Like taxes, when it comes to investing, fees are pretty much unavoidable. But low fees don’t always mean good; and higher fees are automatically bad.
There will always be a cost attached to investing.
Organisations, and the people within them making investment decisions on your behalf require payment for their expertise. Research and consider fees before making your decision – the cheapest fees are not always the best investments.
When you pick a fund the key cost to note is what’s known as the ongoing charge. This consists of a management fee, covering the fund manager’s research and investment selection process, plus the additional administrative costs associated with running the fund.
Different assets, such as shares or bonds, cost different amounts of money to trade. More unusual asset classes, such as collectable art, will carry higher ongoing charges, as their rarity requires more specialist investment knowledge.
Whatever the rate of your ongoing charge, the fees will always be taken directly out of the fund. This is why the underlying value of your shares is always called the net asset value, or NAV, because the fees have already been subtracted.
Performance fees, which are paid only when a manager does well, are taken from are also taken from the value of the fund.
There are additional direct costs involved with investing that an investor should be aware of.
A platform fee, covers the online platform where you buy, hold and sell your assets. Some occur as flat fees, while others subtract a percentage of the value of your investments.
Certain funds incur a charge when buying and selling - and if these are investment trusts or individual companies, a tax called stamp duty may also be applicable to purchases.
If you buy a fund directly through the fund manager rather than through a platform, then entry and exit charges may apply.
Performance fees, draw a percentage out of any gains made by your investments.
And finally, if you use a financial advisor, they will also expect to be paid.
Over time, fees of any kind will impact your return, so it’s worth understanding the fees that apply,before you invest.