The cost of investing

When it comes to investing, paying much less can actually increase the quality of your investments. There is no charge for our service as we are paid as part an advisor's development costs, however, there are investment costs that should be critical to your decision making.

Good advisors charge for their services and beyond that, do their best to reduce costs 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 the less obvious charges you should look out for on our Investment Basics page.

What do advisors charge?

Charges agreed between yourself and your advisor should be clear and easy to understand. The cost is taken as a flat fee or a percentage of the assets under management and payable for the service you receive.

 

Between 0.5% - 1% per annum of the assets managed is usual and for larger assets the costs can fall. Fees are visible through online portals and statements and taken monthly, quarterly, half-yearly or annually.  

A fixed fee uncorrelated the amount of assets being managed can be arranged, or ad-hoc fees applied for services as and when required.

Investment platform charges

Investment platforms charge a small fee as custodian of your assets, ranging from around 0.3% per annum of the assets under management. 

Unbeknown to many, offshore bonds can also offer similar pricing. However, fixed charging structures for a contracted term are common facilitating large upfront commissions to advisors. Restrictions on liquidity then apply and expose the customer to penalties for early closure. It is crucial to know that these charges can be removed altogether, see our Good to Know page to learn more on what to look out for. 

Other charges include trades that can range from zero up to £50 per transaction, or calculated as a percentage of the amount being bought or sold. Again, all fees should be itemised on your statements and explained in advance.

Fund charges

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 with different pricing. Our article on reducing fund costs explains more.

Funds can apply 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 higher to generate commission which advisors are often not required to disclose.

It is not necessary to pay higher costs as funds usually have 'clean' share classes that are cheaper to run, whilst using exactly the same investment strategy, only 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 employ fund managers have risen in popularity.  Passive funds track markets and benchmarks at a significantly reduced cost which over time, can have a huge effect on returns. Even modest increases in performance can leverage returns with the effect of compounding over the longer term.  

Our customers receive expert opinions on achieving value for money. Guidance on cutting portfolio costs with full transparency can optimise your investments, so contact us today for a free portfolio review and learn more about investing in the most cost-efficient securities available.

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