Key takeaways
Whether related to management, expertise or both, investment fees can impact your returns and, consequently, your financial plan.
Ask your financial professional about fees and read fee schedules to find out what you get for the fees you’re paying.
Understanding fees can also help you determine if active or passive investments are a better fit for your financial plan.
Even seemingly small fees can make a huge difference to your investment returns over time.
“Fees have actually become a fairly important part of the all-in plan for investors,” says Rob Haworth, senior investment strategy director for U.S. Bank Wealth Management. “If you don’t account for them, your investment results could be different from your target, and that can cause problems for your investment or spending plan.”
“If you don’t account for fees, your investment results could be different from your target, and that can cause problems for your investment or spending plan.”
Rob Haworth, senior investment strategy director for U.S. Bank Wealth Management
Investment fees are generally tied to the costs related to handling your assets and the expertise required to help manage your portfolio.
They could include:
According to Haworth, the most obvious fees are the visible fees that appear as line items on a statement, such as an hourly charge for a financial professional, commissions on trades, loads on select mutual funds and redemption fees.
What doesn’t usually appear on statements, however, are the “invisible” fees that managers of mutual funds and exchange-traded funds (ETFs) charge.
Rather than providing guidance and investing advice like a financial professional, fund managers are responsible for implementing a fund’s investment strategy and managing trading activities. Fees associated with fund managers, which vary widely and are enmeshed in the day-to-day activities of the fund, are reflected in the daily net asset value of a share – not as a stand-alone figure.
“Financial professionals pay a lot of attention to costs embedded in funds, but clients may not ask about those fees unless they’ve been digging through the fund prospectus or semiannual report,” Haworth says.
Given the impact that expenses can have on your investment returns, Haworth suggests starting any fee discussion with two key questions:
On the latter point, if the actively managed fund and the passively managed fund have a similar profile with many common holdings, it might make sense to opt for a lower-cost passively managed fund option. But if you’re considering an asset class where some selectivity can potentially enhance performance, then an actively managed investment might be more beneficial in the long run.
“We think a good case can be made for both active and passive investments, but you have to look at the data,” Haworth says.
When working with a financial professional, you may see fees in a variety of forms, such as in commissions; in the form of an hourly rate, or a flat fee calculated as a percentage of your assets under management. Many financial firms offer a sliding scale fee structure that drops as assets under management increase.
The impact of fees on investment returns can add up over time, even if the fees themselves are relatively low. This can significantly lower your portfolio’s investment return over time.
For example, let’s say you have a $100,000 investment portfolio with a 4% annual return over 20 years. An annual fee of 0.50% would reduce the value by $10,000, compared with a portfolio with a 0.25% annual fee. If your annual fee were 1%, your portfolio value would be reduced by nearly $30,000 compared with a 0.25% annual fee.1
As fee levels fluctuate, financial professionals adjust their business models.
For example, instead of a one-size-fits-all approach to service, Haworth says firms are differentiating between low-cost support levels for investors who seek simple, off-the-shelf types of solutions and elevated fees for investors with more sophisticated situations who require a team approach and more frequent contact.
“That’s where the investor determines whether they find value in the process,” he says.
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