Brokers and investment companies charge fees for managing your money and possibly growing it. While a 0.5% fee or 1% fee may seem small, costs can pile up over time and affect your earnings.
To maximize potential returns, you should understand investment fees and find out whether they’re worth your money. Follow the steps below.
1. Compare similar products or services
The fees you’ll pay will vary depending on the investment vehicle or specific product you’ll choose or the extent of service you’ll avail. For example, there are different costs for investing in stocks directly vs. investing through a managed fund.
Comparing fees across similar products or services can help you identify whether an option charges way more than its peers. Here are the questions to ask:
- How do fees affect actual returns?
You might prioritize performance when comparing your investment options, but this may not tell you the whole story. Consider this example:
Let’s say you’re looking at 2 similar investment funds.
Fund A earns an average of 10% a year before fees and has a 2% annual fee.
Fund B earns an average of 9% a year before fees, but charges only a 0.5% annual fee.
If you’ll invest P50,000 and hold the investment for 10 years, here are your projected returns with each fund:
| Investment option | Without fees | With fees |
| Fund A | P129,687.12 | P107,946.25 |
| Fund B | P118,368.18 | P113,049.17 |
In the example, the fund with the lower fees offered better actual returns than the higher-performing fund with bigger fees.
Keep in mind that investment returns aren’t guaranteed. Additional costs like taxes and transaction fees can also affect what you might earn.
- What are the services or benefits offered?
Before writing off an investment or service because of high fees, it’s worth checking if there are benefits aside from potential returns that could make it worth the cost.
For example, if you want to invest in stocks, you can do so through a brokerage service. Such services typically charge commissions and other fees.
In exchange, they may provide support that can add value to your investing journey like personalized financial advice, daily guidance and updates, and research reports.
If the fees translate to useful services that can help you reach goals, the cost may be justified. However, if the services aren’t relevant or don’t add much value, you can consider a more affordable option.
2. Check for hidden costs
Fees are required to be shown in an investment product’s fact sheet as well as in the terms and conditions that investors must agree to.
Remember to read the fine print of relevant documents and don’t hesitate to ask a professional to explain any unclear costs.
For managed funds, you can check its expense ratio to get a better sense of what you might need to pay. This ratio reflects the cost of operating an investment fund expressed as a percentage of its total assets.
If you want to minimize fees, it’s ideal to choose products with a relatively low expense ratio.
You should also account for taxes and fees that may be charged each time you’ll buy or withdraw from an investment.
3. Consider your strategy
You’ll generally pay more in fees and taxes the more often you’ll transact. If you’re an active investor who buys and sells frequently, these costs may take a bigger chunk of your potential earnings over time.
Conversely, investing in an asset for the long-term may help you save on costs. Investment funds can also be actively or passively managed.
Actively-managed funds have hands-on managers that try to outperform the market by making frequent trades, and so their fees are usually higher.
Passive funds, on the other hand, simply mirror the performance of a certain index. These funds tend to be easier to manage and so they typically charge lower fees.
Given your preferred strategy, you should check whether an investment’s performance can actually meet your expectations after accounting for costs.
Investment fees can also change over time. It’s ideal to review your investments periodically to know if you’re still getting what you’re paying for.
