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More Than One-Fifth of Investors Don’t Believe They Pay Fees — How These Can Add Up to Thousands

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If you’re an investor, one of the first things you should know is that you’re probably paying some kind of a fee, whether you realize it or not — and many don’t. More than one in five investors (21%) don’t think they pay any kind of fee for investing, according to a study from the FINRA Foundation. Another 17% admit to not knowing how much they pay.

This can get expensive if you don’t pay careful attention, with the potential to cost you tens of thousands of dollars over time.

The FINRA Foundation study — based on a survey of 27,118 U.S. adults and a separate survey of 2,824 U.S. investors — found that just more than four in 10 investors believe they pay account service fees and fees or commissions on trades. This means that nearly 60% either don’t think they pay these fees or are unaware of them.

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The reason investors might not be aware of fees is because of the way they are charged. As CNBC reported, investment fees are often charged as a percentage of investors’ assets, deducted annually. This is known as an expense ratio. Since fees are automatically deducted — meaning you don’t have to transfer money or write a check to pay them — they are often invisible. Or, as GOBankingRates recently reported, they’re buried in disclosures that could be difficult to decipher even if you knew to look for them.

But just because you don’t see them doesn’t mean they aren’t there. Investors paid an average of 0.40% for mutual and exchange-traded funds in 2021, according to data from Morningstar. Based on that data, the average investor with $10,000 would have had $40 withdrawn from their accounts in 2021. An investor with $100,000 would have had $400 withdrawn.

Those might seem like insignificant amounts considering the wealth involved, but fees with even small variations can rapidly add up over time because of compounding. As the Vanguard Group noted, you don’t only lose the fees you pay — you also lose the growth that money might have had well into the future.

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CNBC pointed to a Securities and Exchange Commission example that demonstrates the long-term impact of fees. The example assumes a $100,000 initial investment earning 4% a year for 20 years. An investor who pays a 0.25% annual fee would have $208,000 after two decades. In contrast, an investor paying 1% a year would have $179,000 – nearly $30,000 less.

Another thing to keep an eye on are IRA investments, which typically carry higher fees than 401(k) plans. This can get expensive if you roll over your 401(k) plan into an IRA for the tax advantages. Based only on rollovers conducted in 2018, investors would lose $45.5 billion in aggregate savings to fees over 25 years, according to an analysis by The Pew Charitable Trusts.

The good news is, not all financial firms charge fees based on expense ratios or percentages of investments. Some charge flat fees that are easier to track and plan for. In some cases you might only pay a one-time, upfront commission to buy stocks or bonds rather than an annual fee. Some investment funds charge no fees at all as a way of cross-selling customers other products that do carry fees.

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Meanwhile, fees for the average fund investor have fallen by half since 2001, to 0.40% from 0.87%. CNBC noted. For that, you can thank the rise of low-cost index funds that are passively managed.

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