How Investment Fees Erode Your Returns

Summary

Investment fees — expressed as the Ongoing Charges Figure (OCF) — are a percentage of your portfolio deducted each year. A seemingly small fee difference (e.g. 0.15% vs 1.50%) compounds dramatically over decades, costing tens or even hundreds of thousands of pounds in lost growth. The FCA’s landmark 2017 Asset Management Market Study found that both active and passive funds failed to outperform benchmarks after fees, and that there is no positive relationship between higher charges and better gross performance.

How it works

Every fund charges an annual fee, expressed as the OCF (Ongoing Charges Figure). This fee is deducted from your portfolio value continuously — you never see a line-item deduction; your fund simply grows slightly less than the market.

The key insight is compounding works against you too: fees don’t just reduce this year’s return — they reduce the base that next year’s return grows from. Over 30 years, this creates an exponential gap between a low-fee and high-fee portfolio.

Typical UK fund fees

Note: Platform fees (Vanguard 0.15%, AJ Bell 0.25%, HL 0.45%) are charged on top of fund OCFs.

The formula

The fee is subtracted from the gross annual return before converting to a monthly compounding rate. This means the fee reduces every month’s growth, not just an annual deduction.

Fee cost = Value with no fees − Value with fees. This represents the total growth lost to fees over the investment period.

Worked example

Inputs explained

• Initial investment — a lump sum (e.g. ISA transfer, inheritance, savings). Default: £20,000.
• Monthly contribution — a regular amount invested each month. Default: £500.
• Expected annual return — the gross return before fees. 7% is a common nominal assumption for global equities over the long term (FTSE All-World 20-year annualised return ~8-10% nominal).
• Investment horizon — how many years until you need the money. Longer horizons amplify fee drag.
• Fund A fee / Fund B fee — the annual OCF for each fund being compared.

Outputs explained

• Lost to higher fees — the headline difference in final value between the two scenarios.
• Final values (Fund A / Fund B) — what each portfolio is worth at the end.
• Fee drag % — the fee difference as a percentage of the low-fee portfolio. Above 15% is severe.
• Total fees paid — the cumulative growth lost to fees vs a zero-fee baseline.
• Extra monthly saving — how much more per month the high-fee investor would need to save to match the low-fee investor’s outcome.
• Verdict — minimal (under 5% drag), significant (5–15%), or severe (over 15%).

Assumptions & limitations

• Returns are assumed to be constant at the specified rate. Real markets are volatile — fees still compound the same way, but the exact amounts will differ.
• The fee is modelled as an annual OCF deducted continuously (via monthly compounding). In practice, some fees are deducted daily from the NAV.
• Platform fees are not modelled separately — users should add their platform fee to the fund OCF for a total cost comparison.
• Transaction costs (buy/sell spreads, stamp duty reserve tax on UK equities) are excluded. The FCA notes these can add 0.05%–0.50% on top of the OCF.
• The calculator assumes no tax — in practice, ISAs and pensions shelter investments from tax, making the gross-to-net comparison accurate for most UK investors.
• Inflation is not adjusted for. A 7% nominal return with 2% inflation gives ~5% real growth.

Verification