Money is difficult to acquire but easy to spend. This is perhaps more true now than ever before – it’s just so easy to spend money. With just a fingerprint or a click, you can buy almost anything from the comfort of your sofa. Businesses invest huge amounts of time and energy into making the purchasing process as smooth as possible, encouraging us to spend without thinking about the long-term consequences.
But not all spending is obvious. Some of the most costly expenses are the ones we barely notice at all. One of the most overlooked examples is investment fees — the charges investment providers apply to manage your money.
These fees may seem small, but they can have a surprisingly large impact on your long-term returns. A charge of 1% per year might not sound significant. However, the compounding effect over time can dramatically reduce the growth of your investments. Many investors underestimate how much investment fees quietly erode their portfolios.
In this article, I’ll explore the real impact of investment fees and why keeping them as low as possible is one of the most important steps you can take to maximise your long-term investment returns.
Money is hard to come by – treat it with respect
Every pound that you acquire should be treated with respect – even small amounts of money can have a surprisingly large impact on your life, if spent in the right way. Money can buy you the food, goods and services you need to survive, or it can be wasted extravagantly on excess.
You worked hard to earn it – money isn’t given away and it certainly doesn’t grow on trees. It’s earned, or made through successful investing. With this in mind, we ought to stack the odds as greatly as possible in our favour. This means taking the correct investment approach – which for me is a globally diversified Exchange-Traded Fund (ETF) like VWRL. I’ve discussed this approach in more detail in my guide to making money in the stock market.
However, my preferred investing approach is not the focus of this blog. Here, we’re more interested in the investing fees fund providers charge. The impact of investment fees on your money is greater than most people realise.
A lot of people have major wealth tied up in pensions: in the UK, there’s around £3 trillion invested in pension schemes, while in the US there’s around £39 trillion. That’s a lot of money (the entire global GDP in 2023 was £106 trillion). More worryingly, research by Hargreaves Lansdown found that only 36% of people know their pensions are invested in the stock market(!) Even fewer people know precisely which funds their pensions are invested in.
Investment fees eat into your gains
This is very worrying, because, as we are about to see, investing fees play a major role in your ability to build long-term wealth. High management fees are the nemesis of the private investor. A typical fund manager might charge 1-1.5% of your portfolio per year as a fee! This is outrageous and could potentially cost you hundreds of thousands of pounds in the long term. On an annual basis, the costs may not seem like much, but when you consider that the negative impact of fees on your portfolio compounds over time (just like the positive impact of investment gains will compound over many years), the costs quickly skyrocket.
The actual amount of money a fund will charge you depends on how it is managed – is it actively managed (where the fund manager actively buys and sells stocks or other funds to try and beat the market average return), or is it passively managed, where a fund simply ‘tracks’ a number of companies by owning and holding a small fraction of each of them? Actively managed funds tend to be more expensive as they require more work by the manager, but they do provide a good foothold into investing for complete beginners.
Active vs passive funds: why fees are different
If you don’t feel confident enough to manage your money, but want to get a taste for investing, then sure, an actively managed fund, or robo-advisor (like Nutmeg), can be a temporary solution. However, it’s unlikely they’ll be able to beat the market anyway – according to this report by Portfolio Advisor, only 14.2% of actively managed funds beat passive strategies over the past 10 years (since 2015).
So, the lesson here is to ignore actively managed funds with their higher fees – they generally underperform and will cost you more money. But even within passive management strategies, the investment fees can have a significant impact on the returns that end up in your pocket.
The real impact of investment fees over time
Consider how £10,000 invested into a global stock market index fund (with an average annual return of 8.5%), will perform under scenarios with different fees:
The above (rather elegant) chart shows how compounding really works (in this case to negatively impact on portfolio performance). Although a 1 or 1.5% fee may not seem like much, over time it can cost you a significant proportion of your portfolio. This is also how funds make so much money and why there are so many multi-millionaire or even billionaire hedge fund managers.
Hopefully this makes it clear that you need to keep your investment fees as low as possible in order to maximise long-term gains. To do this, you need to understand that most investment fund platforms are either publicly owned (like Robinhood), or privately owned (like Fidelity). In both cases, the owners will expect a return on their investment, which comes from the profits the company makes from operating its funds (i.e. what’s left after the operating costs are accounted for).
Why low-cost platforms like Vanguard matter
However, one investment platform is different, and that’s Vanguard. The interests of Vanguard are aligned with the owners of the funds (you and me), because Vanguard’s funds are the owners of Vanguard. (The company operates under a unique structure where it is owned by its funds, which in turn are owned by the investors.)
In other words, if you invest in a Vanguard fund, you become an “owner” in the company. You don’t own shares in the company, but the net result is that Vanguard does not need to skim off a profit for its shareholders. This means that the fees are lower (the lowest on the market in fact), and you keep more of the returns. So, a win for the investor.
I recommend using Vanguard if you want to keep your investing fees as low as possible.
It’s also worth checking that your investments (including pensions) are not unfairly supporting businesses or sectors that might be socially or environmentally harmful, or are not aligned with your personal ethical beliefs. Socially Responsible Investing (SRI), as it is known, considers these factors, and there are now a growing number of funds which stick to strict environmental, social and governance (ESG) guidelines. These are a fantastic way to invest in an environmentally and ethically responsible manner.
Conclusion
Investment fees may seem small at first glance, but their long-term impact can be enormous. Because fees are charged every year, they compound in the same way that investment returns do – except they work against you instead of for you. Even a seemingly modest fee of 1% can significantly reduce the value of your portfolio over several decades.
The good news is that keeping investment fees low is one of the easiest ways to improve your long-term investing results. By choosing low-cost index funds, understanding the fees you are paying, and regularly reviewing your investments, you can ensure that more of your money remains invested and working for you.
Successful investing is not about clever tricks or constantly trying to beat the market. Often, it simply comes down to controlling the factors you can influence. Keeping your investment fees low is one of the most powerful — and most overlooked — ways to build wealth over time.
FAQ
Investment fees are charges paid to financial institutions or fund managers for managing your investments. These can include fund management fees, platform or account fees, trading costs, and sometimes advisory charges. While they may seem small individually, they are typically charged annually and quietly reduce your overall returns over time.
Investment fees matter because they reduce your returns every single year, not just once. Over long periods, this creates a compounding drag on your portfolio. Even a 1% difference in fees can result in tens or hundreds of thousands of pounds lost, making fees one of the most important factors in long-term investing success.
A high investment fee is generally anything above 1% per year. Many actively managed funds fall into this range, often charging 1–1.5% annually. In contrast, low-cost index funds typically charge under 0.25%. Over decades, this difference can have a huge impact, making higher-fee funds much less attractive for long-term investors.
You can reduce investment fees by choosing low-cost, passively managed index funds instead of expensive active funds. Minimising trading activity helps avoid unnecessary transaction costs. It’s also worth comparing platforms, as account fees vary. Keeping your setup simple and low-cost ensures more of your money stays invested and compounding over time.
Yes, investment fees apply to pensions just as they do to other investments. Because pensions are typically invested over several decades, even small annual fees can significantly reduce your final retirement pot. Choosing low-cost funds within your pension and reviewing fees regularly can make a substantial difference to your long-term outcomes.
Where do you invest your money? Do you think the fees are too high or are fair value?
Curious for more? You might like the following:
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- Make hay while the rain pours
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