How to identify hidden investment fees in your portfolio

Investors that are confused by investment fees aren’t alone. A recent survey showed that nearly 73% of investors either didn’t know how much they were paying in investment related fees or didn’t think they were paying any fees at all. And almost two-thirds of investors don’t know where to look to find the fees they are paying.

The challenge that most investors face when it comes to fees is that they often aren’t transparent and easy to find, but they are very real and very much eating into your savings and your returns. Understanding the fees you pay to invest is essential to eliminating or reducing them. At the end of the day, it’s not just about how much you make, it's how much you keep that matters.

Here are the five hidden fees you need to be aware of so you don’t unknowingly pay fees that eat away at your returns. 

Why do investment fees matter?

Aren’t fees a normal part of investing? The short answer is, yes, some fees are to be expected. The longer answer is that high fees are pervasive in the industry and have been around for decades.

While you might not always notice fees day-to-day, over time they can eat into your investment returns and erode your wealth. Without a clear understanding of investment fees and what you are paying, your investment returns could be lower than you think and you could be missing out on critical years of compounding returns and growth of your money.

Here’s an example of what high investment fees could mean for your returns and your money:

Let’s start with an initial investment of $250,000 and assume you contribute $1,000 per month ($12,000 per year) and achieve a 7% return (before fees). Here is what you would have after you account for fees:

^{Source: Dinkytown.net Financial Calculators}

A 0.50% fee can leave you with more than 10% less wealth after 30 years, and a 1% fee can leave you with almost 25% less wealth. A small difference in fees can lead to a very big difference in how much money you keep.

Common types of investment fees

#1 Management fees

The most common investment fee is a management fee. It’s a fee that professional money managers charge for picking the stocks and bonds that make up either their mutual funds or exchange-traded funds (ETF). You may also hear it referred to as an expense ratio because it is expressed as a percentage of how much you invest.

These fees will never show up on your account statement as the fees are charged internally within the fund. So if you look at your account statement and don’t see a fee, you may still be paying one that is embedded in the fund or ETF that you own.

Let’s look at two different types of investments:

• An actively managed mutual fund that invests in international stocks has a management fee (an expense ratio) of 0.83%. This means that for every $100,000 you invest, you pay $830 per year.
• A passively managed ETF has an expense ratio of 0.07%. For every $100,000 you invest, you pay just $70 per year.

#2 Sales loads and commissions

The terms sales load and commission are interchangeable. They are both upfront fees that are charged when you purchase an investment product, which is typically either an annuity or a mutual fund. How the fee is paid depends on what you buy.

When you purchase an annuity, you will pay a commission to a broker or financial advisor. Annuity commissions can range anywhere from 1% to as high as 7% in some cases. The sales charge doesn’t come directly out of your investment in the beginning, but you may face a surrender charge if you pull money out. The surrender charge is essentially the annuity company recouping the commission they paid to the advisor.

When you purchase a mutual fund, you may also pay a commission or load. These charges can vary from fund to fund even within the same fund company itself as some funds have different share classes with different fee structures. Clear as mud, right? However, mutual funds can have sales charges as high as 5.75%, which is what you have to pay when you buy it. So if you invested $100,000 into one fund, or several funds, you could pay $5,750 in upfront fees.

When investing, especially in mutual funds or ETFs, you want to look for “no load” solutions, because they have no sales loads or upfront commissions.

#3 Brokerage fees

Brokerage fees are generally smaller costs that you will incur when investing through either a custodian (a financial institution that holds your money) or a broker-dealer (an institution that facilitates investment activity or trades). They are fees you pay for a financial institution to execute trades, service your accounts, and safeguard your assets. There are three main types of fess you should be aware of:

Trading fees

Trading fees are charged when you buy or sell an investment like an individual stock, mutual fund, or ETF. They are generally pretty small and range from $5 to $50 and sometimes more, but they can add up if you are trading on a regular basis. In recent years, many investment firms have eliminated trading fees, but some still have them or may require that you sign up for electronic delivery of statements before granting you free trades so be sure to look into associated trading fees before opening an investment account.

Custodial fees

Financial institutions that hold your investments are performing a service called custody (which is why they are often called custodians). They ensure your investments are kept safe and sound and minimize the risk of theft. They also provide reporting on all transactions from buys and sells to dividend payments to withdrawals and even taxable events. For these services, you might pay anywhere from $20 to north of $100 per year per account depending on the custodian.

Service fees

Custodians are also responsible for handling different types of account services like processing account transfers, wiring funds, and even providing check writing capabilities. For each of these services, you may experience a small fee that can range from $5 to north of $100 per transaction.

Brokerage fees are small, but they add up quickly. Between trading, custody, and service it isn’t uncommon to pay a few hundred dollars per year per account if you aren’t careful. 

#4 Turnover and taxes

Taxes aren’t often seen as a fee directly tied to investments like a management fee, but how investments are managed and how you own them can have a material impact on how much money you end up with in the future. Here’s what you need to know about turnover and what it means for your taxes.

Turnover is a measure of what percentage of an investment, like a mutual fund or exchange-traded fund (ETF), is being replaced, or turned over, each year. So if a fund held 100 stocks and sold 25 of them and bought another 25 in a given year, the turnover would be 25% (i.e. they replaced 25% of the fund's holdings).

Let’s look at two different investments and compare their turnover rates:

• The Vanguard Total International Stock ETF (VXUS) has a turnover rate of 7.8%.(as of 4/30/22). This means that less than 10% of the stock holdings are being turned over, or sold and replaced, in any given year.
• The Blackrock International Fund (MAILX) has a turnover rate of 77% (as of 5/31/21). This means that three-quarters of the holdings are being replaced every year.

When a stock or a bond is sold and replaced with a new holding, that sale creates a taxable event. Those taxable events are distributed periodically to investors in the fund or ETF. This means that you, as a shareholder, will have to report and pay taxes on those capital gains even if you do not sell the fund or ETF itself. Higher turnover equals higher taxable transactions which means higher potential taxes.

Turnover really only matters if you own the investment in a taxable investment account. Any turnover experienced in a 401(k), IRA, or Roth IRA is not taxable. The bottom line is that you need to be aware of the turnover of the investments you own and in what type of account you own them. The more you pay in taxes, the less of your money you get to keep.

#5 Financial advisor fees

The final fee you should be aware of is how much you pay to a financial advisor to manage your investments. There are two primary fees that you will see that are tied directly to how much you invest.

Advisory fees

The second fee is what is known as an assets under management (AUM) fee. It’s a fee based upon how much money you invest and it can range from 0.30% to north of 1%. It’s a recurring fee that you pay every year and that fee goes up as your money grows, even if you aren’t getting more advice from the advisor.

Distribution fees

Technically you see these called 12b-1 fees because of the SEC rule that authorized them. They are called distribution fees because they are paid to people, typically financial advisors, for distributing, or marketing, the mutual fund to individual investors. In short, a 12b-1 fee is a hidden fee that is paid to a financial advisor for selling a fund, and it’s an ongoing fee that is based upon a percentage of how much you invest.

Here’s an example of an actual mutual fund and it’s overall expenses:

The total expense ratio is listed as 1.37%. However, if you dig deeper, here is what that entails:

The 12b-1 fee is what you are paying to a financial advisor.

Fees based on how much you invest are never a good idea. As your money grows so do your fees, which can substantially reduce your return and how much money you end up with. Instead, look for a fixed or subscription fee that’s fair, transparent, and aligned with your needs.

Where can you find information on your investment fee expenses?

The good news about investment fees is that they have to be reported or disclosed somewhere. The bad news is that “somewhere” can be very hard to find, and you have to know where to look. To the untrained eye, fees are hard to spot, but they are still slowly eroding the growth of your money. Here’s where to find hidden investment fees:

Account agreements

When you establish an account, you will receive an account agreement. That account agreement is required to list the breadth of fees that you might pay.

Account statements

You have to know where to look, but there should be a section specifically related to transactions or fees. This is where you can find any financial advisor fees (or AUM fees).

Disclosure documents

If you are ever required to sign a disclosure document to purchase an investment or an annuity, read it carefully. You will often find very high fees that must be disclosed prior to your purchase.

Trade confirmations

For every trade that you or an advisor places, you will receive a trade confirmation. It will likely be posted to your online account so you have to log-in and search for them. The confirmation will list any trading fees you paid to purchase the investment.

Investment websites

If you want to know what management fees you are paying for a mutual fund or ETF, you can go to their websites and look up the investment. All fees must be disclosed so you can determine what you are really paying.

A good investor is an educated investor. Know where to find your fees so you know what you are paying, if they are fair, and if you need to make a change.

Knowing your investment fees puts you in control

Not understanding your fees could mean you are paying too much, leaving a lot of money on the table, and substantially reducing how much money you will have in the future. If you are investing on your own, you should do your homework to determine what you are paying in fees. If you work with a financial advisor, it’s your right to know your fees and you should ask so you have a clear picture of your all-in costs.