What are investment charges?

When you invest, you will generally have to pay specific fees or have certain costs associated with the investment.

The main costs will be to the provider (that provides the investment product), the investment fund charge (an ongoing fee charged for the selected funds) and an advice fee (an initial and ongoing cost if you choose to have an adviser managing your investment)

What different types of investment fund charges are there?

Looking at the investment fund charge specifically – there are three options available to the investor when selecting which type of funds to invest in, each option has different levels of ongoing fees.

  • The first option is a ‘managed’ fund. A managed fund requires the manager to have specific and individual expertise within a narrow field and to do comprehensive research in order to make investment decisions – this results in a relatively expensive investment charge in comparison to the other two options.
  • The next choice is a ‘tracker’ fund. This is cheaper than the ‘managed’ fund as it simply follows an index and does not require any manpower/research because a computer can track the components of any index at any time, without any investment decisions being required.
  • The final option is a ‘multi-asset’ fund. With relatively similar costs to the ‘tracker’ fund, the ‘multi-asset’ fund has a manager that deals with many different and varied assets under one fund.

As an example – Our clients can invest for example in three different ways:

1/ A portfolio of diversified ‘managed’ funds, which cost about 0.77% per year (£770 per year on a fund of £100,000).

2/ A portfolio of diversified ‘tracker’ funds which follow a number of the world’s main indexes and which costs 0.19% per year (£190 per year on a fund of £100,000).

3/ A single popular ‘multi asset’ fund which costs 0.15% per year (£150 per year on a fund of £100,000).

Therefore the ‘managed’ funds cost up to 0.62% per year more than the cheapest investment choice, so a saving of £620 per year on a fund of £100,000 can be seen immediately, that’s a saving of £3,100 over 5 years.

The answer would seem obvious that the single ‘multi asset’ fund is by far the cheaper and therefore if the cost was the primary focus this would be the obvious choice.

However, if we look at the current returns of each of these options over the last 5 years, we can see that the returns were as follows:

1/ A portfolio of managed diversified funds = +44%

2/ A portfolio of diversified tracker funds = +36%

3/ A single multi-asset fund = +26%

The ‘managed’ funds return of 44% is 8% more (over 5 years), than the cheaper ‘tracker’ route and 18% more than the cheapest single ‘multi asset’ fund. Therefore, the returns were more than the cost savings of 3.1% over 5 years.

Hence looking only at cost can quite potentially be a red herring if your ultimate returns are lower.

It should be noted that, if using a single multi-asset fund with more than £85,000 invested, then it is quite possible that your monies will fall outside of the Financial Services Compensation Scheme (FSCS), which only covers up to this amount with any single institution.

If you would like to get in touch with us about your investments or pensions, then please contact us here.

ABOUT THE AUTHOR

Woody Snapper

Woody Snapper

Woody works with individuals and business' looking for corporate finance, high net worth mortgages, complex loans, bridging loans and development finance.

To contact Woody.

Tel: 07922 413586

or

Email: woody@veracityfp.co.uk