Ongoing fees

Ongoing fees are recurring charges associated with maintaining an investment or account, deducted regularly from an investor's assets or portfolio value. These fees fall under the broader category of Investment management fees and are a critical consideration for investors as they directly impact net returns over time. Unlike one-time transaction fees, ongoing fees persist as long as the investment or account is held.¹⁷

History and Origin

The concept of ongoing fees in investment management evolved with the growth of professionally managed investment portfolios. As collective investment vehicles like mutual funds gained prominence, mechanisms were needed to compensate fund managers, administrators, and service providers for their continuous work. Early investment funds often had less transparent fee structures, but regulatory developments over decades have pushed for greater clarity. The Investment Company Act of 1940 in the United States, for instance, established a framework for regulating mutual funds, including aspects of their fee structures. Subsequently, regulators like the U.S. Securities and Exchange Commission (SEC) have emphasized the importance of disclosing how fees and expenses affect an investor's portfolio, highlighting that these charges can significantly erode returns over the long term.¹⁶

Key Takeaways

• Ongoing fees are recurring charges incurred for holding and managing investments.
• They are typically expressed as a percentage of assets under management (AUM) or a flat rate.
• Common examples include management fees, administrative fees, and 12b-1 fees (for mutual funds).
• Even small ongoing fees can have a substantial cumulative impact on long-term investment performance due to the effect of compounding.
• Transparency in fee disclosure is mandated by regulatory bodies to help investors understand and compare costs.

Formula and Calculation

Ongoing fees are typically calculated as a percentage of the assets under management (AUM). The most common measure that encapsulates many ongoing fees for funds is the expense ratio.

The annual dollar amount of ongoing fees can be calculated using the following formula:

Where:

• Expense Ratio: The total percentage of fund assets used to cover operating expenses, including management fees, administrative fees, and other operating expenses.
• Average Assets Under Management (AUM): The average monetary value of the assets managed by the fund or financial advisor over a given period, typically a year.

This calculation provides the total cost incurred by the investor due to these recurring charges for a specific period.¹⁵

Interpreting the Ongoing Fees

When interpreting ongoing fees, investors should consider them in the context of the services provided and the potential impact on their investment growth. A lower ongoing fee is generally advantageous, especially for long-term investments, as it allows a greater portion of the return on investment to remain with the investor. For instance, an exchange-traded fund (ETF) tracking a broad market index might have a very low expense ratio, reflecting its passive management style. In contrast, an actively managed fund seeking to outperform the market may justify higher ongoing fees due to the intensive research and trading involved. However, higher fees do not guarantee superior performance. Investors should review disclosures such as the prospectus fee table to understand the total annual fund operating expenses, which include various ongoing charges.¹⁴,¹³

Hypothetical Example

Consider an investor, Sarah, who has an investment portfolio worth $100,000 managed by an advisory service. This service charges an advisory fee of 0.75% annually, calculated based on the assets under management. This 0.75% represents the ongoing fee.

To calculate the annual dollar amount Sarah pays in ongoing fees:

This means Sarah pays $750 each year for the management of her portfolio. If her portfolio grows, the dollar amount of the fee will also increase, even if the percentage rate remains constant. Over many years, this $750 annual deduction, combined with the lost potential earnings on that amount, can significantly impact her total wealth accumulation.

Practical Applications

Ongoing fees appear in various financial products and services, influencing an investor's overall profitability. In mutual funds and exchange-traded funds (ETFs), ongoing fees are typically captured within the fund's expense ratio, which covers management fees, administrative costs, and other operational expenses.¹²,¹¹ These fees are continuously deducted from the fund's assets. Similarly, investment advisors managing brokerage accounts or providing wealth management services often charge ongoing advisory fees, frequently structured as a percentage of assets under management. These recurring costs are fundamental to the operation and maintenance of investment products and services, covering everything from professional management to regulatory compliance.¹⁰ The Investment Company Institute (ICI) reported a long-term downward trend in average equity and bond mutual fund expense ratios from 1996 to 2024, reflecting investor demand for lower-cost options.⁹

Limitations and Criticisms

A primary criticism of ongoing fees, particularly when they are high, is their potential to significantly diminish long-term investment returns. Even seemingly small percentages can compound over decades, leading to a substantial reduction in an investor's final portfolio value.⁸ For example, a 1% annual fee on a portfolio can reduce its value by tens of thousands of dollars over 20 years, even with a modest return.⁷ This impact is exacerbated by the fact that ongoing fees are deducted regardless of investment performance; whether the market goes up or down, the fees are still charged.⁶

Another limitation is the potential lack of transparency or understanding by some investors regarding the full scope of these costs. While regulatory bodies like the SEC and FINRA require disclosure of fees, the complexity of various fee structures can still be challenging for a non-expert to fully grasp.⁵,⁴ Moreover, high ongoing fees can incentivize financial professionals to recommend products that are more profitable for them rather than necessarily being in the client's best interest, creating a potential conflict of interest. A study using FINRA Foundation data indicated that investors with higher objectively measured investing knowledge reported paying lower fees, while those with higher self-assessed knowledge tended to report paying higher fees, suggesting a gap in actual understanding versus perceived understanding of costs.³

Ongoing Fees vs. Upfront Fees

The distinction between ongoing fees and upfront fees lies in their timing and nature of deduction.

Ongoing fees are persistent costs associated with the continuous operation and management of an investment. In contrast, upfront fees are charged at the beginning of an investment or service engagement. For instance, a mutual fund might charge a "front-end load" as an upfront fee when shares are purchased, while simultaneously levying an annual expense ratio as an ongoing fee.²,¹ Both types of fees reduce investor returns, but their cumulative impact differs significantly over the long term.

FAQs

What types of investments typically have ongoing fees?

Many types of investments and investment accounts have ongoing fees, including mutual funds, exchange-traded funds (ETFs), managed accounts, and annuities. These fees cover the continuous management, administration, and operational costs associated with these financial products.

How do ongoing fees impact my investment returns?

Ongoing fees directly reduce your investment returns. Since they are typically calculated as a percentage of your assets, the dollar amount of these fees can grow as your portfolio grows. Over long periods, even small percentage differences in expense ratio can lead to a substantial difference in the final value of your investment portfolios due to the power of compounding.

Are ongoing fees negotiable?

For some investment services, such as those provided by a financial advisor for a managed account, ongoing fees might be negotiable, particularly for larger account balances. However, for pooled investment vehicles like mutual funds and ETFs, the stated expense ratio is generally fixed for all investors in a particular share class.