The Real Cost of Investment Fees

The great investor Warren Buffett once remarked that ‘the chains of habit are too light to be felt until they are too heavy to be broken.’ The same is true with investment fees. If you’re not careful, these fees will eat into your investments before you know it.

The impact of high investment fees is clear – investment businesses put more of your money into their pockets. In this article, we’re going to explore just how significant investment fees can be.

Breaking Down Investment Fees

There are three main types of investment fees: platform fees, fund fees and trading fees.

Investment platforms are like a bank account for your investments. It’s where your investments are held. Firms like Hargreaves Lansdown or AJ Bell are among the larger investment platforms in the UK, and they charge a fee for providing the service of an investment account. That fee is typically expressed as a percentage of the assets you have with the platform, for example charging 0.5%/year on your assets.

Investment platforms typically offer a number of different funds into which you can invest your money. These funds will also charge fund fees for the service of investing in specific areas, for example in US stocks or European bonds.

Some investment platforms will also charge you trading fees. These fees are mostly reserved for trading individual stocks, which we wouldn’t recommend. However, there can also be fees for trading between funds.

In short, investment fees are charged for providing you with a service. It’s right that you should pay for this service, but paying more than a certain level is just putting your money in someone else’s pocket. For most investors, paying above 1%/year in total across platform fees, fund fees and trading fees is excessive. So watch out.

How High Fees Bring You Down

High fees ruin your returns by more than you think. They are direct detractor from your investment return.

Let’s consider an example, assuming the average return on your investments is 7%/year over 30 years.

Imagine you invest £10,000. If your investments return 7%/year before fees, and your total fees are 1%/year, your net-of-fee return will be 6% (7%-1%). After 30 years, you will have £76,000 – a £66,000 profit.

If you invest the same £10,000, but pay 2%/year in fees, your net-of-fee return will be 5% (7%-2%). After 30 years, you will have £51,000 – a £41,000 profit. You can see this in the chart below:

The difference is stark. Paying an extra 1%/year in fees may not seem like much, but it makes an enormous difference. Rather than making £66,000 in profit, you will make £41,000 instead. 38% of your profit has disappeared – you’ve paid it to the investment platforms and fund managers, rather than making it work for you.

The implication is clear – high fees put a significant dent in your personal finances. It’s definitely worth doing some homework to better understand what your investment fees are, and whether you can reduce those fees while receiving the same service. The pennies make the pounds. In this example, reducing your fees from 2% to 1% puts £25,000 back in your pocket – over 30 years, that’s almost £1,000/year.

If you don't take control of your investment fees, you'll be working hard to earn a salary, saving to invest, and then paying much of it to investment platforms. It doesn't make sense.

Investment companies provide a valuable service – just make sure you’re paying the right price. They don't need you to make them richer.