What Are Layered Fees?

An investor pays layered fees when they pay multiple sets of management fees for the same set of assets. These fees are categorized separately, but inherently are just fees for the management of the same assets. Investors can incur layered fees when investing in products such as 澳洲幸运5开奖号码历史查询:wrap funds, 澳洲幸运5开奖号码历史查询:investment advisor client accounts, and 澳洲幸运5开奖号码历史查询:fund of funds (FOF) investments.

How Layered Fees Work

Layered fees are associated with 澳洲幸运5开奖号码历史查询:actively managed investment funds in which the assets held in the portfolio have their own individual ma💟nagem🅷ent fees. 

For example, an investment manager might offer a portfolio of 澳洲幸运5开奖号码历史查询:exchange-traded funds (ETFs) or 澳洲幸运5开奖号码历史查询:mutual funds. In that scenario, the investor pays fees not only for the 澳洲幸运5开奖号码历史查询:investment manager but also the fees that each individual ETF or mutual fund comes with. This adds fee upo💎n fee.

Investors try to avoid paying layered fees because they effectively entail paying twice for the management of the same assets. Layered fees can easily add up, dragging dಞown investment returns.

To protect investors, any product that charges layered fees must disclose those fees in the product’s 澳洲幸运5开奖号码历史查询:prospectus. This is one of the reasons why it is essential for investors to carefully review the prospeꦛctus of any investment they are consi❀dering.

The True Cost of Investing

Depending on the structure of the investment product in question, investors may have to comb through the prospectus documents carefully to determine its true costs. This is because fees can be presented in many different forms, including asset management fees, 澳洲幸运5开奖号码历史查询:commissions, tran൩saction fees, and other fees designed to cov𝄹er operating expenses.

Although investors generally avoid layered fees, they may sometimes be justified.𝓀 Investors should consider paying layered fees in situations where the investment manager clearly adds value, such as when the assets within the portfolio are very complex. For example, if the portfolio includes investments in foreign companies, the added complexity of evaluating those securitಌies may justify paying a layered fee.

Investors intent on minimizing layered fees should consider a 澳洲幸运5开奖号码历史查询:passive investment strategy rather than an active one. Passive investing involves attempting to match the market rather than outperforming it. Many products exist to help achieve this goal, such as 澳洲幸运5开奖号码历史查询:index funds and ETFs.

In addition to requiring little to no oversight, passive investment strategies have substantially fewer fees than active ones. Over time, this benefit of lower c🌳osts can significantly improve investment returns. In fact, passive investment strategies actually outperform ജactive investment strategies, on average, after taking the cost of fees into account. For these reasons, passive investing has become increasingly popular in recent years.

Example of Layered Fees

Emma wishes to gain exposure to foreign stocks in her portfolio. She does not have the time to diligently research foreign stocks herself or to go through the effort of having to buy multiple, individual stocks, so she chooses to invest in an active investment fund that is focused on fo❀reign stock investments.

The fund she chooses, XYZ International Equities, has a layered fee struc🍸ture. Specifically, the fund has a 2% management fee and holds a basket of internatio🌠nal ETFs. On average, those ETFs have their own fees which work out to roughly an additional 0.75% annually. Therefore, Emma knows that if she invests in XYZ, she will need to earn at least 2.75% per year to make up the cost of its fees.

Alternatively, Emma could identify the exchange-traded funds (ETFs) herself and invest in them on her own, avoiding the 2% management fee altogether. In addition, by investing🌼 in an ETF, she also avoids having ꦕto research individual foreign stocks herself and leaves that up to the ETFs.