Last Updated on 22 February 2023 by Dan
Hello everyone! When we look at investing, we often focus on the nuts and bolts of what we’re investing in much more in what it’s actually costing us to deal through our preferred investment provider. This can cause us to overlook the key issue of investment fees and charges, which can make a substantial difference to your investment returns, and it’s this we’re looking at today!
As ever – our normal note that we take care with what we write on this site but it is not official “financial advice” and whatever investments and savings you enter need to be right for your circumstances. We always suggest doing your own further research. If you’re in doubt about anything, it’s worth consulting a regulated and reputable financial advisor who can provide tailored advice built for you.
Unbiased is a resource that can help you match with an advisor who matches your needs.
Why do investment fees and charges matter?
Let’s take two providers, and assume we’re going to invest a mighty £100,000 in each. The first provider charges an annual fee of 1.5% a year, and the second charges a fee of 0.5%.
This gets us to an initial difference in charge of £1,500 vs. £500. It’s not an absolutely crippling difference, but it’s enough to give us pause for thought.
Where the impact of charges because much more pronounced however is the long term. Previously, we’ve talked about the idea of compounding – that as you make money, that money itself becomes reinvested and makes more money in a snowball type of effect.
However if you’re paying a high investment charge it also means that money isn’t going into that compounding snowball – and this is where the charges really hurt you.
The impact of investment fees and charges
Let’s demonstrate.
We’ve spoken before about how the S&P 500 tends to average out at an 8% return a year, so let’s have both of our two funds grow at that pace annually. (In practice that growth would be variable, and more in some years, less in others – this is strictly to illustrate the charges point!)
We’ll then apply the relevant fee to each fund at the end of each year, and see what difference that leaves us with over time.
| Year | Fund A (0.5% charge) | Fund B (1.5% charge) | Fee Difference |
| 0 | 100,000 | 100,000 | – |
| 1 | 107,500 | 106,500 | 1,000 |
| 2 | 115,563 | 113,423 | 2,140 |
| 3 | 124,230 | 120,795 | 3,435 |
| 4 | 133,547 | 128,647 | 4,900 |
| 5 | 143,563 | 137,009 | 6,554 |
| 6 | 154,330 | 145,914 | 8,416 |
| 7 | 165,905 | 155,399 | 10,506 |
| 8 | 178,348 | 165,500 | 12,848 |
| 9 | 191,724 | 176,257 | 15,467 |
| 10 | 206,103 | 187,714 | 18,389 |
You can see the effect over time is an absolutely massive £18,389 over a ten year period – that’s an amount that anyone would consider a significant amount of money.
Can higher investment fees or charges be worth it?
Now an investment professional that’s at the higher end of the fee charges spectrum would naturally put a counter-argument – that yes, they may charge you more but they compensate for this in the form of their investment skill and expertise providing a higher return.
This argument can hold water but needs careful review. In practice we as humans like the idea of someone human reviewing our money because it provides a sense of comfort and that someone is “looking after this”. In practice, many active investment professionals actually underperform the market (and even if they overperform one year, it proves to be unsustainable). It’s an argument that often comes up in the passive vs. active funds debate.
Underwhelming investments combined with high investment fees and charges aren’t always the case – but it’s worth spending some time looking at the history of how your investments have performed relative to the wider stock market after fees, and challenging it if you see significant differences.
Perhaps a more persuasive argument is if you are getting other services tied in with your investment fees. For instance, if an investment professional is helping you manage your investments so they’re more tax efficient, or help get to an appropriate level of risk, this does have value.
The gains from this can offset the higher cost, but the charges still shouldn’t be excessive for this unless you’re requiring something quite bespoke and complex.
How can I review my investment fees or charges?
Unfortunately, reviewing what you’re being charged for investment can be more difficult to work out than it should be – some market providers are very transparent, others less so.
No matter who you’re investing with, you should be receiving a regular statement of your investments which displays your total fees paid clearly. If not, you are entitled to ask for that to be broken down and you should make clear you want to understand all charges.
Whilst investment sites sometimes proudly display a charge as part of their advertising, on closer scrutiny this can on occasion not include everything. Unfortunately most investment sites charge smaller fees on multiple bits of the puzzle which add to a whole, rather than a single easy investment fee.
To try and help with what to keep an eye out for I’ve got some of the most common investment charges here:
What is a platform fee?
A platform fee is a charge for the service that allows you to make investments in a range of companies. For instance – if you are a client of Hargreaves Landsdown, this is an ongoing charge for depositing your money with them and them giving you access to investment funds.
In practice, it’s covering the maintenance charges of the system itself and the more practical side – like giving you information on what you’re invested in, providing statements and the ongoing costs of the administration of your investments.
A platform fee is usually between 0.10% and 0.4%.
What is a management fee?
If someone is making investment decisions on your behalf (such as what to invest in, or balancing bonds and equities) you’re likely to be charged a management fee.
This is the cost of either a human reviewing those decisions for you, or the costs of running an algorithm in the case of some of the new “robo-advice services” like InvestEngine or Nutmeg.
If someone is selected individual specific stocks around portfolio needs, you’ll likely pay more for that than someone simply putting you into a standard investment funds.
Management fees vary significantly depending on what the service offers – I’ve seen everything from 0.1% right through to a huge 3% for a full discretionary service.
What is a fund fee?
This is a fee charged on the investment itself by the fund manager to cover the costs of structuring and making investment decisions for the fund.
The fund fee vary significantly depending on if it’s a basic tracker replicating an index which can be done by computers, or it’s an actively managed fund where humans will try and identify stocks of particular interest.
Again, the fees will vary significantly based on complexity – simple index funds can be as low as 0.06%, whereas a fully managed fund could be 1% plus.
A fund should provide a key investor information document, which should list all charges associated with investing in the fund.
Where can I find low fee and charges investment providers?
We’re purposely not going to answer the question of who is “the best” low cost investment provider because different things matter to different people – such as ease of use of the platform or range of choice. It’s important to do your own research on what is best for you, or contact a reputable financial adviser if you’d like advice that’s specific to your needs.
What investment provider do we use?
We primarily use Vanguard who I consistently find excellent on both a return and cost basis – but using their platform limits you to Vanguard-owned funds only which may not be for everyone.
We do also rate InvestEngine which provides more of a wider range of funds and is excellent on cost – we wrote a review of them here and if I want to invest in wider ETF’s they’re now who I use. We wrote a recent review of InvestEngine here.
There’s a number of other well established market names out there who have developed a reputation for effective low cost services – some options worth researching include:
Any questions?
We’ve hopefully demonstrated that your investment fees and charges can make a big difference to your returns, but it can be a confusing area so if you have questions just let us know in the comments below.
We also absolutely love hearing success stories so if you found you were able to make significant positive changes to your investments after reviewing your fees and charges, please do let us know!
And that’s it!
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