A fee of 2% a year sounds tiny. On €10,000 it is €200 in the first year, less than many people spend on coffee. But a fee is not charged once. It is charged every year, on a growing balance, for as long as you stay invested. Over decades, it compounds against you in the same way growth compounds for you. This lesson shows how much that can be.
Before we start: what do you think?
€10,000 is invested for 25 years at an assumed 5% a year before fees. Fund A charges 0.1% a year, fund B charges 2%. Roughly how much less does fund B leave you at the end?
✗ Much too small: fund B already costs €190 more than fund A in the first year alone.
✗ That is 1.9% of €10,000 times 25 years, but fees are taken from a growing balance and the lost money also stops growing.
✓ Right: fund A grows to about €33,066 and fund B to about €20,938, a difference of about €12,129.
✗ Too much: fund A reaches only about €33,066, so a €20,000 gap would leave fund B with about €13,000, and it ends with about €20,938.
What fees you can pay
Investing has several kinds of costs. Not all of them appear on your statement as a clear line:
- Yearly fund fee. Called the or ongoing charge. It is taken from the fund's value every year, so you never see a bill. You only see a slightly lower return.
- Entry and exit fees. Some funds charge a percentage when you buy or sell.
- Account fees. Some banks and charge a monthly or yearly fee for holding your investments.
- Transaction costs. A commission per purchase, plus the : the small difference between the price you buy at and the price you could sell at.
- Currency conversion. If you pay in euros for something priced in dollars, a conversion fee may be added.
Fees differ widely between products. In the EU, investment products sold to ordinary investors must come with a short key information document that shows the costs. Read the cost section before you buy, not after.
Quick check
Why do many investors never notice their yearly fund fee?
How a fee compounds against you
The tool below uses a simple model. Your money gets an assumed yearly return, and the fee is subtracted from that return every year. With an assumed 5% return:
- a 0.1% fee leaves 4.9% a year;
- a 1% fee leaves 4%;
- a 2% fee leaves 3%.
The assumed 5% is not a forecast. Actual returns change every year and can be negative. But the fee is charged in bad years too. Returns are uncertain. Fees are certain.
The tool starts with €10,000, an assumed 5% return and 25 years. Here is the same calculation for three time spans:
| Years | 0.1% fee | 1% fee | 2% fee |
|---|---|---|---|
| 10 | about €16,134 | about €14,802 | about €13,439 |
| 25 | about €33,066 | about €26,658 | about €20,938 |
| 40 | about €67,767 | about €48,010 | about €32,620 |
After 10 years, the gap between 0.1% and 2% is about €2,695. After 25 years it is about €12,129. After 40 years it is about €35,147. The longer you invest, the more the fee matters, because it compounds just like growth.
Quick check
In the table, why does the gap between the 0.1% and 2% fees grow so much from 10 to 40 years?
What share of your growth goes to fees
Another way to see it: how much of the growth do you keep?
Worked example: €10,000 for 25 years at an assumed 5%
With no fee at all, €10,000 would grow to about €33,864. The growth is about €23,864.
| Yearly fee | Final value | Growth you keep | Growth lost to the fee |
|---|---|---|---|
| 0.1% | about €33,066 | about €23,066 | about 3% |
| 1% | about €26,658 | about €16,658 | about 30% |
| 2% | about €20,938 | about €10,938 | about 54% |
A 2% fee looks like a small slice of the money. But it takes 2 of the 5 percentage points of assumed return every year. Over 25 years that adds up to more than half of the growth.
The key idea: compare the fee with the return, not with the money. 2% of your balance can be 40% of a 5% return.
Quick check
Why should you compare a fee with the expected return rather than with your balance?
Does a higher fee buy anything?
Sometimes a higher fee pays for a service you want, such as advice or a product that is not available cheaply. That can be a fair choice. But a higher fee does not promise a higher return. A fund that charges 2% has to beat a 0.1% fund by 1.9 percentage points every year just to end up level. Long-running studies of active funds suggest that is hard to do for long. (See Index funds and ETFs.)
Before you pay a fee, ask three questions:
- What exactly is the yearly cost, in % and in euros?
- What do I get for it that a cheaper option does not give me?
- What other costs are there: entry, exit, account, currency?
This is education, not advice. Check your own situation, and the costs that apply in your country.
Key takeaways
- Fees are charged every year on a growing balance, so they compound against you.
- On €10,000 over 25 years at an assumed 5%, a 2% fee leaves about €12,129 less than a 0.1% fee.
- A 2% fee can take more than half of the growth over 25 years.
- Compare a fee with the return, not with the balance. Returns are uncertain, fees are certain.
- Look for all costs: yearly fee, entry and exit fees, account fees, transaction costs and currency conversion.
Try this
Find the yearly fee of every investment or pension product you have. Write each one in % and in euros per year. Then put your own numbers into the tool above. Note the difference between your fee and a 0.1% fee after 25 years.