If you are investing money, you could well be paying up to 3 levels of cost.
A dealing platform
You will pay for a structure, or electronic dealing platform that allows you to own and trade investments without having to keep assorted certificates and pieces of paper. It is now virtually impossible to own investments without an on-line service. A by product of holding your investments in an on-line service and thereby using a nominee is extra security and some useful reporting of tax information. In many cases, you will also get access to research services and performance analysis.
This sort of service may cost as little as £100 per year, plus extra costs for dealing and things like pension payments, or up to as much as 0.5% of your assets. In another article, I will look at some of the leading market players and their service and costs.
In some cases, especially if you deal with a stock broker or discretionary fund manager, this cost will be bundled up into an overall fee but have no doubt, you are paying it.
Dealing costs/manager fees
If you only buy and sell shares on your own judgement, you won’t have to pay an investment manager because you are DIY! But you will still have to pay dealing costs and tax in the form of Stamp Duty Reserve Tax, plus some other small statutory fees for larger transactions.
If you own and trade collective funds or have a manager run a portfolio for you on a discretionary basis, you will usually pay an annual percentage fee. If you buy collective funds direct from fund managers without using a dealing platform (generally not a good idea), you will pay a hefty initial fee of up to 6%. Purchases via platforms are usually free of such fees but be careful about so-called “soft closed” funds. These are funds that have done rather well and where the manager wants to slow down inflows of money. The manager will let you buy units but you pay a special entry fee. As most advisers can usually find an alternative, they won’t recommend doing that, so the only new investors are the (arguably naïve) public at large with no advisers and that slows down inflows.
Fees for fund management vary across a wide range from below 0.1% per annum for funds that are made of funds that match a stock market index or computer model (so are passive, not actively managed) up to as much as 2.5% per annum. An average for a well-diversified actively managed portfolio would be about 0.8%.
Fortunately, EU regulations (which are implemented by the FCA in the UK) oblige fund managers and advisers to fully disclose costs and to do so in a standard way so if you read the paperwork, you ought to know what you are going to pay for fund management.
Adviser Fees
If you appoint a regulated independent adviser (IFA), such fees will be agreed and part of your contract with that firm. They will generally be a percentage but some firms charge fixed fees, offering a menu of services. The latter is much better value for investors with larger portfolios and in any case is much more transparent and fair. I pioneered such an offer in my own IFA firm over 20 years ago.
Some advisers, especially those who have the investment management function within the same business, like St James Place or Towry, but also many of the larger IFA firms, may charge you a percentage of your investment up front, extra for new advice and will also take a percentage from your portfolio. In such situations it is not always clear what the total fees are and what service is being supplied in return for what deduction. What may be described as an investment manager fee is actually be being shared with your adviser, which means that she or he is incentivized to suck up into their portfolios as much of your money as they can get their hands on.
The reason that large “vertically integrated” investment firms exist and make large profits is simply because the owners control more of the fees cake.
Adviser annual fees vary from less than 0.1%, where a flat fee is charged to 1% plus extras. An average is 0.75%, but in my opinion, that is expensive and you ought to be able to get a better deal.
Check it out!
The financial services industry is not that good at transparency. Although big strides have been made to increase professionalism, there can be a certain amount of “smoke and mirrors” trickery even now, such that you can’t see what you are really paying.
The UK regulator is clear that the investor should be able to see all costs in actual money terms, not just percentages. Make sure you are given that information before you invest. You also ought to know exactly what you are getting. For example, if the offer says you will get two reviews a year with face to face meetings do make sure you do or seek to lower the fees.
NotHarry can offer subscribers a service to analyze proposals from advisers to check for true costing and market competitiveness. See this link.