Surprise: You're Probably Paying a Lot More in Investing Fees Than You Think

Here are some shocking statistics via a recent report from the Financial Industry Regulatory Authority (FINRA) Investor Education Foundation:

• 21% of investors don't think they pay any kind of fee for investing.
• 17% say they don't know how much they pay.
• 38% of mutual fund investors think they don't pay any mutual fund fees or expenses.

Oh dear. That's very troubling -- because most investors pay fees of various kinds, and they can be considerable, sometimes even reducing investment returns significantly.

Image source: Getty Images.

Why fees matter

The table below shows what a difference fees can make. It assumes two investments with average annual gains of 10% over some long periods, with one investment charging 0.10% annually and the other charging 1.00% annually -- shrinking the annual gains respectively to 9.9% and 9%:

Data source: author.

Clearly, fees can take a huge bite out of your investment results. Here's a very stark example, modeling hedge fund fees, which can be exceptionally steep, from the folks at Dividend Growth Investor: "If you invested $1,000 in Berkshire Hathaway in 1965, by 2009 your investment would have been worth $4.3 million. If Buffett had set up Berkshire as a hedge fund, and charged a 2% annual fee plus 20% of any gains, the investor would have been left with only $300,000."

"The average investor pays from approximately 1.5% to 2% annually," according to Stuart Boxenbaum, president of Statewide Financial Group, who also notes that with a portfolio valued at $300,000, someone paying 1.5% is forking over $4,500 annually, or $375 per month. Ouch!

Meanwhile, the Securities and Exchange Commission (SEC) itself has pointed out that if you start with a portfolio valued at $100,000 and it grows by an annual average of 4% over 20 years while you pay 0.50% per year, you'll end up with $10,000 less than someone in the same situation who only pays 0.25%.

What fees are you paying?

Here's a big (but not totally comprehensive) list of fees and expenses that investors often pay. You likely pay some of them and you may or may not pay others:

• Trading commissions: Many good brokerages these days are charging $0 per trade, but not so long ago many charged $10 or even $25 per trade. If your broker is charging you for trades and you trade frequently enough, it might be worth switching brokerages.
• Expense ratios: An expense ratio is an annual fee charged by mutual funds and exchange-traded funds (ETFs). It's hard to avoid paying this fee when you invest in mutual funds, but you might still favor funds with low fees. The average expense ratio for stock funds was recently 0.42%, while you can find solid passively invested index funds (such as S&P 500 index funds) that charge less than 0.05%). Some funds charge 1% or more, though, and the table above shows what that can do to your returns. (Note that a 0.42% fee would cost you $43 per $10,000 invested -- annually.
• Load fees: When a fund charges a load fee, know that you're essentially paying a sales commission -- and these fees have sometimes approached or exceeded 5%! Fortunately, there are gobs of solid no-load funds these days, so it's smart to favor them.
• Investment management/advisory fees: If you're having a financial professional manage some of your money, there's a good chance that you're either being charged for each transaction they orchestrate or you're being charged an overall "wrap fee" -- which is a percentage of the account's value. Wrap fees are generally between 1% and 3%. If you're paying, say, 2% on an account worth $500,000, you're looking at forking over $10,000 annually! The service you're getting better be worth that.
• Exit fees: Some kinds of investments, such as certificates of deposit (CDs), insurance policies, and annuities, charge you fees when you exit the investment, and if you're exiting early, the fees can be bigger. Make sure you understand fee schedules before you sign up for any investment.

What to do

Smart investors should always do some digging to find out just what fees they're paying. Every now and then, take inventory of your investments and see what they're charging you. You stand a good chance of finding fees being charged by your mutual funds, your retirement accounts, and even your cryptocurrency investments, among many other investments.

To minimize your fees, you might favor simple, low-fee index funds and mutual fund companies known for low fees. Sticking with a good brokerage that charges little to nothing per trade can save you a lot of money, too.