Investment costs: the fees that quietly eat your returns

Every investment has costs, and unlike returns, costs are certain. A fee taken every year compounds just like a return does, only in the wrong direction. Small percentages can add up to large sums over long periods.

The main costs

• TER (total expense ratio), also called ongoing charges: the yearly running cost of a fund or ETF, as a percentage of what you hold. A TER of 0.2% costs €2 a year for every €1,000 invested. It is deducted inside the fund, so it never appears as a separate bill.
• Transaction fees (or commissions): what the broker charges each time you buy or sell. Often a fixed amount, a percentage, or both. A fixed fee weighs much more on a small order than on a large one: €5 is 5% of a €100 purchase but 0.5% of €1,000.
• Spread: the gap between the price buyers are offering (the bid) and the price sellers are asking (the ask). Buying at the ask and selling at the bid means losing the spread on a round trip, even if the price does not move. See how the stock market works.
• Currency conversion (FX) fees: buying shares or funds traded in another currency, such as US dollars, means swapping euros first. Brokers charge for this through a fee, a less favourable exchange rate, or both, and again when you sell and convert back. See exchange rates explained.
• Custody fees: some brokers and banks charge for holding your investments in an account, often a yearly percentage or a fixed amount per holding.
• Taxes: gains, interest and dividends are usually taxed, and some countries also tax transactions. Taxes are not a fee, but they reduce what you keep in the same way. The rules depend on where you live, and a qualified tax adviser can explain them.

A worked example: 1% vs 0.2% a year

Take €10,000 invested for 20 years in something that earns, as a simple illustration, 5% a year before costs. Compare a yearly fee of 1% with one of 0.2%, so the money grows by 4% or 4.8% a year after costs. (Real returns go up and down; the steady rate just shows the effect of the fee.)

After	No fee (5%)	0.2% fee (4.8%)	1% fee (4%)	Gap between 0.2% and 1%
5 years	€12,763	€12,642	€12,167	€475
10 years	€16,289	€15,981	€14,802	€1,179
20 years	€26,533	€25,540	€21,911	€3,629

After 20 years, the 1% fee has cost about €4,622 compared with no fee at all: nearly half of the €10,000 originally invested. The 0.2% fee has cost about €993. The gap between the two keeps widening, because every euro taken in fees is also a euro that no longer earns a return in later years.

A difference of 0.8 percentage points a year sounds tiny. Over 20 years in this example, it adds up to €3,629, or more than a third of the starting amount.

Costs you don’t see

Many costs are built into prices rather than billed: the TER comes out of the fund’s value, the spread is part of the price you pay, and FX fees can hide in the exchange rate. That makes it easy to underestimate them. Comparing the KID of a fund, which lists its costs and their effect over time, with the broker’s published price list gives the fuller picture.

Frequent trading multiplies transaction fees and spreads, and a high fee also makes it harder for an investment to keep ahead of inflation. For how growth and costs compound over time, see compound interest.

Want to try your own numbers? Try the calculator.