A better deal on charges

Picking investments requires you to consider lots of variables – and very often to make fine judgements (or best guesses) about criteria such as likely future returns, the quality of a fund manager or the way in which a market will perform. But while many of these choices effectively involve “known unknowns”, there are also definitive comparisons you can make between funds before buying – most obviously, you can compare their charges.

Investors often underestimate the impact charges have on long-term returns. Imagine two funds that both generate a before-charges return of 7 per cent a year for the next 10 years – and that you invest £10,000 in each of them upfront, plus £100 a month thereafter. In fund A, which levies an annual fee of 0.5 per cent a year, your investment would be worth a little over £35,440 in a decade’s time; in fund B, which charges 1.5 per cent a year, you’ll end up with just over £32,759 – almost £3,000 less.

The bad news is that fund managers aren’t renowned for transparency or price competitiveness. A recent report from the Financial Conduct Authority warned that too many fund managers are failing to disclose all their charges, and also that many charge excessive fees for a service that doesn’t deliver enough performance to justify the cost.

Investment companies to the rescue?

Where should investors look for a better deal? Well, the FCA’s research did not extend to investment companies, which are closed-ended funds structured in a different way to the open-ended funds in its study. However, the sector has enjoyed a long-held competitive advantage on cost – closed-ended funds have generally cost less than their open-ended equivalents.

It’s only fair to say that the gap has begun to close in recent years. Investment companies welcomed the ban four years ago on open-ended funds paying commissions to financial advisers, which often left closed-ended funds out in the cold. But now open-ended funds are no longer able to make such payments, they have been able to cut their charges to compete with their investment company counterparts.

Still, very often, investment companies work out cheaper, particularly since a significant number of funds have reduced their charges in the face of this new-found competition. We’ve also seen the sector do away with more complicated fee structures such as performance-related charges, which has improved transparency.

In this context, it was interesting to note a Daily Telegraph article on good-value investment funds published last week. The piece focused specifically on the investment company sector, identifying no fewer than seven actively-managed closed-ended funds with annual fees of between 0.42 per cent and 0.62 per cent a year.

Pick the right platform too

One word of warning, however. How you invest can make just as significant a difference to the charges you pay as what you invest in. Investors putting money into collective funds via online platforms such as Hargreaves Lansdown, Fidelity and similar services, will find they pay very different charges to invest in the same funds on different platforms.

That begs the obvious question of which is cheapest. Frustratingly, there isn’t a simple answer. Platforms structure their charges in different ways – some charge higher fees when you first invest but less to hold your investments on an ongoing basis, while the opposite is true at others. Some platforms charge fixed cash fees for their services while others apply percentages – the former offer better value on large sums but can be very expensive for investors with smaller portfolios.

Picking the right platform is a crucial part of keeping charges to a minimum – and therefore reducing the impact of fees on the value of your investment, but you’ll need to do some sums based on your own circumstances. Check which platforms offer investment company shares (not all do) and then look at what it will cost to operate your particular portfolio with each one. An online comparison tool such as comparefundplatforms.com can help.