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Home Finance How investment fees can affect returns

How investment fees can affect returns

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By Alister Sneddon, Head of Product at CMC Invest

Amid ongoing economic uncertainty, many people are turning to investments to outperform inflation, exceed interest rates and reach their financial goals in the long term. However, without careful planning and research, the fees incurred on investments can easily affect their performance, compound losses and restrict returns. 

One-off fees, regular fees, management charges, account fees, trading fees and transaction costs like commission can create a minefield for investors. In fact, the average investor could lose £1,200 per year through investment fees (finder.com) – a considerable sum at any time, but particularly significant when we consider the rising prices that consumers are facing. Investors might also be tempted by ‘zero-commission’ promises but these could come with a host of hidden fees which makes comparisons difficult.  

What fees might investors be charged? 

    • Platform fees could cover the cost of using the platform, for holding investments (custody charges) or administration fees e.g., ISA and SIPP fees. These are all often wrapped up together as platform fees. Platform fees vary so investors need to do their research into them. Quite often investors may incur a flat monthly fee – when they are charged the same amount every month or daily in equal installments. Or it may be a percentage fee – a percentage of the value of the investment. 
  • Commission is a dealing fee or trading fee for a transaction of shares and funds on the platform. Each time shares are bought or sold, the broker takes a percentage fee depending on the size of the transaction. Or it can commonly be a fixed fee that the brokers or platforms always charge, regardless of the size of investment. Different charges apply depending on the type of investment and the type of account.
  • Fund management fees: Those investing in funds need to consider annual management fees, which are intended to cover the costs of the fund manager. Fund fees are set by the fund management group, but sometimes larger platforms will receive a discount from the funds. So, a platform might offer you a high platform fee but a lower fund fee than an alternative platform, but this is not always the case.

Higher fees don’t guarantee better fund performance. Investors need to judge fund managers’ past performance, and to understand if fees have been holding them back, or if they are overcharging compared to equivalent funds. Although it’s not a certainty that this will continue, it is a good indicator.

  • FX fees: for investing in stocks listed outside the UK and transferring returns back into sterling. These are often a hidden cost where the spread is very large and is impacted by the size of the investor’s transactions.
  • Other hidden fees: account opening fees, withdrawal fees (i.e the percentage of the amount that the investor deposits into or withdraws from the account for transactions), dividend reinvestment charge, exit fees.

How to save on platform fees

It’s easy for fees to add up quickly, and they matter more over the longer term. Compounding is important: as more is invested, returns get bigger. But fees can eat into these returns over time, and how much is invested each month will determine the kind of fee that works best. For example, if an investor is investing a high sum each month, then a flat fee will work out better than a percentage. Investors should also consider how often they are going to rebalance their funds or buy and sell their holdings as this will have an impact on trading fees. Investors can reduce costs by having a long-term plan and strategy. By maintaining this planned approach investors can avoid unexpected costs and make fees more predictable.

Whether investors are experienced or are just getting started, it’s important to be aware of all the hidden costs. After all, every pound paid in fees takes away a pound of returnable profits. To simplify their strategy, investors should make a list of priorities and a clear plan of how exactly they will be using the platform, how much time they will devote to this and how much they could invest. Only by answering these questions will investors maximise their chances of success. 

 

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