The point of investing is to make money. But everything has a price—even making money. In the course of investing, you may encounter all sorts of fees. The problem is that these fees are often hidden and difficult to understand. So let’s take a closer look at all the types of fees you see in your investment journey.
Commissions
Commissions essentially are transaction costs paid to the broker or brokerage firm. Although considered a thing of the past, many brokerage firms still charge commissions when you buy a stock, bond, mutual fund, exchange-traded fund (ETF), or other security. These can be expressed as a percentage of the transaction or a flat dollar fee. However, many major firms today charge no commissions, especially when it comes to trading stocks and ETFs.
Some full-service brokerages do charge commissions as they offer more complex and comprehensive services.
In addition, some financial advisers may get commissions from fund companies for recommending their products. This can create a conflict of interest. The adviser may be pressured to recommend a commission-based product over one that may better suit your goals because they’d earn a kickback.
So if you’re working with a financial adviser, be sure to make sure they’re fiduciaires. A fiduciary is legally required to work solely in your best interest.
Expense Ratios
When you invest in a mutual fund or ETF, you may encounter an expense ratio. These are costs paid directly to the fund company to cover management and operating costs. It is expressed as a percentage of total total assets invested in the fund and calculated annually. While you won’t directly pay the expense ratio, it will affect your returns because it comes directly out of fund assets.
So if a mutual fund returns 8 percent and has an expense ratio of 1 percent, it’s really returning 7 percent.
Another way to look at it is like this. If you have $10,000 invested in a mutual fund with a 1 percent expense ratio, you’ll lose $100 annually to cover the fund’s expenses.
But while 1 percent could seem minuscule, it’s actually quite high. The average asset-weighted expense ratio for mutual funds and ETFs is 0.34 percent, according to research by Morningstar.
But you can find some mutual funds and ETFs with expense ratios as low as zero percent.
Still, an expense ratio can have some moving parts. Cooked into some expense ratios are what’s known as 12b-1 fees. These are costs associated with the marketing of the fund and are legally capped at 1 percent.
But total expense ratios of 1 percent and higher are typically more common among actively managed mutual funds and ETFs. While passive funds aim to mimic the returns of a given stock market index like the S&P 500, actively managed funds seek to beat these benchmarks—thereby justifying the higher fees.
However, this isn’t always the case. A study by Wharton Executive Education found that, “In many cases, active investment managers are not able to pick enough winners to justify their high fees.”
Loads
Loads are sales commissions typically paid to brokers when you purchase or sell shares of a mutual fund. There are two types of loads: front-end and back-end.
A front-end load is a transaction cost charged when you purchase shares of a mutual fund. So if you invest $1,000 in a mutual fund with a front-end load of 5 percent, you’ll pay $50, and your initial investment would be reduced to $950.
Back-end loads are typically charged when you sell shares of a mutual fund within a specific time frame. Throughout that time frame, the load may be reduced. For example, it can start at 5 percent for shares held for less than a year and be reduced to 4 percent for shares held between one and two years. It can eventually reach zero percent after a certain time.
Also note that back-end loads are also called contingent deferred sales charges (CDSC).
Portfolio Management Fees
If you work with a financial adviser or robo-adviser, you may be charged a portfolio management fee. These are often referred to as assets under management (AUM) fees. These fees are calculated as a percentage of your portfolio balance and charged annually. So if you have $500,000 in your portfolio and your adviser charges a 1 percent AUM fee, your annual fee is $5,000.
The Bottom Line
Like everything in life, investing comes with a cost. But it doesn’t have to keep you from reaching your goals. If you understand the fees of the investing world, you’re better equipped to make better investing decisions and make the most of your returns. So look out for fees such as commissions, loads, expense ratios, and portfolio management fees.
The Epoch Times copyright © 2025. The views and opinions expressed are those of the authors. They are meant for general informational purposes only and should not be construed or interpreted as a recommendation or solicitation. The Epoch Times does not provide investment, tax, legal, financial planning, estate planning, or any other personal finance advice. The Epoch Times holds no liability for the accuracy or timeliness of the information provided.
