What it means
Layered fees arise when a product contains other products. An adviser might charge an annual fee for managing a portfolio, which is built from funds, and each fund then charges its own management fee.
If one of those funds invests in further funds, a third layer appears, with every layer taking a slice before the investor sees any return. The danger is that each fee looks small when viewed alone.
A charge of 1.0%, another of 0.5% and a third of 0.75% each feel modest, but together they total 2.25% a year. Because fees are charged every year on the whole balance, whether the investment performs or not, they quietly eat into the return.
Layering is not confined to investment products. Payment chains, marketplaces and software platforms often involve fees at several stages, such as a card network, a processor, a bank and a platform, each taking a percentage.
A business accepting card payments can find that the total cost is more than the single rate quoted by the first provider. In practice, finance teams reveal layers by asking for the total cost of ownership rather than the headline fee.
In investments this means looking at the ongoing charges figure of each fund as well as the adviser fee and any platform fee. In payments it means reconciling what a customer paid with what actually lands in the bank account.
The nuance is that layering is not always bad value. A specialist fund of funds, for example, may offer access to managers the investor could not reach alone, and the extra layer may be worth its cost.
The test is whether the total fee is justified by the service and return, and whether a cheaper route could do the same job.
In practice
Real-world examples.
Example
A retired teacher pays a financial adviser 1.0% a year and is placed into a fund of funds charging 0.60%. The underlying funds charge a further 0.40%. Her annual statement shows only the adviser fee separately, so she is surprised to learn the total is 2.0%.
Example
An online florist accepts card payments through a platform. The card network, the payment processor and the platform each add a percentage and a fixed fee per sale. On a $100 order the florist receives only about $96.50 after all the layers are taken.
Example
A start-up founder uses a venture fund that invests through a smaller specialist fund. Both charge management fees and a share of profits. The founder's finance adviser asks both managers for a combined fee schedule so the true cost to investors can be seen.
Formula
Calculation
Total fee = fee layer 1 + fee layer 2 + fee layer 3 (each as a % of the assets it is charged on)
An investor holds $500,000. The adviser charges 1.0%, which is $500,000 x 0.010 = $5,000. The fund of funds charges 0.50%, which is $500,000 x 0.0050 = $2,500. The underlying funds charge 0.75%, which is $500,000 x 0.0075 = $3,750. The total is $5,000 + $2,500 + $3,750 = $11,250 a year, or 2.25% of the portfolio. If the portfolio earns a gross 6%, which is $30,000, the investor keeps $30,000 - $11,250 = $18,750 before tax, so fees take 37.5% of the gross return.Case study
Seen in the real world.
Oakridge Family Office is an illustrative, fictional firm whose client, a small business owner, held $800,000 across three products arranged by different advisers. A review by the finance manager found a platform fee of 0.30%, an adviser fee of 0.90% and fund charges averaging 0.80%.
The combined layers cost 2.00% a year, or $16,000, and the same exposure was available through lower-cost index funds for about 0.70% in total, which would be $5,600. The client moved the money and saved $10,400 in the first year. The illustrative lesson is that asking for the full stack of fees, rather than the headline charge from each provider, is the first step to controlling cost.
Watch out
Common mistakes.
- Adding up only the fee shown on the adviser's invoice and overlooking the fund-level charges that are taken from the investment itself.
- Assuming a small percentage fee is harmless, when a charge of 2% a year compounds into a very large sum over decades.
- Assuming layered fees are always bad, when a layer can be good value if the service it pays for is genuinely worth more than it costs.
Questions
People also ask.
How can I find all the layers on an investment?
Ask for a full cost disclosure, check the ongoing charges figure of each fund and request a statement of all platform, adviser and transaction costs.
Do layered fees apply to businesses as well as individuals?
Yes, companies face layered fees in payment processing, marketplaces, banking and outsourced services, where several parties each take a share.
How do layered fees affect long-term returns?
Because fees come off every year, even a 1% difference in total cost can reduce a portfolio by a large amount over 20 or 30 years, since lost growth compounds.
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