Investment Fees Explained: Complete Guide to Investing for Beginners - The Humble Penny (2023)

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Investment Fees Explained: Complete Guide to Investing for Beginners

You might have heard the saying that you need to spend money to make money.

However, when it comes to investing (whether in your ISA or in your Pension), what you pay to invest your money has a huge impact on what you have left in your pocket today and even more so in the future.

Today we want to give you a complete guide to investing fees using practical examples.

By the end of this post, you’ll learn:

  • How high fees stop your money from growing,
  • What the different types of investment fees are,
  • How to compare fees when investing, etc.

Let’s dive straight in!

Table of Contents

Investment Fees Explained: The Cost of Investing Your Money

Let's now walk through why you should pay close attention to investment fees:

1: Why Does How Much You Pay In Fees Matter?

On the face of it, investment fees just look like a small percentage and don’t appear to matter.

However, over time, investment fees compound alongside your investment returns.

You not only lose the fee itself, but you also lose all the future growth that the fee might have generated if it was invested.

To illustrate this to you, let us use a practical example:

Imagine that you had £100,000 invested and it was generating a 6% average return (excluding inflation).

Imagine that amount was invested over 25 years.

Let’s now look at 2 scenarios.

Scenario 1:You invest £100,000 over 25 years with 6% returns and zero fees.

The result is that you’ll end up with around £430,000, with around £330,000 of that being your returns on top of the £100,000 invested:

Investment Fees Explained: Complete Guide to Investing for Beginners - The Humble Penny (1)

Recommended: How to invest in stocks for beginners: step-by-step

Scenario 2: You actually paid 2% fees (not zero) when you invested £100,000 over 25 years generating 6% returns on average.

If you did that, you’ll find that rather than earning £330,000 returns, you’ll earn £160,000 and lose £170,000.

That £170,000 loss represents almost 40% (39.5%) of your total portfolio!

In other words, you paid 2% every year to wipe off 40% of your final portfolio amount.

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Here are those 2 scenarios side by side:

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Pretty staggering isn't it?

2: What Are The Different Types Of Investment Fees?

The fee you pay depends on the type of investments that you make.

When you invest in funds in the UK, you typically get a Key Investor Information Document (KIID).

In that document, you’ll find what’s known as the Ongoing Charge Figure (OCF).

The OCF includes the Annual Management Charge (AMC) and other ongoing expenses of running a fund.

The OCF is similar to another number, the Total Expense Ratio (TER), which some funds publish where permitted.

However, the OCF does not include things like a Performance Fee as this will vary depending on how well a fund performs.

The OCF is quoted as a single annual percentage figure and is an accurate indication of a fund’s charges and their effect on a fund’s performance.

Here are the main fees that make up the annual OCF (Ongoing Charge Figure):

I: Investment Management Fee

This fee is deducted from your investment in order to cover the cost of managing the fund e.g. researching and selecting investments for the fund, etc.

This fee forms a part of the OCF figure.

II: Admin Fee

This is deducted for the administrative tasks of your fund. E.g. calculating the value of your fund daily and keeping a record of your investment.

This fee forms a part of the OCF figure.

III: Platform Fee

This is charged because fund platforms offer you an online service that allows you to review your whole portfolio at any time.

This could be via an app or website and could include a number of interactive tools.

This is what you pay for with the Platform Fee.

Some providers charge it as either an annual percentage of your total investment or a flat fee on a monthly or annual basis.

This fee is not part of the OCF figure.

IV: Dealing Fee and Stamp Duty

These are the trading costs of buying and selling shares for the fund itself.

They are similar to costs you’d incur if you bought stocks and shares for yourself.

These fees are usually lower for tracker funds as they don’t change their investments as often.

This fee is not part of the OCF figure.

V: Performance Fees

Some funds (typically ones that Target Absolute Return Funds), charge these on top of the OCF.

These fees are typically 20% of performance above the target for the investment manager.

This is charged to better align the interests of the investment manager and the investor.

So watch out for these in any funds you invest in to see if they exist and what triggers them.

VI: Entry and Exit Fees

If you buy or sell OEICS (Index Funds) or Unit Trusts from an Investment Company, you may have to pay entry or exit charges.

Note that some providers do not charge these entry and exit fees.

This fee is not part of the OCF figure.

VII: Adviser Fee

If you invest money with the help of a Financial Adviser, you pay a separate fee for that advice.

The amount you pay is decided between you and the financial adviser.

You can either pay a lump sum or you can spread your payments.

The fees you pay could be per hour or around 0.5 – 2% of the value of your fund.

This fee is not part of the OCF figure.

Recommended: Super Simple Investing Course for beginners

Summary of Investment Fees

Here is a summary of everything above in a simple and digestible way.

The total cost of investing your money is made up of 3 broad fees:

  • Fund management fee
  • Platform fee
  • Adviser fee

Here it is again with more details:

Total Cost of Investing =

Fund Management Fees [OCF + Transaction Costs (e.g. Dealing fees and taxes) + One-Off Costs]


Platform Fee (or Account Fee)


Adviser Fee (if you get Financial Advice)

To keep things simple, some investment platforms charge you one fee only.

A good example of that is PensionBee, which I used to combine my old pensions for free:

They charge between 0.5% and 0.95%depending on the plan you choose.

The fee then gets halved on the portion of your savings over £100,000.

Another provider that I use that also simplifies fees and makes them transparent is Vanguard:

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They are known for very low fees.

I really like that they tell you the category of fees and also show you the total costs of each fund you invest in.

3: What Are Typical Charges For Different Types of Investments?

The typical total cost for investing in funds will differ depending on what you invest in.

Here are some examples depending on the type of investment:

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4: How Should You Compare Investment Fees?

The best way to compare the charges across different funds is to use the Ongoing Charges Figure (OCF).

This has become the standard.

But remember that the OCF does not take into account trading costs like dealing fees or a performance fee (if one exists).


To conclude, it's important to remember that all investments have costs.

Themoney you lose in high fees compounds and keeps rising exponentially over time.

Finally, the performance of investments with high costs suffers over time compared to investments with lower costs.

Related resources on investing money smartly:

  • Super Simple Investing Course – Gain investing confidence in 12 days
  • How to Start Investing In Stocks: Step-by-Step For Complete Beginners
  • Best Vanguard Funds: Index Funds and ETFs for Financial Independence

Frequently Asked Questions About Investment Fees

Here are some frequently asked questions about investment fees:

Should you pay fees for investing?

Yes, you should pay fees for investing because investment management is a service and costs money.

Your goal should be to pay a reasonable fee taking into account the service offering and performance of the funds available.

What are typical investment fees?

If you invest in tracker funds such as index funds and ETFs, you expect to pay between 0.1% and 0.85%.

Next, if you invest in actively managed funds, you'd typically pay between 0.7% and 1.5%, although there are funds that charge 2% or more.

If you invest in investment trusts, you'd typically pay between 0.8% and 1.8%.

How are investment management fees calculated?

They are calculated by multiplying your annual investment fee (usually a percentage) with the amount you have invested.

e.g. if your fee is 0.5% and you have £10,000 invested, then your annual fee would be £50.

What is a fair investment management fee?

Anything around 0.5% is considered fair and reasonable.

Even fees of up to 1% are considered reasonable, although the lower, the better for your portfolio over time.

How can I invest without paying a fee?

  • Invest in stocks and ETFs from brokerages that offer zero commissions,
  • Buy commission-free ETFs from online brokerages,
  • Invest in funds directly from fund companies at no extra cost.

Is it worth paying a financial advisor 1%?

No. If you have a complex financial situation, it might be worth your while speaking with a financial adviser.

However, you can do that for a fixed fee rather than paying 1% of your portfolio.

For most people, a financial advisor is unnecessary.

You can learn to invest your money yourself and adopt a simple passive investing strategy by investing in index funds and ETFs.

Watch our video on Investment Fees Explained:

Guys, we’d love to hear from you in the comments:

Do you typically compare fees when you make investments in funds? What one action step will you take from reading this post?

As always, in all things, be thankful and seek joy!

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