If you’re starting to invest or already on your investment journey, you’ve probably heard this advice before: keep your fees low. But what does that really mean? More importantly, how do you go about reducing investment fees while still working toward growing your money?

Fees might seem like a small detail, but they can have a big impact over time. Let's explore some simple strategies to help you reduce your investment fees and boost your returns.

Why Investment Fees Matter

Think of fees as a slow leak in your bicycle tire. At first, the leak seems minor, but over time, it can make the ride a lot harder. Investment fees work the same way. Even a seemingly small percentage, like 1% or 2%, can eat away at your returns over many years.

For example, imagine you’re investing $10,000, earning an average of 6% a year. With no fees, your investment could grow to $60,000 over 30 years. If you’re paying just 1% in fees annually, that growth drops to around $50,000. Over time, fees can cost you tens of thousands of dollars.

The takeaway? Every dollar that goes toward fees is a dollar that’s not working to help grow your wealth.

Step 1: Know What You’re Paying

The first step to lowering investment fees is knowing where they’re hiding. Fees can be easy to miss because they’re often baked into your investments or charged in ways that aren’t obvious. Here's where you might find them:

  • Expense Ratios for Mutual Funds and ETFs. These are ongoing fees that cover fund management and other costs. They’re expressed as a percentage of your investment (e.g., 0.50%).
  • Trading Fees and Commissions. Some platforms charge you each time you buy or sell an investment.
  • Account Fees. This includes annual maintenance fees, transfer fees, or inactivity fees charged by your brokerage.
  • Advisory Fees. If you use a financial advisor or robo-advisor, you may pay a percentage of your portfolio in fees, like 0.25% to 1% per year.

Reviewing your account statements and investment materials can help you identify these fees. If you’re unsure where to look, don’t hesitate to call your broker or advisor and ask them to explain what you’re paying.

Step 2: Choose Low-Cost Investments

One of the easiest ways to reduce fees is by choosing low-cost investments, like index funds and exchange-traded funds (ETFs).

  • Index Funds and ETFs. These funds track the performance of specific market indexes, like the S&P 500. Because they’re passively managed (not actively bought and sold by a professional), they typically have much lower expense ratios than actively managed funds.
  • Sample Savings. Suppose you invest $10,000 and choose an index fund with a 0.10% expense ratio instead of an actively managed mutual fund with a 1% expense ratio. Over 30 years, that difference could save you thousands of dollars in fees.

Expense ratios can vary widely, so always compare the costs of funds before committing. Look for funds with expense ratios below 0.20% when possible.

Step 3: Take Advantage of No-Commission Platforms

Trading fees once cost investors $5 to $10 per trade, but that’s changed. Many online brokerages now offer commission-free trading for stocks and ETFs. Switching to one of these platforms can cut out those charges entirely, so your money stays invested rather than spent on transaction fees.

If you’re not ready to change brokers, at least look for ways to minimize trades. Instead of frequently buying or selling, consider a buy-and-hold strategy where you hold investments for the long term, which can also help reduce trading fees.

Step 4: Avoid Overtrading

Speaking of trading, it’s important not to underestimate how frequent buying and selling can drain your returns. Overtrading not only incurs more fees but can also tempt you to "time the market," which is notoriously hard to do successfully.

Instead, focus on creating a diversified portfolio that aligns with your long-term financial goals. Rebalancing your portfolio once or twice a year should be enough to keep things on track without racking up unnecessary costs.

Step 5: Opt for a Robo-Advisor

Robo-advisors have gained popularity for good reason. These digital platforms manage your investments using algorithms and charge much lower fees compared to traditional financial advisors.

  • Typical Fees. While traditional advisors may charge around 1%, robo-advisors typically cost 0.25% to 0.50% of your portfolio annually.
  • Extra Perks. Many robo-advisors automatically invest in low-cost index funds, rebalance your portfolio for you, and offer tools to help you reach your goals.

If you prefer some human guidance, look for hybrid robo-advisors that include access to financial planners for additional support.

Step 6: Consolidate Your Accounts

Do you have old 401(k)s, scattered brokerage accounts, or investments spread across multiple platforms? Consolidating them into one can help streamline costs.

Many brokerage accounts charge account maintenance or inactivity fees if they don’t meet certain activity levels. By rolling everything into one account, you’ll not only reduce fees but also make it easier to track your investments.

Just be mindful of potential transfer fees when moving accounts, and check if your new account offers fee waivers for rollovers.

Step 7: Watch Out for Hidden Costs

Some fees aren’t immediately obvious but can still impact your returns. For instance, funds with high turnover rates (how frequently investments are bought and sold) can lead to extra costs due to trading fees within the fund. Tax inefficiencies, where your investments generate more taxable income than necessary, can also chip away at returns.

To avoid these costs, look for tax-efficient funds or tax-managed investment accounts. Also, using retirement accounts like IRAs or 401(k)s can provide tax advantages that keep more of your money invested and less going toward taxes each year.

Step 8: Maximize Employer-Sponsored Plans

If your job offers a 401(k) or similar plan, use it to your advantage. Many employers negotiate lower fees for their employees’ plans compared to what you’d get on your own.

Even better, if your employer offers matching contributions (free money!), make sure to contribute at least enough to get the full match. A match can significantly boost your returns without costing you extra.

Step 9: Stay Educated and Ask Questions

Reducing fees is an ongoing process, so always stay informed about the costs you’re paying. Don’t be afraid to ask questions or negotiate fees, especially when working with financial professionals.

If you’re considering working with an advisor, ask them about their fee structure upfront. Are they charging an hourly rate, a flat fee, or a percentage of your assets? And while you’re at it, ask them how they plan to help you reduce overall costs.

Small Changes, Big Impact

Lowering your investment fees doesn’t require a finance degree or hours of research. By following these steps, even small changes can lead to significant improvements in your long-term returns.