Money 101 · Module 5 of 6: Investing · Lesson 4 of 4 · 4 min read
Why fees matter more than they look
Investment fees are usually shown as a small yearly percentage, so they are easy to ignore. Because they are taken every year, they compound against you in the same way returns compound for you.
How a yearly fee works
A fund or service that charges 1.5% a year takes 1.5% of your money each year, whether the investment went up or down. On €10,000 that is about €150 in the first year, and more in later years as the balance grows.
The fee also removes the future growth that money would have earned. That second part is easy to miss, and over long periods it can become the larger part.
A worked example over 30 years
Take €10,000 invested for 30 years with no more money added. Assume the investments return 6% a year before fees. This 6% is only an assumption for the arithmetic, not a forecast.
To keep it simple, treat the fee as coming straight off the return, so a 1.5% fee turns 6% into 4.5%.
No fee: €10,000 × 1.06^30 ≈ €57,435
1.5% yearly fee: €10,000 × 1.045^30 ≈ €37,453
Difference: about €19,982
What the example shows
In this example, the 1.5% fee costs about €19,982 over 30 years, which is almost twice the €10,000 you started with. The fee looked like a small slice of the return each year, but it ended up taking about 42% of the growth (€19,982 out of €47,435).
With a 0.2% fee in the same example, the return becomes 5.8% and the result is about €54,271. That is about €3,164 less than with no fee, instead of about €19,982 less.
Fees are one of the few parts of investing you know in advance. Returns are uncertain, but a cost you avoid is money that stays invested.
Where to find the costs
In the EU, packaged investment products sold to retail investors come with a Key Information Document (KID). It has a section titled "What are the costs?" that shows the total costs both in euros and as a percentage, so you can see their effect over time. More on the KID in what is an ETF?
Also check costs that are not part of the fund itself:
Fees per trade when you buy or sell
Account or custody fees charged by the platform
Currency conversion costs when you buy in another currency
Advice or management fees if someone manages the money for you
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Key takeaways
A yearly fee is taken every year and also removes the growth that money would have earned.
In the 30-year example, a 1.5% fee cost about €19,982 on a €10,000 start.
Check the "What are the costs?" section of the KID before you buy.
Try it
The calculator is prefilled with €10,000 for 30 years at 4.5% – the assumed 6% return minus the 1.5% fee. Change the rate to 6 to see the no-fee result, or 5.8 for a 0.2% fee.
4 questions. Pick an answer to see why it's right or wrong.
In the example, what is the after-fee return when the assumed return is 6% and the fee is 1.5%?
Right. 6% − 1.5% = 4.5%, using the simple method in the lesson.
Not quite. A fee reduces the return; it is not added to it.
Not quite. That mixes up 1.5% with 0.15%.
Show the answer
4.5% – To keep it simple, treat the fee as coming straight off the return, so a 1.5% fee turns 6% into 4.5%.
Why does a yearly fee cost more than the fee amounts themselves?
Not quite. The lesson's example uses one yearly fee.
Not quite. The fee is taken whether the investment went up or down.
Right. Money taken as fees can no longer compound for you.
Show the answer
Because the fee also removes the future growth that money would have earned – The fee also removes the future growth that money would have earned.
In the 30-year example, roughly how much did the 1.5% fee cost?
Right. €57,435 − €37,453 ≈ €19,982.
Not quite. That is 30 × €150, which ignores growth and the lost compounding.
Not quite. The cost was almost twice that.
Show the answer
About €19,982 – In this example, the 1.5% fee costs about €19,982 over 30 years, which is almost twice the €10,000 you started with.
Which KID section shows the costs of a product?
Not quite. That section describes the product's nature and features.
Not quite. A KID must include a section on costs.
Right. This section shows total costs in euros and as a percentage.
Show the answer
"What are the costs?" – It has a section titled "What are the costs?" that shows the total costs both in euros and as a percentage, so you can see their effect over time.
Education, not advice. I'm not a financial adviser and I don't know your situation. These tools show the maths behind common rules of thumb; check important decisions with a qualified professional. Full disclaimer.
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