Investing Fees Explained: Expense Ratios, Commissions and Advisory Fees

Every investment comes with costs, and as Investor.gov puts it, fees that seem small can have a major impact on your portfolio over time. Knowing the three common fee types tells you most of what you need.

What is an expense ratio?

Funds charge an expense ratio: the percentage of the fund's average net assets used each year to pay operating expenses, including management fees. You will find it in the fund's prospectus fee table. A 1% expense ratio means roughly $10 a year per $1,000 invested, taken from the fund's assets rather than billed to you directly.

What about commissions and advisory fees?

Brokers may charge commissions when you buy or sell, and many now charge none on standard stock and ETF trades. Investment advisers charge for their guidance, often as a percentage of the assets they manage for you. Investor.gov's advice is simple: ask how any professional gets paid, and how much.

How much do fees really matter?

Investor.gov's own illustration shows a hypothetical $100,000 portfolio growing at 4% annually over 20 years: worth about $208,000 with a 0.25% annual fee, about $198,000 at 0.50%, and about $179,000 at 1.00%. The numbers are hypothetical, but the direction is the point: higher fees leave you with less, year after year.

The short version

Know your expense ratios, ask about commissions, and ask any adviser how they are paid. Small percentage differences become large dollar differences over decades.

Frequently asked questions

Where do I find a fund's fees? In the fund's prospectus fee table, which lists the expense ratio and any sales charges.

Are low fees a guarantee of good returns? No. Fees are only one factor, and all investments can lose value. But costs are one of the few things you can control in advance.

Sources and further reading: Investor.gov, "Understanding Fees" (https://www.investor.gov/introduction-investing/getting-started/understanding-fees); Investor.gov, "Expense Ratio" (https://www.investor.gov/introduction-investing/investing-basics/glossary/expense-ratio).