Most saving and investing routes have some fees and charges associated with them, but this article focuses on investment products. While some fees are made clear up front, be alert to the fact that others may be hidden.
How fees stop your money growing
Managing investments involves time and money and you must expect to pay reasonable charges.
But fees erode your investment earnings. To see how much look at the returns John and Jo get in the table below.
|Yearly return before fees
|Yearly operating fees
|Value in 20 years
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 there is no real evidence that any fund or fund manager can consistently deliver superior performance.
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.
Typical annual charges for different investment types
This table provides an indication of the typical annual costs for different investment products, based on ongoing charges (similar to a previous measure called the TER) and excluding any entry and exit costs and charge for financial advice (see below).
The yearly return is based on a fund that has invested in the market and so has incurred dealing costs.
||Typical yearly cost
|Actively managed funds
||0.75% - 1.25%
||0.25 - 0.85%
||0.8% - 1.8%
What makes up the costs shown in the table?
This depends on the type of investment.
Costs are made up of some or all of the following – always ask before you buy.
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.
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.
A ‘fund platform’ is an online service that administers your investments, typically lets you review your whole portfolio at any time and might offer a range of interactive tools to help you explore your investment options (a fund supermarket is an example of a fund platform).
The platform makes a charge for these services, in the region of 0.25% a year.
Up until April 2014 this charge was usually collected as part of the ongoing charges and passed on to the platform provider.
For new investments from April 2014, you pay this charge separately, direct to the platform provider.
What other costs might you have to pay
Entry and exit fees and costs
If you buy or sell OEICS and unit trusts direct from an investment company, you might have to pay entry or exit charges.
It might be cheaper to buy through a broker (especially a discount broker), taking into account brokerage fees, so it is worth comparing the costs before you buy.
You invest in investment trusts by buying their shares, which are quoted on the stock market, so you need to allow for the dealing charges you’ll have to pay to the stockbroker both when you buy and when you sell.
There is also a spread between the buying and selling prices which is, in effect, another charge.
Fund trading costs 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.
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 might be around, say, £150 an hour, or 0.5% a year of the value of your fund.
How to compare costs
It can be worth paying higher fees if you get a better service or performance. But you should remember that past performance is not a reliable indicator of future performance. And higher returns are normally available only with higher risk investments, where the risk of losing your money is also greater.
The ongoing charges figure has become the standard way to compare the cost of different funds.
They might be up to 1.25% (or more) on an actively managed funds, compared with under 0.5% for a tracker fund.
So, on an investment worth £1,000, you could pay more than £12.50 a year on the actively managed fund or under £5 on the index fund.
You can use the ongoing charges figure to compare between funds – but remember it doesn’t take into account trading costs or performance fees.
Try and check all the fees you will pay.
Fees and charges on life insurance linked investment products
Endowment policies, investment bonds and whole of life policies are subject to most of these charges too.
But they have different charging structures to other investments.
A key features illustration might be provided which shows the charges you will pay, including the cost of any commissions, and how these might affect what you get back.