Fee

DEFINITION of 'Fee'

The price charged for a service. Fees are applied in a variety of ways such as costs, charges, commissions, and penalties. Fees are most commonly found in heavily transactional services, and are paid in lieu of a wage or salary.

BREAKING DOWN 'Fee'

Individuals and businesses pay fees for a wide variety of reasons. An individual may pay a financial advisor a fee for helping choose and manage investments, and a family may pay a fee to a real estate broker when selling a home. A business may pay a fee to an accountant to help manage its books, and to a security company to make sure that the building is protected after work hours. Governments may charge fees for obtaining a business license or an individual passport. Investment institutions may charge a quarterly maintenance for accounts, and banks may charge overdraft fees when cardholders overdraw their accounts.

Fees are most often associated with transactional relationships, specifically with regards to professionals providing services. In some cases, a fee is charged when an individual hires a business to do a specific task, such as cleaning a house or filing taxes. This type of fee is often the most transparent and transactional, as it represents payment for the sole reason a fee-charging business was hired. Examples of transactional fees include mortgage fees and fees for wiring money.

Fees can also be charged in situations in which a customer requests additional services. These à la carte fees are commonly found in transactions related to travel. For example, a travel package may include the option of having ground transportation waiting for the customer upon arrival at a port of call. One of the more recognizable examples involves baggage on flights, as airlines often allow passengers to bring one carry on item for free but charge for any bags that are checked.

Fees charged by banks are less likely to be transactional in the sense that the account holder has not requested a service. In some cases, as when an account is overdrawn or a credit card payment is made late, a fee is charged as a penalty. In other cases, such as when a bank charges a monthly fee to checking account holders, the fee has little to do with the cost of maintaining the accounts. Regulations targeting the activities of banks has reduced or eliminated traditional sources of revenue, prompting these organizations to find other sources.

Investors who trade stocks, mutual funds, and options face a variety of fees. Equity trades often carry a per trade fee known as a trade commission, while options trades include both a per trade fee and a per contract fee. Fees paid for margin trading vary according to the outstanding margin balance, with a lower fee rate levied on higher balances. An investor looking to put some money into mutual funds may be faced with costs like the Management Expense Ratio (MER) and fees associated with load funds.