If you’re making tons of money from your investments, you’re probably not going to worry too much about fees. After all, if you’re making a good return and the fund manager is earning (just) enough to pay their electricity bill, everyone’s winning. But when markets get a bit choppy like they are now, all of a sudden, that cut they’re taking starts to stand out a bit more.
So how much should you pay in investment fees? It’s actually a harder question to answer than you think because investment fees can be confusing, and investment platforms and fund managers all calculate them slightly differently. In today’s article, I’m going to break it down as simply as possible and also share my thoughts on how much you should be paying in fees on your investments.
When it comes to ongoing fees for your investments, there are basically two main types. There are also some upfront costs like transaction fees, but first, let’s cover the ongoing charges that apply to your portfolio.
This is the fee paid to the actual company managing your money. If you invest in the Vanguard FTSE 100 ETF, for example, this fee is paid to Vanguard. In return, they move your money around in accordance with the strategy that they offered to you. In this case, they make sure that your money is aligned with the FTSE 100.
Fund management fees are always charged as a percentage of your investments. Very rarely, specialised hedge funds will also charge a performance fee for when they do really well, but this isn’t common.
The platform or broker is the ‘middle man’ between the fund manager and you. These platforms provide an account that allows you to buy different investments from loads of different companies without having to deal with each of them individually.
There are lots of investment platforms to choose from, but some big examples in the UK are Hargreaves Lansdown and eToro. On these platforms, you can buy investment funds and shares from thousands of different companies and manage them all in one place. You can also trade, sell to cash and add and withdraw money easily.
Investment platforms make investing a lot more straightforward and often charge a fee for doing so. This fee can be charged as a percentage of your account balance or sometimes as a fixed flat cost each month. Some also don’t charge fees directly, and if this is the case, they’re going to be making money in other ways, such as selling your data or with wider market spreads (we’ll get to that in a minute).
Okay, so you’ve got a handle on the ongoing fees, but they aren’t the only fees you pay. Often, you’ll also pay fees to buy or sell shares, funds and ETFs. These are called dealing or trading fees. Some brokers charge this as a flat fee, others charge as a percentage; some charge a percentage with a minimum flat fee for small trades, and others don’t charge dealing fees at all.
Dealing fees are one of the fees you need to be careful of because they can often look small. However, these small fees can add up to really dig into your returns over time.
Another transaction cost to be aware of is the buy and sell spread. This is where the price offered by the platform is different from the price they purchase the investment on your behalf. For example, they may quote you a price of £1 per share, and you decide to buy 100 shares for £100. They may then go on to purchase the shares at £0.99 per share. You still get your 100 shares, but they pocket the £1 spread.
You can get your fees down to really low levels if you’re happy using only index funds. That’s fine if that’s how you want to invest, but if you’re looking for the greatest level of diversification, then it may be worth considering actively managed funds for at least some of your portfolio.
If you want to create a portfolio for yourself that keeps costs as low as possible, you should be able to put together a diversified mix of index funds for under 0.50%, including the fund management and platform fees. If you want to add in some actively managed funds or niche investment funds such as hedge funds, a good benchmark to aim for is to keep the portfolio below 1%.
Here’s a list of all the investment fees fund providers and other investment platforms charge.
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