(charges may apply)
A significant study by the education division of the Financial Industry Regulatory Authority found that roughly one in five (21%) US investors “don’t think” they pay charges on their investments.
The probably do. Almost certainly they do. Some modern digital investment platforms have carved out USPs by not charging commissions or fees for but you can be sure they still get their ends …
What’s that, a big withdrawal fee? You crafty so-and-sos.
Some online optimists paint investing, or certain types of investing, as a no-cost way to grow your money, your way, on your timetable …
Then there’s the fine print.
Charging stations
Charges can get a little complicated but they tend to fall into one of two or three buckets. In the list below, most are admin costs, two are what we’ll call expertise costs, and we’ve a word on advice below.
- Initial charges may apply to cover set-up or simply the cost of engaging a person or institution.
- Platform charges are paid to the provider or platform used, sometimes a flat fee and often an annual percentage of the value of your investments.
- Switching charges may kick in if you decide to switch funds, this may be a flat fee or, again, a percentage.
- Payment charges / exit fees may hit if / when you withdraw funds at all, or via a specific payment method (BACS / CHAPS etc). This is usually a flat fee but may be a percentage of the withdrawal amount.
- Transfer charges may be levied if you move your investments to another company, platform or manager, and this is usually a fixed fee.
- Fund manager charges are paid to the human being or beings who manage an investment fund you’re part of. More often than not this is a percentage.
- Performance fees are elastic and based on how your investments perform. These may kick in only if your investments outperform a stated benchmark.
Financial advice. Approaching a financial adviser is optional. The adviser will help you in financial planning and ongoing support. Investments will probably be part of their advice. You can take that advice and go elsewhere, or your financial adviser will be able to execute those investments for additional admin and fund management fees.
Are changes necessary?
People and organisations engaged in the process of investing invariably want payment for what they do. Conceptually that’s not hard to swallow – people want paid for doing work.
But is what you pay reflected in value? AKA d’you get your money’s worth? That’s muddy.
Charges levied when, for example, moving investments or for that vague concept of bespoke investment management can really add up and they often aren’t necessary.
A good and straightforward investment administrator probably isn’t looking to bleed you at every new turn. Instead, they will charge a transparent, simple percentage (or fee) to cover most outcomes as part of the deal.
So for new investors just dipping a toe in, do think through the administration, investment, and advice services you actually need, and always make sure you’re clear what you’re paying; not just in percentages but in pure pounds and pence. Be clear what you’re paying and why you’re paying it.
Rule-of-thumb, if you pay more than 1% in fees you’ll want to see more love than just an annual statement or report. If you pay more than 2% in fees it’s time to ask big questions around what you’re actually getting for your money.
Efficiency moves
In any other realm, we can try to maximise the money in our hand in two (legal) ways: cutting costs, or earning more.
In the context of investments, earning more is usually a result of people, things and forces outwith our control. Hence challenging charges and fees, and shopping around for other options, is a more controllable way of maximising what’s in your hand.
Appraising the necessity of the fees you’ve paid (and will pay) based on what you actually need (or could arrange at low or no cost elsewhere) is a solid way to optimise your investments, especially if performance is flat.