The Costs of Expat Investing
When it comes to investing, paying less can actually increase the returns on your investments. Product charges, fund and advice fees all have an impact on investment performance so it's critical to understand which add value and which don't.
A good advisor will charge for their services and beyond that, do their best to reduce costs or find the best value in every aspect of an investment portfolio to maximise returns for the investor. Below is a guide to charges you could expect to pay, some you should avoid and others some you may not be aware you're paying. Find out more on charges that may be less obvious but you should look out for on our Investment Basics page.
What should expat advisors charge?
The charges agreed between yourself and your advisor should be clear and easy to understand. Initial advice fees are generally taken as a flat fee, or a percentage of the assets being invested.
Ongoing service fees between 0.5% - 1% per annum is common and for larger assets the costs can fall. Fees are visible through online portals and statements and taken monthly, quarterly, half-yearly or annually, depending on the platform being used.
A fixed fee uncorrelated the amount of assets being managed can be arranged, or ad-hoc fees applied for services as and when required. If you are dissatisfied with the service you receive, you should be in a position to either stop paying advisor fees or change advisors without penalty. If you are this position, contact us for a second opinion.
Investment platform charges
Investment platforms charge a small fee as custodian of your assets, ranging from around 0.25% per annum of the assets under management.
Unbeknown to many, offshore bonds can also offer similar pricing as platforms. However, fixed charging structures for a contracted term are often used as they facilitate large upfront commissions to advisors, in turn creating restrictions on liquidity and exposing the customer to penalties for early closure. It is crucial to know that fixed charges can be removed altogether, see our Good to Know page to learn more on what to look out for.
Other fees include trading costs that can range from zero up to £50, or can be calculated as a percentage of the amount transacted. Again, all fees should be itemised on your statements and explained in advance.
Key investment criteria that is often overlooked by investors is the running cost of funds. Most fund managers offer different share classes of the same fund, but many have different pricing for different target markets. Our article on reducing fund costs explains more.
Funds options often include visible entry costs of around 4% or 5% which is paid to advisors as commission, while others are free to enter but carry an exit penalty for early redemption. The cost of early redemptions is usually 5% in the first year, reducing by 1% per annum to zero after the fifth year. Underlying running costs are generally higher to generate the commission which advisors are often not required to disclose.
It is not necessary to pay higher costs as most funds usually have 'clean' share classes that are cheaper to run, whilst using exactly the same investment strategy but with better returns.
Fund costs are critical to performance and as fund literature doesn't always show the full costs, it can be misleading. Below is a guide to the charges to look out for and to ask your advisor about if in doubt.
Annual Management Charge (AMC) - Fund fact sheets generally display the AMC, the fund manager's charge for buying and selling assets within it attempting to outperform markets. The charge usually ranges from 0.5% to 1.5% per annum.
Total Expense Ratio (TER) or Ongoing Charge Figure (OCF) - This figure includes the total running costs of a fund and is a crucial consideration if to invest. In addition to the AMC, legal costs, buying and selling of assets and distribution expenses determine the TER/OCF. It may not be apparent, but this what investors actually pay and it reduces fund performance as a result.
Fund costs have a significant impact on returns, fuelling a long-running debate over a fund manager's ability to outperform markets and whether the fees they charge are worth paying.
'Passive' investments such as index trackers and exchange traded funds (ETF) that do not use fund managers have risen massively in popularity in recent years, tracking markets and benchmarks at a significantly reduced cost which over time can have a huge effect on returns. Even modest reductions in fees can enhance the effect of compounding over the medium and long term, significantly leveraging returns for the investor.
Guidance on cutting portfolio costs with full transparency can optimise your investments, so contact us today for a free portfolio review and receive expert opinions on investing in the most efficient securities available.