What fees do you pay when you invest?
Most investors pay a platform or management fee to the provider, ongoing charges to the funds they hold, and transaction costs when investments are bought or sold. Some also pay advice fees, exit or transfer fees, or currency conversion charges. Each one is small on its own. What matters is the total.
Not every investor pays every fee on this list. A managed portfolio normally bundles the investment decisions into the management fee, so you won't pay a separate adviser. But you will still pay the fund charges underneath it.
| Fee | Who charges it | How it's usually charged | Where you'll see it |
|---|---|---|---|
| Platform or management fee | The provider running your account | Percentage of your balance a year, sometimes a flat fee | Deducted from your account, shown on statements |
| Fund ongoing charges (OCF) | Each fund or ETF you hold | Percentage a year, taken inside the fund | Fund factsheet or key information document |
| Transaction costs | The market and the fund | Spreads and dealing costs when assets are traded | Costs and charges disclosure |
| Advice fee | A financial adviser, if you use one | Flat fee or percentage, one-off or yearly | Adviser's fee agreement |
| Exit or transfer fee | Some providers | Flat fee when you leave or move | Terms and conditions |
| Currency conversion | The provider or fund | Percentage on overseas trades | Terms, fee schedule |
What's the difference between a platform fee and ongoing charges?
A platform fee is what the provider charges to hold and run your account. Ongoing charges are what each fund charges to run itself. The platform fee comes out of your account, while ongoing charges are taken inside the fund's price. You pay both, so add them together.
This is where people get caught out. A provider might advertise a 0.45% platform fee, and that's accurate. But if the funds inside your account charge another 0.20%, your real yearly cost is 0.65%. Fund charges don't appear as a line on your statement, because they're reflected in the fund's price instead.
You'll often see ongoing charges labelled OCF (ongoing charges figure). Some documents also quote a TER (total expense ratio), which is an older term for much the same thing. Neither one includes the platform fee or, usually, transaction costs.
How much do investment fees cost over 10, 20 and 30 years?
Over long periods, fees cost far more than their small yearly percentage suggests, because money paid in fees no longer grows. In our illustrative example, $10,000 growing at 5% a year before costs ends up around $10,800 lower after 30 years with 1% annual fees than with none.
Here's how we worked the table out. We started with $10,000, assumed a steady 5% a year return before costs, and took the total yearly cost straight off that return. So with 1% in fees, your money grows at 4% a year. Real returns are never this smooth, and 5% is not a prediction. The point is to show the gap between the rows.
What the table shows
Look at the 30-year column. Paying 2% a year instead of 0.5% leaves you with about $13,000 less, which is more than the $10,000 you started with. And the gap widens every year, because every bit of money taken in fees also misses out on all its future growth.
The same thing happens if you invest monthly. Put in $200 a month for 25 years ($60,000 in total). At 5% a year growth after costs, you'd end up with roughly $119,100. At 4% after costs, roughly $102,800. That 1% gap costs around $16,300. Again, these are illustrative figures, not a forecast.
| Total yearly cost | After 10 years | After 20 years | After 30 years | Lost to costs after 30 years* |
|---|---|---|---|---|
| 0% (for comparison) | $16,289 | $26,533 | $43,219 | $0 |
| 0.5% | $15,530 | $24,117 | $37,453 | $5,766 |
| 1.0% | $14,802 | $21,911 | $32,434 | $10,785 |
| 1.5% | $14,106 | $19,898 | $28,068 | $15,151 |
| 2.0% | $13,439 | $18,061 | $24,273 | $18,947 |
*Compared with the 0% row. Figures rounded to the nearest whole unit. This is an illustration of compounding, not a forecast. Returns vary from year to year and can be negative, and you could get back less than you invest.
Is a percentage fee or a flat fee cheaper?
A percentage fee is usually cheaper for small balances and a flat fee is usually cheaper for large ones. To compare, work out the balance at which they cost the same. Divide the flat fee by the percentage fee. Below that figure, the percentage fee costs less. Above it, the flat fee wins.
An illustrative comparison: Provider A charges 0.45% a year. Provider B charges a flat $120 a year. Divide $120 by 0.0045 and you get about $26,700. If you hold less than that, Provider A is cheaper. If you hold more, Provider B is.
Two things to check before you switch on the strength of that sum. First, look for fees that only appear on the second provider, such as charges per trade. Second, check whether either provider caps its percentage fee or charges less on larger balances, which many do.
How do you find the total cost of an investment?
Ask the provider for a breakdown of its costs and charges, which firms in many countries must give you before you invest. It should show every layer of cost as a percentage and in cash. Then check it against the fee page and fund factsheets, and look for one-off fees such as exit charges.
Get the costs and charges document
In many countries, investment firms must show you an estimate of all costs, in money and as a percentage, before you invest. Even where it isn't required, a provider should be able to give you one. If a firm can't or won't, treat that as a warning sign.
Add up the yearly layers
Platform or management fee, plus fund ongoing charges, plus transaction costs. That total is the number to compare between providers.
Turn it into cash
Multiply the total by the amount you plan to invest. A total of 0.9% on $15,000 is $135 a year at that balance. A cash figure is easier to judge than a percentage.
Check the one-off costs
Read the terms for exit fees, transfer fees, minimum annual charges and any fee to switch portfolio. These matter if you might move later.
Ask what you get for the money
Some regulators now require firms to show that their products offer fair value. Wherever you live, you're entitled to ask what the fee pays for, and a good provider will tell you plainly.
Is the cheapest investment always the best one?
No. Cost is one of the few things you can control, so it deserves close attention, but the cheapest option isn't always the right one. A slightly higher fee can be worth paying if it buys you something you'd use, such as rebalancing, a suitability check or a portfolio you'll stick with.
The real cost of a cheap DIY portfolio can be your own behaviour. If you sell in a panic during a downturn, or leave money sitting in cash because you can't decide, you can lose far more than the fee you saved. On the other hand, if you'd happily buy one global index fund and leave it alone for 20 years, paying extra for management may not make sense for you.
A useful test: for each fee, name what it pays for and ask yourself whether you'd pay for that thing separately. If not, look for a cheaper option.
What does the managed portfolio cost, and is it good value for you?
The managed portfolio's fees are set by the provider and listed in its published charges. Vaulterify doesn't charge you anything on top. Whether that's good value depends on whether you want a managed service. If you're happy running a simple portfolio yourself, a cheaper DIY route may suit you better.
Run the same steps above on the managed portfolio: add the layers, turn them into cash for your amount, and check the exit terms. The the managed portfolio fees page sets out each charge, and how it works explains what the management fee covers. Ask the provider for its costs and charges illustration before you commit, and compare it with at least one other provider.