.
When you’ll see it: You’ll see the charge included in the total price of your purchase or deducted from the total returns from your sale.
Load fee: front-end load or back-end load
What it is: When you start looking at investments you’ll likely start noticing that some of them advertise “no load”. So what exactly is this load?
You can have a front-end load, which is essentially the commission that you pay when you buy the investment. Or you can have a back-end load, which is the fee you pay when you sell the investment. You’ll see huge back-end loads on annuities if you sell the investment early.
When you’ll see it: when you buy or sell an investment. You’ll usually see these load fees on mutual funds, insurance policies, and annuities. Don’t want to invest in a mutual fund with a load? Look for or ask about “no load” funds.
What it is: When you work with an advisor, some of them choose to bill you based on the amount of money they manage for your (this is called assets under management). So if you have $100,000 managed by an advisor and they charge a management fee of 1%, you’ll pay $1,000 fee annually.
If you use a robo-advisor, you’ll also pay a management fee, though this will usually be lower. For example, Wealthfront, Ellevest, and Betterment charge management fees of 0.25% annually. If you invest $10,000 with them, you’ll pay a $250 annual management fee.
When you’ll see it: when you use an advisor (either a person or a robo-advisor) to manage your investments.
What to note: You’ll pay a management fee on top of any other fees that your investments have. Your advisor will charge this management fee to cover their costs and whatever funds they invest your money in will also have an expense ratio.
Annual Fee or Custodian Fee
What it is: an annual fee for maintaining your account.
When you’ll see it: you’ll see this on a lot of retirement accounts to cover annual reporting that they need to do. You may also see an annual fee on any of your other brokerage accounts.
One way to check fees
I’m kind of a broken record when it comes to Personal Capital and all of the ways I use their free tool (to be clear, I only use their free tool, not their investment options. See my review of their free tool here). One thing I do semi-regularly is to check their fee management tool. The fee tool doesn’t include every fee that we pay, but it does track down the management fees and expense ratios on our investments and gives you an average of the fees you’re paying.
As you can see in the chart below, we have an average expense ratio of 0.33%.
Now that Jordan and I share money this is helpful to get a full picture of what we’re paying in fees as a household.
When you invest there will be fees. These fees can eat away at your return significantly. Are fees the only thing you should think about? No. But you should know what you’re paying for before you buy. You’re smart, you’ve got this.
THE LATEST & GREATEST
Join the Project! Everything you need to be smarter with your money, delivered weekly. Disclosure: some of the links below are affiliate links. This means that if you are to click a link and make a purchase, I might be paid a commission at no cost to you. I only...read more
Join the Project! Everything you need to be smarter with your money, delivered weekly. Photos by Joe+Kathrina If you’ve ever looked for career advice (and who among us hasn’t?), you’ve likely found your answer on Career Contessa. Lauren McGoodwin founded Career...read more
Join the Project! Everything you need to be smarter with your money, delivered weekly. 10 years ago I was a bright-eyed, newly minted CPA. I was working for PwC and my clients were all in the banking industry. I’ll never forget arriving to my client’s office early...read more
HAPPY HOUR FOR YOUR INBOX
smart reads + self-care + inspiring interviews all sent to your inbox every Friday. So you can say "see ya" to those Sunday scaries.