Fees can be a hidden nightmare, lurking in all corners of the investment landscape. When I put my hardearned money into an investment, my goal is to maximize the return and minimize the fees that eat away at those returns. Many don't know (or realize) all the hidden fees you're slapped with, whether it's in more transparent public markets or in opaque, previously private markets. We’ll dive into the fees we've uncovered in each of the startup equity investing platforms and strategies you can take to reduce them.
You should more typically expect to pay a management fee for the administrative costs than a percentage on each transaction. As an example, a $100,000 portfolio paying 1% in fees annually over 20 years would equate to you shelling out $30,000, whereas reducing those fees to 0.5% would result in $10,000. Now that we’ve done the math, it's clear that ignoring fees can cause the demise of your investing journey.
It's not just average investors that need to factor this analysis into their strategy. It affects professional investors as well. Fees are viewed as the most important factor when making fund commitments, Pitchbook's annual institutional investor survey finds.
Public Market Fees
Factors like who you choose for a trading platform or broker are usually the leading driver for fees paid. Brokers have been finding ways to drop upfront fees and profit from new hidden areas. Personal Capital charges 0.89%, WealthSimple charges 0.25%, and M1 charges 0 but makes interest in a few different forms. In an effort to compete for your wallet, Fidelity and other larger players have dropped their upfront fee as M1 and Robinhood have.
Fees are Under Pressure
Increasing competition and choice in the market are making platforms ever more competitive. Not only were fees ‘viewed as the most important decision when making a fund commitment, they're also the area with the worst alignment with general partners, according to a 2018 Pitchbook survey. And with funding portals improving and evolving, it’s no mystery that the state of fees is coming into question.
Comparing Brokers and Platforms
No doubt broker fees can add up. With each broker offering different rates, services, and support. It’s important to weigh the pros and cons of each. Brian Belley at Crowdwise helps break down the difference between a broker-dealer and a funding portal.
Funding Portals Improving Economics of Venture Finance - Syndicates -
Keeping up with Changing Fees
The latest offerings from platforms and changes in fee structures are constantly fluctuating as these companies compete for your business. Percentage-wise, a larger investment results in a lower fee. So, reducing the number of trades and increasing the amount in the transaction being invested, is a sound strategy. Wefunder makes it advantageous to invest larger amounts. As an example of a recent change they're offering a new policy with ‘0% carried interest for $25k+ investments’.
Develop a Passive Portfolio with Funds
Regardless of which startup platform you invest through, actively managed funds will always demand a higher fee than passive funds like an index tracker. So pour yourself a hot cup of coffee and settle in to browse around various funds to find a percentage fee you’re comfortable paying.
One issue with employing a fund manager is incentive alignment - are the people managing your money seeking the best return for you or themselves? Fortunately, only 9.8% are seeing ‘poor alignment’ according to the Pitchbook survey. However, there is still room for ‘alignment improvement’ which we are seeing investing portals help to chip away at.
The Angel Capital Association helps to break down how to leverage AngelList Syndicates, so make the most of this resource. For startup investing, many platforms are offering transparency about each fee entrepreneurs and investors must pay which we built a table to help showcase. Platforms such as AngelList are offering back office services to fund managers and angels such as their syndicate platform, whereby AngelList takes 5%.
Take Note of ‘Hidden Fees’
Some brokers will slap you with a fee for inactivity or simply for using the platform on a yearly basis. Sneaky huh? Knowing these rates can save you from a world of unnecessary expenses.
So Can I Avoid Fees?
The short answer is no. We’ve shared strategies to reduce fees, but unfortunately, they’ll always be in place to allow the portals, brokers, platforms, etc. to operate their businesses making markets. So my advice to friends, and those that reach out interested in this market, is to educate yourself, understand where the fees may be hiding and their impact to navigate the investment landscape and maximize your returns.