Investors in dark on fees as charges erode returns

  • Investors undervalue the cost of platform fees on investments by over £5,000
  • One in eight (13%) investors are not aware of the fees they are paying
  • Majority of advisers believe there needs to be more transparency when discussing charges

Investors are in the dark over the fees that are eroding their investment returns according to the new What Price Advice report from AFH Wealth Management. In particular, investors do not understand platform fees and their impact, with more than four in five (84%) undervaluing the true cost of such fees on their investments.

Investors who have accessed financial advice were asked how much a 0.3% platform charge would cost on a £50,000 investment over 25 years. On average, investors estimated platform fees would cost £7,400, undervaluing the true £12,500 cost by over £5,000.

Those who had received advice in the last five years were closer to the real cost, estimating £7,600 against those who hadn’t (£7,100). Nonetheless, both sets of investors significantly underestimated the impact of platform fees.

Platforms have become an integral tool in the investment landscape, used by both advisers for their clients and directly by individual investors, to buy, hold and sell funds, and monitor performance. Yet despite being widely adopted there is a clear knowledge gap amongst investors. 

Two in five (41%) investors admit they don’t know the impact of platform fees on their investments; 27% are aware of the fees but are not sure how they affect their investments and one in eight (13%) are not aware of the fees they are paying at all. With so many investors undervaluing the impact of platform fees, even those with some understanding do not realise the full extent of their bearing on long-term returns.

To bridge this knowledge gap, it is crucial the industry plays a greater role in educating clients about platform fees and their significant compound impact on investments over the long term. This is a view supported by the adviser community. The majority (70%) of advisers believe there needs to be more transparency on costs and charges.

Holly Mackay, Founder and CEO of Boring Money commented:

“The fundamental question that any retail investor wants to answer is how much their investment pot has gone up by and how much they have paid for the privilege. Sadly, this latter question remains more difficult to answer than it should be.

Cost is, of course, an important component of net performance, but investors remain broadly unable to articulate or calculate what these charges are. Advice is valued but we continue to take for granted that people understand what it is. It is only once we can better articulate the benefits and be very upfront about what the total charges are, that we can expect our customers to decide if that represents value or not.”

Alan Hudson, CEO, AFH Wealth Management commented:

“Investors are baffled by the charges they face, and the impact they have on returns. Platform fees, for instance, have the potential to cost thousands of pounds which could delay a person’s retirement goals or stop them from supporting younger generations onto the housing ladder.

Advisers and advisory firms must be ready and willing to disclose fees, be that platform fees or ongoing advice fees and importantly, outline their impact over the long term through the power of compounding. Only through a greater drive for transparency will the industry be able to show value for money, and ultimately improve widespread trust.”

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