Don't let excessive fees eat away at your wealth

Story

Make sure you know what you are being charged and how those costs could seriously affect the true value of your investments in the long term.

A deal that promises £20 of savings vouchers per month sounds great, right? Sure, until you find out that it costs you £19 per month to take part.

 

When deciding how and where to invest our money for the longer term, it is all too easy to focus on the generous returns trumpeted by investment advisers. What some are less eager to discuss are the layers of fees payable for their services.

 

Such payments can severely eat into the headline returns on a portfolio, often leaving investors barely better off than when they started.

 

The fees that are levied on our investments come in many guises. The European financial directive, known as MiFID II, which came into effect in 2018, aims to provide investors greater clarity about the fees advisers charge.

 

But it is still all too easy to skim over the costs, which may look small on paper, that are being incurred on a portfolio without realising how quickly they can add up.In many cases, choosing a cheaper provider could leave you thousands of pounds better off over a longer period.

 

It is also tempting to buy into the myth that the higher the charges levied by an investment adviser the better the performance you will get from your investments. But a recent study on the investment industry from the Financial Conduct Authority (FCA), the UK regulator, found there is no clear relationship between what you are charged and the performance of UK investments.It makes sense to ensure you know what you are being charged and reduce costs wherever
possible.

 

How to find out what you are being charged

Fees and charges on investments come in various guises. There is often a set-up fee for when you first come on board, together with an annual platform fee. You may also be charged for dealing or for switching funds, depending on the fee structure offered by your platform provider. The funds offered by such platforms will in turn charge their own fee.
 

Funds have to tell you their continuing charges, which are the costs of running the fund itself, including paying the fund manager and administration costs. But as well as the ongoing charges, you will be paying transaction costs relating to buying and selling the fund’s investments, and any stamp duty due when shares in the fund are bought and sold.

 

On top of these charges, in some cases you could end up paying a performance fee if a fund does particularly well or an exit fee if you wish to sell. When added up, these fees and charges can have a significant effect, particularly over time.

 

For example, if you are assuming a 5% annual growth rate over 20 years, the difference between a 0.5% charge and a 1% charge on an initial £10,000 investment is £2,329.

 

The effect of high charges can be even more pernicious in times of falling returns, since you could actually end up with less money than you started with. If you invested £10,000 over 20 years and the market remained flat in that time, your money would be worth £9,048 if you paid a 0.5% charge and £8,187 if you paid 1%.

 

Under the new rules, investment companies must be more upfront about their fees and charges, so you should be able to see these before you invest if you use a financial adviser. If you are using a platform as a DIY investor you can find fees and charges from the fund manager in the Key Information Document for each fund, while the platform charges are on the website of the company you invest through.

 

Companies are also required to – at least annually – send you a list of the charges you have paid for investing, and how these have impacted returns, which should make it easier for you to see exactly what your investments are costing you.

 

The inertia trap

Whether you are a DIY investor or investing through an adviser, staying with the same investment platform, rather than comparing prices, could leave you paying more than you need. Platform fees, for example, vary widely, with some providers offering you flat-rate fees and others charging on a percentage basis. You may also find yourself paying dealing or switching charges for buying or selling funds or shares.

 

Platform fees alone can have a significant effect on investments. On an initial investment of £200,000, over 15 years, assuming a growth rate of 5% a year, for example, your investment returns could be reduced by an average of £1,235 each year due to platform fees (assuming an average 0.3% platform fee).

 

The suitability of investments is based upon individual circumstances. Past performance is not a guide to future performance. You should contact a financial adviser before proceeding with any course of action.

This article was originally published on The Telegraph website on 28 January 2019.

1. fca.org.uk/publication/market-studies/ms15-2-3.pdf page 4, paragraph 1:12

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