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Recently we have been looking at investment fees and questioning what people really know about them.
September 26, 2021
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Recently we have been looking at investment fees and questioning what people really know about them. We’ve had quite a few follow up questions so we thought we would try and clarify a little more.
Some people were asking how much they were saving by not using an IFA and going to an Investment Manager instead. To be honest, not a lot. They offer extra services on top of investments that you might need to pay for but otherwise, it’s pretty much the same thing. If you want financial advice, then you pay for it. If you just want to invest, then you pay investment manager fees.
The bigger firms like to call the whole thing, ‘Wealth Management’, as it’s even more vague and all encompassing. A Wealth Management service has most things under one roof which means they can charge for pretty much everything you touch.
Having said that, most saving and investing products have some fees and charges associated with them no matter how you choose to do it. Managing investments involves time and money and you must expect to pay reasonable charges.
But fees erode your investment earnings. Of course, your hope is that a fund that charges higher fees is doing so because it’s confident that it will perform above average, but this is not always the case. Popular funds, may not be popular because they make the most money, but because they are good at selling the fund to investors.
Try and make sure you know how much you are paying and satisfy yourself that it is good value for the service and investment performance you’re getting or expect.
As an example of how a small amount can impact your investment, if you were to put £50,000 with an investment manager, and then add £1,000 per month, over 5 years you would pay £7,672 in costs (if the all-in fee was 1.5% per annum). This amount will always be more than you expect.
Many funds must now provide a key investor information document to investors which displays an ongoing charge figure, but as we’ve pointed out before, they often don’t include all the actual costs that you end up paying.
Investment Management charges
Investment management charges are deducted from the value of your investment in order to cover the costs of researching and selecting investments for the fund.
They form part of the ongoing charge. As an example, Rathbones charge 1.2% for this.
These are charges for administration and other services such as maintaining a record of your investment and calculating the value of the fund each day.
They form part of the ongoing charge.
Platform Fee
If you have any investment anywhere, you will most likely have some on an investment platform. Most platforms charge an ongoing admin fee, which might be a percentage based on your total investment, although some will charge a flat fee on a monthly or annual basis.
What other costs might you be paying that won’t be included in the headline figure?
Entry and Exit Fees
St James’ Place have famously large fees if you ever actually want to take your money out, and they aren’t alone. Some have entry fees as well just to accept your business; they charge you to get in, and charge you to get out.
Fund trading cost and stamp duty
These are the costs of buying and selling the shares and other investments that make up the fund.
They are equivalent to the costs you would incur if you decided to buy shares for yourself. Therefore, they are not included in the ongoing charges figure, which is the additional cost that results from using a fund to invest.
They will be lower for tracker funds since they will usually change their investments less frequently. You are unlikely to ever know what these costs are.
Performance Fees
Some types of fund (for example, targeted absolute return funds) charge these on top of the regular annual charge.
They are typically 20% of any performance in excess of a target level, the idea being to align the interests of the fund manager and the investor.
Check to see if there’s a performance fee, what would trigger it and how much it would cost you.
Fee for Advice
Since the start of 2013, if you invest with the help of a financial adviser, you pay a separate charge for this advice.
The amount of the charge is decided between you and the adviser, but there are different ways to pay.
For example, you could pay a lump sum direct to the adviser at the time you receive advice.
Alternatively, you might arrange to spread the payment for the initial advice or to pay a regular sum to the adviser for continuing help, in which case the payment might be collected as a deduction from the value of your investment.
The cost of advice varies but the average is around £150 an hour, or 0.5% a year of the value of your fund.
As we said at the beginning, not everyone requires this service.
As you can see, there are so many charges that need to be accounted for and a lot of the time, investors don’t know which ones they’re paying for. At The Portfolio Platform, the fees are very simple.
The one thing you do pay, is a subscription to the strategies you autotrade and this is a fixed amount each month. That is it, you get to keep all the profits.
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