When it comes to investing, fees are often an afterthought for investors. The industry norm is a fixed ad valorem percentage charge, which is taken directly out of the fund’s assets on a daily basis. Whilst some think this is a little unfair given you pay regardless of whether investment performance is good or bad (listen to our podcast with Dan Brocklebank), it is what we must contend with.
As such, keeping fees low is an enormously important aspect to investing. Small differences can have a dramatic impact on your wealth. Many of us spend time finding great deals in lots of areas of our lives, and we should be taking the same approach with investing.
Laura Suter, head of personal finance at AJ Bell, has run the numbers:
“On a £100,000 ISA portfolio that’s returning 6% gross a year, a reduction in charges from 1% to 0.5% a year means your investment pot is worth £26,400 more over 20 years. Over 30 years that difference increases to just over £66,000.
“Even smaller cost cuts to your portfolio can make a big difference. On £100,000 of investments returning 6% gross a year, a cut in annual charges from 1% to 0.8% will mean you’re better off by £10,300 after 20 years and by £25,400 after 30 years.”
Of course, cheaper isn’t always better. Finding a well-run actively managed portfolio can do wonders for your wealth, but will cost you more.
Here’s Laura’s top tips for keeping costs low.
Five ways to reduce charges in ISAs & SIPPs
1. Use tracker funds and ETFs
Passive funds are the flavour of the month at the big investing platforms, with investors preferring the cheaper index trackers over their active rivals. There has also been a boom in the number of passive funds on the market, which has pushed costs down considerably. For a plain vanilla tracker fund you can usually pay around 0.1%, while an active version will set you back closer to 0.75% a year.
Unlike an actively managed fund, passive funds will never outperform the market and will just mimic its performance, while some active fund managers have demonstrated the ability to outperform over long time frames, even after charges. However, many have not, so if you’ve got some active funds that have continually failed to perform, consider replacing them with tracker funds to reduce your costs. You don’t have to sit in one camp or the other, you can use a combination of active and passive funds together. For example, you could use a tracker fund in markets where active outperformance is more challenging, like the US, and choosing active funds in more niche areas, such as smaller companies funds or emerging markets.
2. Don’t overtrade
Every time you buy and sell investments, there are costs to doing so. These come in many forms, whether it’s the bid-offer market spreads, dealing commission or stamp duty, depending on what you’re trading. There are sometimes very good reasons to buy and sell, but repeatedly doing so with no plan can really eat into your returns because of the charges you’re racking up.
Having an investment plan can stop you trading so much, but also make sure you don’t check your account too often – the more you check it the more you’re likely to trade based on emotion rather than sticking to your strategy. Another option is setting up regular investing, as it takes the decision about when to buy investments out of your hands and stops you tinkering with your portfolio. Lots of platforms will offer you a discount on charges for regular investing too – a double win.
3. Consider investment trusts
There are a range of charging structures available for both actively managed unit trusts and investment trusts, but generally trusts tend to be cheaper. A typical actively managed fund charges in the region of 0.75%, but some highly successful investment trusts are available for significantly less. Scottish Mortgage is the obvious example, with an annual ongoing fee of just 0.36%. City of London investment trust also comes with a slim 0.36% annual charge, and Monks investment trust is available for just 0.48% per annum. Those are very attractively priced fees for an actively managed equity portfolio.
4. Shop around
There are big differences in how much similar funds will charge, and even small changes in the fund’s annual charge can make a big difference over the long term. You shouldn’t automatically pick the cheapest option, but it’s worth comparing funds and assessing whether it’s worth paying a higher fee or not. Once you’ve got your shortlist of funds in a particular sector, whether they are active or passive, look at how the charges for each stack up. Then work out whether you are happy paying a higher fee, and what you’re paying that higher cost for. With tracker funds the rule of thumb is to go as low as possible, but with active managers you might decide it’s worth paying more for a particular manager or their team’s expertise.
5. Keep it simple
The more complicated the area you’re investing in, the more it’s likely to cost. This goes for both active and passive funds. It means that a general UK FTSE 100 tracker fund, such as the iShares Core FTSE 100 ETF, costs just 0.07% a year. But the iShares Automation and Robotics ETF costs 0.4% – almost six times as much.
You shouldn’t let charges lead your decision – if you want to get exposure to an area and it fits in your portfolio, you should invest. But it pays to be aware of the extra costs that could come from investing in more niche areas and not over-complicate your portfolio without good reason.