How investment fees work, and what they cost you over time

What are the main types of investment fees?

Most investors meet five kinds of charge: a fund's ongoing charge, an account fee (often listed as a platform fee), dealing charges when you buy or sell, entry or exit charges, and sometimes a performance fee. Currency conversion and costs inside a fund can add more. Each is charged differently, so compare them in money, not by name.

Also look for currency conversion when you buy investments priced in another currency, the gap between buying and selling prices, transfer-out charges, and advice fees if you use an adviser. Names vary between firms; what counts is the total you pay.

How do investment fees add up over time?

A yearly percentage fee is charged every year you hold the investment, so its cost adds up. In this illustration, the investments in a fictional $20,000 pot neither rise nor fall before charges. Over 20 years, a 0.5% yearly charge takes about $1,908, a 1% charge about $3,642 and a 2% charge about $6,648.

Holding the investments flat is deliberate: it isolates the fee and avoids pretending to know what an investment will do. Each figure below comes from one formula: fees paid = $20,000 × (1 − (1 − yearly charge) ^ number of years).

The gap between rows is the point. Moving from a 2% to a 0.5% yearly charge on this fictional pot leaves about $4,740 more after 20 years. A lower fee doesn't make an investment better, but a higher fee has to be earned back every single year.

In real life the cost is usually larger. If the investments rise, the same percentage takes more money each year, and every amount taken out also loses whatever it would have earned afterwards. If they fall, the fee is still charged.

Illustration only: invented amounts, with each year's fee taken from the value at the time and the investments otherwise neither rising nor falling. Not a forecast.

How do you work out the total cost in money?

Convert every charge into money for a typical year, then add them up. Multiply each yearly percentage by the amount you'd hold, add each dealing charge times the number of trades you expect, and spread any one-off entry or exit charge over the years you'll hold. Divide the total by the amount invested for your real yearly percentage.

1. List every layer

   Write down the fund's ongoing charge, the platform fee, dealing charges, any entry, exit or performance fee, and currency conversion if it applies.

2. Turn percentages into money

   Multiply each yearly percentage by the amount you'd hold. For example, 0.8% of $10,000 is $80.

3. Add the per-trade charges

   Multiply each dealing charge by the number of times you expect to buy or sell in a year, including regular monthly purchases if they're charged.

4. Add it all up

   The total is what a typical year costs. Divide it by the amount invested to get your all-in yearly percentage, and compare that across options.

In this illustration, the fund's headline 0.8% becomes 1.3% once the other layers are added. That's why the figure on one document is rarely the whole story.

Illustration only: invented charges, not typical of any provider.

Which investment fees are easy to miss?

The easiest fees to miss are the ones that never arrive as a bill: a fund's ongoing charge taken from its value, trading costs inside the fund, the gap between buying and selling prices, and currency conversion. Exit and transfer charges are easy to miss too, because they only appear when you try to leave.

• Charges inside the price. A fund's ongoing charge reduces its value day by day, and your statement may never show it as a separate line.
• Exit and transfer charges. Some products charge you to sell early or to move to another firm. Read this before you buy, because it decides how easily you can leave.
• Performance fees. These come on top of the ongoing charge. Check the target the manager has to beat, and whether past shortfalls must be made up first.
• Currency conversion. Buying investments priced in another currency can mean a charge each way, sometimes built into the exchange rate rather than shown as a fee.
• Minimum or inactivity fees. A flat minimum charge can be a large share of a small balance.

A flat fee that looks small can be expensive on a small pot, and a percentage that looks small can be expensive on a large one. Compare both ways, at the amount you'd actually invest.

What questions should you ask about investment costs?

Ask for the total cost of a typical year in money, at the amount you'd invest, with every layer included. Then ask what it costs to leave, whether any fee depends on performance, and whether anyone is paid for selling you the product. Get the answers in writing; a firm that can't give them has told you something.

1. What will I pay in total in a typical year, in money, if I invest this amount?
2. Which charges come out of the fund's value, and which are taken from my account?
3. What does each purchase, sale or regular monthly investment cost?
4. Is there a charge to sell early, close the account or transfer to another firm?
5. Is there a performance fee, and how exactly is it worked out?
6. Is anyone paid a commission or fee for selling me this product?
7. Where will I see these charges reported, and how often?

Copy the answers into the ten-question decision check when you weigh a specific option. And remember that a demand for a fee before you can withdraw your money isn't a charge at all; our fraud red flags lesson explains why it's a stop sign.

Is the cheapest investment always the right one?

No. A lower fee leaves more of any rise in your pocket, but it doesn't make an investment suitable. Risk, what it holds, how easily you can get out and whether it fits your goal matter at least as much. Use fees to compare options that are otherwise alike, and to question high charges that aren't clearly explained.

Higher charges sometimes pay for something you may value, such as a different way of managing money or extra services. The useful question is whether you understand what the extra cost buys, and whether it's worth it to you every year, because you pay it every year. If you want a personal view on which option suits you, that's a job for a regulated financial adviser.

Investment fees: common questions