Befuddled by fund charges? Read our 60 second guide to investment fees to ensure you don’t pay over the odds
In spite of the investment industry’s efforts to make fees and charges more ‘transparent’ in recent years, it can still be pretty confusing to unpick layers of cost.
Depending on the fund, platform and adviser you use, different charges will apply. There are also management fees, entrance and exit charges and sometimes performance fees to consider.
Overpaying investment fees can be devastating for your savings, with returns sometimes completely wiped out.
Are you overpaying on fund charges and investment fees? Charges vary considerably
For this reason, it’s worth taking time to ensure you understand what you’re paying and whether there are better value options available.
To help, Darius McDermott, managing director of Chelsea Financial Services, has put together a 60 second guide to fund charges.
When you buy a fund, you could be charged up to three different fees
A fund management fee: This covers the investment company’s research and expertise looking after the fund, plus other costs associated with running a fund.
Sometimes there will also be a performance fee if the manager can achieve a specified return. The most accurate figure to look for is the ongoing charges fee (OCF) which is an indication of the overall annual fund management costs.
A platform fee: This pays for your access to the funds available to UK investors, the platform administration and custodianship of your money.
A service or advice fee: This depends on the type of intermediary you use. Some charge a percentage of your investments held with them, others a flat annual charge and some an annual advice fee.
Headlines can be deceiving
Fees can vary significantly and soon add up, so knowing what you are going to be charged for an investment is extremely important.
What may seen as low cost at first glance, could mask additional add-ons. Are you going to be charged for paper statements or dealing by telephone, for example?
The Investment Association has put together a list of typical investment charges
Cheapest is not necessarily the best
While charges can have a significant impact on your investments, it is also important to consider investment returns after charges.
You don’t want to overpay for an investment but just because an investment is cheap, doesn’t always mean it is the best.
Looking at the performance of a fund after the charges have been deducted is a good idea.
Value for money
When considering the cost of an investment, it is also important to think about what you are getting for your money, especially when it comes to the platform and/or service or advice.
It the service or advice personalised or good quality? Is it reliable and predictable? No one wants surprises when it comes to their life savings.
For more on how to manage your investments yourself and how it compares to paying the professionals, read This is Money’s guide to DIY investing.