The Truth About Investment Fees: Why Ongoing Charges Matter More Than You Think.

The Hidden Cost of Investing: How Ongoing Portfolio Fees Eat Into Your Long-Term Gains

Investing is a lot like dieting—small choices today have a massive impact down the road. You wouldn’t sign up for a gym membership that secretly charged you every time you used the treadmill, so why let hidden fees quietly drain your investment returns?

If you’re evaluating the best mutual fund for your investments, understanding how much your portfolio truly costs you is crucial. One of the most overlooked yet significant expenses investors face is the ongoing fees associated with managing their portfolio. Research from Morningstar, along with insights from industry veterans like Jack Bogle, highlights that these costs aren’t just a footnote in your investment strategy, they are a central determinant of your long-term success.

What Are Expense Ratios and Ongoing Portfolio Fees?

Expense ratios represent the percentage of assets deducted annually to cover fund expenses. When you invest in a fund, your money isn’t just allocated to stocks or bonds; you’re also paying for the fund manager’s expertise, administrative costs, marketing, and more. These fees vary widely and can have a profound impact on your returns over time.

When assessing mutual funds or ETFs, you’ll often encounter the term Ongoing Charges Figure (OCF). This includes the Annual Management Charge (AMC)—the primary fee that fund managers collect for overseeing the portfolio. But that’s not where it ends. The OCF also encompasses additional expenses, such as fees for trustees, auditors, and other operational costs, often adding around 0.1% or more to the AMC.

Legally, fund managers must disclose the ongoing charge in their fund literature, typically found in the Key Investor Information Document (KIID). However, this figure doesn’t always tell the whole story. Other hidden costs, such as trading fees and bid-offer spreads, can further erode your returns.

The Initial Adviser Fee vs. Ongoing Fees: What Really Matters?

Many investors fixate on the initial adviser fee, the one-time charge paid for financial advice when setting up their portfolio. While this fee can seem substantial, it can often be recovered within months if the portfolio performs well. What’s far more damaging over time are the ongoing fees, which investors frequently overlook.

Unlike an initial fee, which is a one-off cost, ongoing fees continue to eat into your returns every single year, compounding their negative impact. Even a seemingly small difference in annual fees can lead to massive losses in the long run. This is why understanding and minimising ongoing fees should be the real focus when assessing investment costs.

Why Fees Matter More Than You Think

The compounding effect of fees is one of the most underestimated threats to your investment growth. A small difference in annual fees might seem trivial in the short term, but over decades, these costs compound, quietly reducing your wealth. For instance, if you invest ￡100,000 in a fund with a 1.5% annual fee, over 30 years, you could pay over ￡75,000 in fees alone—money that could have been compounding in your favour.

Morningstar’s research consistently demonstrates that lower-cost funds tend to outperform higher-cost ones over time. To test this, they grouped funds into five categories based on expense ratios, from cheapest to most expensive. The results were compelling:

• In UK equity funds, those in the lowest fee category had a success rate of 62%, while the most expensive funds had a success rate of just 20%.
• Higher-fee funds were more likely to be liquidated or merged due to poor performance, leaving investors with fewer options and often additional costs.
• This trend was consistent across different types of funds, including international equity and balanced funds.

Understanding the Real Cost of Your Portfolio

Beyond mutual funds, investors should also scrutinise the total cost of their entire portfolio, not just individual fund fees. Many investors unknowingly pay multiple layers of fees, including:

• Platform fees for using investment platforms or robo-advisers.
• Trading fees when funds or stocks are bought and sold.
• Financial adviser fees, which can range from 0.5% to 1.5% annually.
• Hidden transaction costs, which fund managers don’t always disclose clearly.

Adding up these costs, an investor might think they’re paying 1% in fees annually, but the actual cost could be closer to 2-3% when all expenses are considered. That might not sound like much, but over 20-30 years, it can mean hundreds of thousands in lost returns.

How to Minimise Fees and Maximise Your Returns

To avoid unnecessary portfolio costs, consider the following strategies:

1. Opt for Low-Cost Funds: Look for funds with expense ratios below 0.5%, ideally 0.2% or lower for ETFs and index funds.
2. Be Wary of Active Management Fees: While some actively managed funds perform well, most struggle to consistently beat the market after fees are deducted.
3. Avoid Overtrading: High turnover increases trading costs, which can silently erode your portfolio value.
4. Use Fee-Efficient Platforms: Some investment platforms charge lower fees than others—compare costs before committing.

Conclusion: Every Percentage Point Counts

Morningstar’s research reinforces a simple yet powerful investing truth: costs matter—a lot. The lower the fees, the greater your share of the returns. While expense ratios aren’t the only factor to consider, they are one of the most reliable indicators of long-term fund success.

Many investors focus on market performance and returns, but what truly determines wealth accumulation is how much of those returns you actually keep. By reducing your portfolio fees, you can ensure that more of your money is working for you rather than being siphoned off in hidden charges.

At the end of the day, investing should be about growing your wealth, not financing someone else’s yacht. So, next time you check your portfolio, ask yourself: am I paying too much for too little?

Written by Dion Angove, EU Regulated Financial Planner!

Email - [email protected]

Book your Free Discovery Session - https://sjb-global.com/dion-angove/