Taking your first steps into the world of investing is an exciting moment, but it’s crucial to understand how investment fees can impact your journey from the very beginning.
We get it; the thought of charges eating into your potential profits can be disheartening, especially when you’re just starting out and trying to make your money grow.
These costs, which can sometimes feel hidden, have a surprisingly large impact over time, silently diminishing your returns without you even noticing.
Consequently, understanding the true cost of investing is just as important as choosing the right assets in the first place.
In this article, we’ll demystify the various brokerage fees and other charges you might encounter, empowering you to keep more of your hard-earned money working for you.
Demystifying the Fees: What Are You Paying For?
In simple terms, an investment fee is a charge you pay for services related to buying, selling, and managing your investments. Think of it like a service charge at a restaurant. You’re paying for the chef’s expertise, the waiter’s service, and the restaurant’s atmosphere.
Similarly, in the financial world, these fees cover the costs of executing your trades, the technology of the trading platform, the safekeeping of your assets, and sometimes, professional advice.
Whilst it’s tempting to seek out the absolute lowest fees possible, it’s also important to understand what you’re getting for your money.
A reliable platform, fast execution, and good customer service are all part of the package. The goal isn’t necessarily to pay zero fees, but to understand them completely so you can ensure the value you receive is worth the price you pay.
Ultimately, these fees are a standard part of the investing landscape, but being aware of them is the first step towards controlling them.
The Main Types of Brokerage Fees You’ll Encounter
When you open an account with a broker, you’ll come across several types of charges. These are often referred to as brokerage fees, and they can vary significantly from one provider to another. Let’s break down the most common ones you’ll see in the market.
Account Maintenance Fees
Some brokers charge a flat fee, either monthly or annually, simply for keeping your account open. This is becoming less common with the rise of modern online brokers, many of whom have eliminated these charges to attract new customers. However, traditional banks or full-service brokers might still have them.
Always check the broker’s fee schedule—often called the Preis- und Leistungsverzeichnis—before you sign up.
Trading Fees (Commissions)
This is one of the most well-known costs. A trading fee, or commission, is what you pay each time you buy or sell an investment, like a stock or an ETF. These can be structured in a few different ways:
- Flat Fee: You pay a fixed amount per trade, for example, €1, regardless of the size of the trade. This is common with many of the newer, low-cost brokers.
- Percentage Fee: You pay a percentage of the total trade value. For instance, 0.25% of a €1,000 trade would be a €2.50 fee.
- Combination: Some brokers use a combination, like a percentage fee with a minimum charge.
Many platforms now advertise “commission-free” trading, which is fantastic. However, be aware that they still need to make money, which often comes from other, less obvious sources we’ll discuss later.
Custody Fees (Depotgebühren)
A very common fee in Germany, the custody fee, or Depotgebühr, is a charge for the safekeeping of your securities in your account (your depot).
It’s typically calculated as a small percentage of the total value of your portfolio and charged annually. For example, a 0.1% custody fee on a €25,000 portfolio would cost you €25 per year.
Just like account fees, many online brokers have started to waive these fees to stay competitive.
Inactivity Fees
As the name suggests, this is a penalty for not being active enough. If you don’t make any trades for a specific period (e.g., six months or a year), your broker might charge you an inactivity fee.
This is something for “buy and hold” investors to watch out for. If your strategy is to invest and then not touch your portfolio for a long time, make sure you choose a broker that doesn’t penalise you for it.
Beyond Brokerage Fees: The Hidden Cost of Investing
The cost of investing goes beyond the explicit fees your broker charges. Some of the most significant costs are actually intrinsic to the investment products themselves or the mechanics of the market. These are often harder to spot, but can have a massive effect on your long-term results.
Expense Ratios (For ETFs and Mutual Funds)
If you invest in Exchange-Traded Funds (ETFs) or mutual funds, this is the most important fee to understand.
The Total Expense Ratio (TER) is an annual fee charged by the fund provider to cover their operating costs—things like the fund manager’s salary, administrative tasks, and marketing.
You don’t see this fee deducted directly from your account. Instead, it’s taken from the fund’s assets, which reduces its overall return.
- Example: Imagine you invest €10,000 in an ETF with a TER of 0.2%. This means you’re paying €20 per year to the fund provider. If you invested in an active mutual fund with a TER of 1.5%, that cost jumps to €150 per year. It might not sound like much, but as we’ll see, it adds up significantly over decades.
The Bid-Ask Spread
This is a truly hidden cost. For any asset, there are two prices at any given moment: the ‘bid’ price (the highest price a buyer is willing to pay) and the ‘ask’ price (the lowest price a seller is willing to accept). The ‘ask’ is always slightly higher than the ‘bid’, and the difference between them is the ‘spread’.
When you buy, you pay the higher ‘ask’ price, and when you sell, you receive the lower ‘bid’ price.
The spread is the small profit the market maker or broker makes on the transaction. For popular, heavily-traded stocks and ETFs, this spread is usually tiny. For less common assets, it can be larger, representing a bigger indirect cost to you.
Currency Conversion Fees
If you’re in Germany and want to buy shares in an American company like Apple or Tesla, your euros must be converted into US dollars.
Brokers often charge a fee for this currency exchange, either as a fixed percentage or by building it into the exchange rate they offer you. This fee applies again when you sell the stock and convert the dollars back into euros.
How Investment Fees Erode Your Returns: A Real-World Example
To truly understand the destructive power of high fees, let’s consider a scenario with two friends, Anna and Ben.
- Both start with €10,000 to invest.
- Both earn an average annual return of 7% before fees.
- Anna chooses an actively managed fund with high total fees, amounting to 1.5% per year.
- Ben chooses a low-cost ETF portfolio with total fees of just 0.4% per year.
Their net annual returns are therefore 5.5% for Anna (7% – 1.5%) and 6.6% for Ben (7% – 0.4%). Let’s see how this small difference plays out over time.
| Years | Anna’s Portfolio Value | Ben’s Portfolio Value | The Difference (Ben’s Gain) |
|---|---|---|---|
| 10 | €17,081 | €18,947 | €1,866 |
| 20 | €29,177 | €35,900 | €6,723 |
| 30 | €49,839 | €67,995 | €18,156 |
After 30 years, Ben has over €18,000 more than Anna, simply by choosing a lower-cost investment. He didn’t pick better stocks or time the market. He just paid less in fees. This is the magic of compounding working in his favour, and against Anna.
Strategies to Minimise Your Investment Fees
The good news is that you have a great deal of control over how much you pay in fees. By being a savvy investor, you can keep more of your money.
- Watch Out for Foreign Stock Fees: Be mindful of currency conversion fees and any other charges associated with buying international stocks. If you plan to invest heavily outside the Eurozone, compare brokers on these specific costs.
- Choose Low-Cost Brokers: This is your first line of defence. Compare brokers in Germany and look for those with no account maintenance or custody fees, and low (or zero) trading commissions.
- Favour Low-Cost Products: As our example showed, the expense ratio is a huge factor. Passively managed index funds and ETFs almost always have significantly lower expense ratios than actively managed mutual funds.
- Read the Fine Print: Before you commit to any broker or fund, find their official fee document and read it. Understand every single cost, and don’t let them surprise you later.
- Limit Your Trading Frequency: Remember that every trade can incur costs, from commissions to spreads. A long-term, “buy and hold” strategy is often far more cost-effective than trying to trade frequently.
Keeping your costs low is a crucial first step. But what about the final step? Knowing the right moment to sell is an entirely different skill.
Your Final Takeaway: Knowledge is Profit
Ultimately, understanding investment fees is not just about saving a few euros; it’s about protecting your long-term growth.
While brokerage fees and expense ratios are an unavoidable part of the landscape, their impact is entirely within your control.
By actively choosing low-cost brokers and favouring simple products like low-cost ETFs, you ensure that more of your money stays invested and works for you.
Consequently, you pave the way for a significantly wealthier future, turning knowledge about the cost of investing into real, tangible returns.
Frequently Asked Questions
Are investment fees tax-deductible in Germany?
Is “commission-free” trading really free?
How can I find the expense ratio of an ETF?
Do I pay fees even if my investments lose value?
