Paying investment fees is normal. Not knowing what you’re paying isn’t.
Research shows that many investors underestimate — or completely overlook — the true cost of investing, with more than 20% believing they pay no fees at all.
In this episode of The Agent of Wealth Podcast, co-host John Williams, CFP®, breaks down the often-misunderstood world of investment fees. He explains the different ways fees show up, where to find them, and how to evaluate whether the value you’re receiving truly justifies the cost.
In this episode, you will learn:
- The three primary types of investment fees — expense ratios, advisory fees, and trading costs — and how each one works.
- Why expense ratios apply regardless of where your investments are held and how they can vary widely by fund type.
- How advisory fees differ based on the level of service, from investment management to comprehensive financial planning.
- Practical steps to identify what you’re actually paying, including how to review statements and ask the right questions.
- How to assess whether your fees align with the value you’re receiving, including expertise, time savings, peace of mind, and performance.
- Why understanding fees is essential to making confident, informed financial decisions.
- And more!
Tune in for a clear, honest conversation about investment fees.
Resources:
Schedule an Introductory Call | Bautis Financial: 8 Hillside Ave, Suite LL1 Montclair, New Jersey 07042 (862) 205-5000
Disclosure: The transcript below has been edited for clarity and content. It is not a direct transcription of the full episode, which can be listened to above.
Welcome back to The Agent of Wealth, this is your co-host John Williams, CFP®.
Today, we’re going to be diving into the topic of investment fees. There’s a lot of confusion around this topic, and there are many different ways that you could potentially be paying investment fees. So today, I want to give our listeners a clearer idea of what those different types of fees are, how to find them, and how to figure out what you’re actually paying — especially if you’re unclear about your investment fees.
Then, once you know those numbers, we’ll talk about how you might assess whether it makes sense to continue paying them and how to understand where the value connected to those fees is actually coming from.
We found a recent study from FINRA that says nearly 73% of investors didn’t know exactly how much they paid in investment-related fees. Even more surprising, 21% of investors believed they weren’t paying any fees at all.
In reality, you’re almost always paying something, which you’ll understand here in just a minute. When we start working with new clients — or even when we’re talking with current clients or just having conversations with investors — it becomes really clear that there’s a big gap between what people could be paying and what they think they’re paying.
I think it’s really important to say this upfront: there’s nothing inherently wrong with fees. Obviously, as an investor, if someone is managing your money, you expect them to get paid for what they’re doing. But understanding what you’re paying and weighing that against the value you feel you’re getting is incredibly important.
For me, it’s critical that our clients — both current and potential — understand what they’re paying and have the opportunity to clearly see and evaluate the value we’re bringing. Ultimately, they should feel confident that the value is worth it.
The Three Main Types of Investment Fees
Let’s start by breaking down the different types of investment fees. There are three main categories:
- Expense ratios
- Advisory fees
- Trading costs or commissions
Expense Ratios
Expense ratios are a fee that runs across all advisors and platforms. Whether you’re managing your investments yourself or working with an advisor, the expense ratio tied to an ETF or mutual fund is the same no matter where you go. That’s regardless of the custodian you’re using.
For example, if you own a Vanguard fund in an account held at Schwab, the expense ratio for that Vanguard fund will be the same regardless of where it’s held.
At the highest level, an expense ratio is a fee connected to the company managing that fund. Using Vanguard again as an example, the expense ratio helps them keep the lights on, pay employees, compensate fund managers, and ultimately run their business. Simply put, it’s how they make money.
Expense ratios can vary widely. They can range anywhere from about 0.05% up to 2%. The reason for that wide range depends on how much management goes into the fund and how many people are involved in managing it.
For example, if you have an ETF that tracks the S&P 500 — an index ETF — there isn’t much active management involved. The job is simply to make sure the ETF mirrors the S&P 500 as closely as possible. On a day-to-day basis, they’re ensuring that the holdings align with the index.
Contrast that with an actively managed fund. In that case, you might have several fund managers trying to outperform the S&P 500. They’re doing more research, making more decisions, and actively adjusting the portfolio. Because of that extra work, you’ll typically see a higher expense ratio.
That makes sense. If an ETF is simply tracking an index, there aren’t many decisions being made, and the expense ratio should be low.
That said, there’s nothing inherently wrong with paying a higher expense ratio for an actively managed ETF or mutual fund. The key question is whether the juice is worth the squeeze. You want to look at performance relative to the expense ratio. You don’t want to get overly fixated on fees if the performance justifies them.
As a fiduciary advisor, there are often many choices. For example, if we’re looking for technology exposure, there could be dozens of technology-focused funds or ETFs available. If Fund A and Fund B are doing essentially the same thing, all else being equal, we’re likely to choose the one with the lower expense ratio.
In short, the expense ratio is what fund managers charge to operate their business and generate a profit.
Related: What Is a Fiduciary?
Advisory Fees
The second type of fee is an advisory fee. We’re a fee-only advisory firm, and advisory fees can vary widely depending on how much work the advisor is doing and what services they’re providing.
The industry average is about 1% of assets under management. So if an advisor is managing $100,000 and charges 1% per year, you’re paying roughly $1,000 annually for their services.
I often think of this not just as an advisory fee, but as a combination of advisory and financial planning fees, because we do both. Everyone’s needs are different. Some people want to manage their own investments but need help with financial planning. In those cases, there are advisory fee structures geared specifically toward planning.
Most of our clients, however, are looking for both investment management and financial planning. In that case, the advisory fee covers all of our services. It really depends on the engagement.
Trading Costs and Commissions
Finally, there are trading costs or commissions. These depend on the advisor and the firm they work for. If an advisor receives commissions, they’re required to disclose how those commissions work.
Typically, commissions are tied to transactions. For example, if you purchase a $100,000 mutual fund, there might be a 5% commission built into that transaction. Commissions can be structured in different ways — front-loaded, back-loaded, or spread out over time.
I won’t go into all the technical details, but the key point is that commissions are tied to trades. Every time a trade occurs, a commission may be involved.
To make things more complicated, it’s possible to work with an advisor who charges both advisory fees and commissions. That’s why it’s so important to understand exactly what you’re paying.
Putting It All Together
To review: expense ratios apply no matter what. Whether you’re paying advisory fees or commissions, the expense ratio is still there and doesn’t change based on the advisor or institution. Advisory fees and commissions are essentially layered on top of expense ratios.
That’s why it’s important to understand not just what you’re paying, but also what your advisor is doing to minimize unnecessary costs while fulfilling their fiduciary responsibility.
How to Find Out What You’re Paying
If you’re working with an advisor, the easiest place to start is simply asking. If you’ve been working together for a while, it’s easy to forget the details. Just say, “Can you walk me through my fees and what they include?”
You can also check your statements. Advisory fees may be billed monthly or quarterly. For example, we bill quarterly, so you won’t see that fee on every monthly statement. Look for transaction or activity sections that show management or advisory fees.
Commissions will show up around the time of trades. If you bought a mutual fund years ago with a front-loaded commission, you might not see it on recent statements. In that case, ask the advisor who sold it to you how the commissions were structured.
Expense ratios are easy to find online. Just search the fund name, and you’ll typically see the expense ratio listed prominently.
Is the Fee Worth It?
Once you know what you’re paying, the next step is evaluating whether the value is there. Personally, I’m often happy to pay fees — even for things I could technically do myself. I use the example of mowing my lawn or changing my oil. I can do those things, but eventually you realize it’s not the best use of your time.
Working with an advisor isn’t just about performance. Performance matters, of course, but there’s also trust, time savings, and peace of mind. Many people value having someone with decades of experience managing these decisions for them.
I always tell new clients, “I don’t want you working with me unless you see the value in what you’re paying.” It’s my job to show that value — through investment management, tax planning, financial planning, and helping you focus on what matters most in your life.
Today, advisory relationships often go far beyond investment management. We think of it as being the CFO of your family’s finances — covering investments, taxes, estate planning, insurance, and more.
You might be paying 1% to an advisor who only manages investments, or you might be paying the same fee to an advisor who provides comprehensive financial planning. Understanding that difference is critical.
As you’re listening to this, I encourage you to evaluate your own situation. Ask your advisor to explain your fees and what you’re getting in return. Then decide whether the value aligns with what you’re paying.
If you ever want help reviewing your fees or understanding your statements, I’m happy to help. You can set up a free call with us.
Hopefully, this episode helped shed some light on what can be a confusing topic.
Thank you to everyone who tuned into today’s episode. Don’t forget to follow The Agent of Wealth on the platform you listen from and leave us a review of the show. We are currently accepting new clients, if you’d like to schedule a 1-on-1 consultation with our advisors, please do so below.
Bautis Financial LLC is a registered investment advisor. Information presented is for educational purposes only and does not intend to make an offer or solicitation for the sale or purchase of any specific securities, investments, or investment strategies. Investments involve risk and unless otherwise stated, are not guaranteed. Be sure to first consult with a qualified financial advisor and/or tax professional before implementing any strategy discussed herein. Past performance is not indicative of future performance.