Fees, explained properly

Fees are the only variable in investing that is knowable in advance. Returns are a guess; charges are published. That asymmetry is the reason they are worth an afternoon of attention.

The layers

Most people pay in more than one place, and only one of the charges is prominent.

• The fund charge (OCF, or expense ratio). Deducted inside the fund, daily, before the price you see. It never appears on a statement, you are never asked to approve it, and it is the largest charge for most people. A broad index tracker might be 0.05–0.25%; an actively managed fund is often 0.7–1.5%.
• The platform or account charge. What the broker takes for holding the account. Sometimes a percentage of your balance, sometimes a flat annual amount. The distinction matters more than it sounds — see below.
• Adviser fees, where an adviser is involved, typically an annual percentage on top.
• Transaction costs. Trading commissions, foreign exchange charges and bid–offer spreads. Small if you buy rarely; not small if you trade often.

Add the first three together before putting a number into any calculator. They all come off the same balance.

Percentage vs flat

A percentage charge grows with your pot. A flat charge does not. On a small balance a flat fee can be brutal — 100 a year on 2,000 is 5%. On a large balance it becomes trivial: the same 100 on 400,000 is 0.025%.

A percentage charge does the reverse. It stays invisible while the pot is small and becomes the largest line item in your investing life once it is not. This is worth revisiting as the balance grows, since the provider that was cheapest at the start often is not later.

Why the damage exceeds the headline number

This is the part that surprises people, so it is worth being concrete about the mechanism rather than just asserting the conclusion.

A 1% fee taken in year one is not a loss of 1%. It is the loss of that money plus everything it would have earned in the remaining twenty-nine years. At a 7% return, money removed thirty years early would have grown roughly eightfold. So each year's fee removes several times its face value from your eventual pot, and it does this every single year.

The result is that a difference of about 1 percentage point in annual charges typically costs somewhere around a quarter of the final pot over thirty years. Run your own numbers — the calculator states the result three ways, including how many months of your own contributions the difference is equivalent to.

What you get for the money

Higher charges are not automatically wasted. Advice can be genuinely valuable, particularly around tax, estate planning, and the considerably more useful service of stopping people selling everything during a crash. Some active managers have long records of beating their benchmark.

The point of the calculator is not that the answer is always "pay less". It is that the cost should be a decision you made with the number in front of you, rather than one that quietly happened. Whether a given charge is worth paying is a judgement about your circumstances — and this site does not make judgements about your circumstances.

Where to look

The fund charge is in the key information document or factsheet, labelled OCF, TER or expense ratio. The platform charge is in the provider's fee schedule, which is published but rarely linked from anywhere prominent. Both are usually several clicks below the marketing pages. Fifteen minutes finding them is probably the highest hourly rate available in personal finance.