What are 'Layered Fees'

Layered fees are multiple fees an investor pays for the management of the same group of assets. Wrap funds, variable annuities, registered investment advisor client accounts and some mutual funds charge layered fees.

Breaking Down 'Layered Fees'

Layered fees usually come in the form of an annual portfolio-management fee coupled with fees for individual investments within the portfolio. Firms typically assess annual management fees as a percentage of total assets in your portfolio. Underlying investments in the portfolio, such as individual funds, charge commissions, transaction fees and fees to cover operating expenses.

Investors try to avoid paying layered fees because, by definition, they are paying twice for the management of the same assets. Layered fees can easily add up to a significant loss in net value of the investment.

Any investment product that charges layered fees must disclose them in the prospectus. Layered fees are just one of many reasons investors should always read the prospectus of any investment they are considering. Investors may have to comb through statements, reading past the annual management fee to operating expenses and transaction fees to determine the total costs associated with the investment product.

While layered fees are generally undesirable, investors should consider paying them in situations where the primary manager adds value, typically when the complexity of the portfolio requires one. For example, if the portfolio includes investments in foreign companies, the inherent complexity may be beyond the ability of the investor to manage directly and, thus, warrant paying a layered fee.

How to Avoid Layered Fees

Investors intent on minimizing layered fees should consider a passive investment strategy rather than an active one. Passive investing involves building a portfolio to mirror a market index. It requires relatively little research and a minimum of buying and selling, which cuts down on fees of all types. Active investing involves employing research and analysis and frequent trading to beat average market returns, incurring all the associated fees. The passive investor prefers the guarantee of lower fees to the tantalizing possibility of beating the market.

The argument behind an investment strategy that prioritizes reducing layered fees is a simple one. Beating average market returns is at best merely a possibility, whereas fees are a certainty. The argument gains strength when you consider that actively managed funds do not, on average, outperform their passively managed counterparts. Doubtful of an individual fund manager’s ability to outperform the market consistently, converts to the passive approach have resigned themselves to earning average market returns and have turned their attention to reducing the cost of investing.

  1. Service Shares

    Service shares are shares of a mutual fund that charge an extra ...
  2. Fee Structure

    A fee structure describes how an entity is to be compensated ...
  3. Bank Fees

    Bank fees are nominal fees for a variety of account set-up and ...
  4. Total Annual Fund Operating Expenses

    Total annual fund operating expenses are a fund's costs, such ...
  5. Costs And Expenses

    Costs and expenses are the expenses associated with running a ...
  6. Buffer Layer

    The buffer layer is the difference between the primary limit ...
Related Articles
  1. Investing

    Understanding Investment Fees Is Critical to Success

    Awareness of the different layers of investment fees can help you, as an investor, reduce the fees you're paying and increase your investments.
  2. Investing

    Are Fees Depleting Your Retirement Savings?  

    Each retirement account will have a fee associated with it. The key is to lower these fees as much as possible to maximize your return.
  3. Tech

    Are Financial Advisor Fees Too High?

    Fees charged by financial advisors run the gamut. Are you getting a fair deal or paying too much?
  4. Investing

    3 Investment Fees That Are Negotiable

    Investment fees are a necessary evil but that doesn't mean they have to be overly costly. There are ways to negotiate some of the expenses down.
  5. Financial Advisor

    5 Signs Fund Fees Are Hammering Your Investments

    The worst long-term killer of investment gains isn’t the market; it’s fees, especially for retirement accounts. How do you know if you're paying too much?
  6. Retirement

    How a 1% Annual Fee Can Ruin Your Nest Egg

    What kind of impact does an annual 1% fee have on your portfolio? The answer may surprise you.
  7. Financial Advisor

    How to Talk Fees with Clients

    Talking about fees with clients is not always a fun discussion. Here's the best way to go about it.
  8. Financial Advisor

    How to Know if Your 401(k) Plan Fees Are Too High

    Finding out how much you are paying for your 401(k) plan takes some research, but you should know exactly what you are getting for your money.
  9. Investing

    Investors: Your Fees Are Probably Too High

    The lower your fees, the higher your returns. Here's how to find out if you're paying too much for your investments.
  1. What kinds of fees are involved in futures trading?

    Learn what the various costs are that are charged by brokerage firms and trading exchanges to individual futures trading ... Read Answer >>
Trading Center