Why Investors Should Wake Up to the Yawning Truth About Fees
Let’s face it, the topic of fees is enough to send many of us to sleep. This may explain why the level of fees wealth managers typically charged went widely unquestioned for generations. And why a lack of transparency around the exact nature of these fees was rarely enough to rouse investors into taking action.
However, in the light of better consumer protection, driven by initiatives such as the Retail Distribution Review (RDR) at the end of 2012 – and with nimbler, more client-focused money managers promoting greater transparency around fees – the landscape has started to shift for the better.
Yet as our own research discovered, and a 2019 survey by EY also highlighted, there is still a disconnect between readily available fee information and what investors would like to know. So we thought it would be useful to provide more clarity on the ins and outs of fees and charging.
A wide variety of potential fees
While the range of fees can vary from firm to firm, it is important to assess whether you are getting value for your money. You must therefore work out the total costs of your portfolio, and should always consider:
1. Investment management fee
Normally a percentage of the assets under management, this is the fee you pay an investment manager to select investments on your behalf and make adjustments through time.
2. Financial planning and ongoing advice
The fee from an adviser to recommend and monitor an appropriate portfolio for you. Sometimes an upfront fee such as 3% on contributions to an ISA or £2,000 to consolidate your pensions. This can also be an ongoing fee usually charged as a percentage of the assets under advice.
3. Custody or platform charges
This is the fee for holding your investments, collecting dividends and interest and dealing with corporate actions and administration. It’s normally charged as a percentage of the assets administered and is typically included within the Investment Management charge for fully managed portfolios. For DIY platforms, there is often a different charging structure for fund-based investments and shares or ETFs.
4. Transaction charges
Fees and charges that are incurred when investments are bought and sold. These charges can be made each time a trade (buying/selling of investments) takes place. They can take the form of a commission charged as a percentage of the trade value or an administration charge, which is usually a fixed fee between £10 and £50 per trade.
5. Underlying investment fees
If your portfolio is made up of collective investments such as actively managed funds, investment trusts or ETFs then these investments will have their own fees and charges for investing your money. You won’t see these deducted from your portfolio as it is factored into the price of the investment each day. For actively managed funds this can result in extra fees and charges of 1.15% on average (source: Defaqto research).
6. VAT
Always check if VAT is included in your investment management fees or charged on top. For most discretionary fund managers, their fees are quoted excluding VAT. So, if you see a fee of 1% the actual cost to you might be 1.2% after applying 20% VAT.
Are you getting value for what you pay?
Some of the fees above may be prominently displayed by a wealth manager, but some may be hidden. To establish whether you are getting value you should ask yourself relevant questions. For example:
- Do you need to pay – eg, 0.45% a year – to a platform to hold your funds?
- If an active wealth manager charges you every time they trade, are you being penalised unnecessarily for frequent trading?
- Do you want to pay so much for an ongoing advice service?
Many fees may be inappropriate for your own particular circumstances, so they are worth interrogating closely – they can quickly add up.
What difference can fees make?
At first glance a small fee disparity between one firm and another may seem negligible, but these extra – and often unnecessary – costs can build up significantly over time. If you are investing for an important future event such as your retirement or moving home, this difference could meaningfully affect your desired outcome.
The example below illustrates the difference that lower fees make to an investment of £200,000 over 20 years.
However, in the light of better consumer protection, driven by initiatives such as the Retail Distribution Review (RDR) at the end of 2012 – and with nimbler, more client-focused money managers promoting greater transparency around fees – the landscape has started to shift for the better.
Yet as our own research discovered, and a 2019 survey by EY also highlighted, there is still a disconnect between readily available fee information and what investors would like to know. So we thought it would be useful to provide more clarity on the ins and outs of fees and charging.
A wide variety of potential fees
While the range of fees can vary from firm to firm, it is important to assess whether you are getting value for your money. You must therefore work out the total costs of your portfolio, and should always consider:
1. Investment management fee
Normally a percentage of the assets under management, this is the fee you pay an investment manager to select investments on your behalf and make adjustments through time.
2. Financial planning and ongoing advice
The fee from an adviser to recommend and monitor an appropriate portfolio for you. Sometimes an upfront fee such as 3% on contributions to an ISA or £2,000 to consolidate your pensions. This can also be an ongoing fee usually charged as a percentage of the assets under advice.
3. Custody or platform charges
This is the fee for holding your investments, collecting dividends and interest and dealing with corporate actions and administration. It’s normally charged as a percentage of the assets administered and is typically included within the Investment Management charge for fully managed portfolios. For DIY platforms, there is often a different charging structure for fund-based investments and shares or ETFs.
4. Transaction charges
Fees and charges that are incurred when investments are bought and sold. These charges can be made each time a trade (buying/selling of investments) takes place. They can take the form of a commission charged as a percentage of the trade value or an administration charge, which is usually a fixed fee between £10 and £50 per trade.
5. Underlying investment fees
If your portfolio is made up of collective investments such as actively managed funds, investment trusts or ETFs then these investments will have their own fees and charges for investing your money. You won’t see these deducted from your portfolio as it is factored into the price of the investment each day. For actively managed funds this can result in extra fees and charges of 1.15% on average (source: Defaqto research).
6. VAT
Always check if VAT is included in your investment management fees or charged on top. For most discretionary fund managers, their fees are quoted excluding VAT. So, if you see a fee of 1% the actual cost to you might be 1.2% after applying 20% VAT.
Are you getting value for what you pay?
Some of the fees above may be prominently displayed by a wealth manager, but some may be hidden. To establish whether you are getting value you should ask yourself relevant questions. For example:
- Do you need to pay – eg, 0.45% a year – to a platform to hold your funds?
- If an active wealth manager charges you every time they trade, are you being penalised unnecessarily for frequent trading?
- Do you want to pay so much for an ongoing advice service?
Many fees may be inappropriate for your own particular circumstances, so they are worth interrogating closely – they can quickly add up.
What difference can fees make?
At first glance a small fee disparity between one firm and another may seem negligible, but these extra – and often unnecessary – costs can build up significantly over time. If you are investing for an important future event such as your retirement or moving home, this difference could meaningfully affect your desired outcome.
The example below illustrates the difference that lower fees make to an investment of £200,000 over 20 years.
The example above is based on the forward looking gross investment return for a medium risk portfolio of 4.40% per annum and an initial investment of £200,000. The total cost of investing for the traditional manager is 1.86%, based on figures compiled by Numis Securities.
As the chart above shows, by assuming average investment returns of 4.40% per annum, after 20 years you could be £73,870 better off by investing with Netwealth compared to a traditional wealth manager. See how much more money you could have with our fee calculator.
This difference highlights the real costs of investing – and shows that while fees are an accepted part of investing, you don’t have to put up with fees that are unacceptable. And when it comes to what you are paying: you snooze, you lose.
Please remember that when investing your capital is at risk.
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