How much do charges affect your returns?
When you invest you’ll face lots of different charges, some tiny amounts and some slightly bigger. The main ones are the annual charge from the broker or platform through which you buy your investments. This is usually based on a percentage of the money you invest but is sometimes a flat rate.
The other main fees are the cost of buying and selling investments, and the stamp duty due when buying certain investments.
If you buy a fund, investment trust, ETF or tracker fund you’ll also pay any charges the fund manager levies, which vary dramatically depending on the type of investment and type of fund. All these charges can seem small, but they can all add up and then have a big impact on your returns over the long term.
Let’s look at platform charges first. If we assume a £100,000 investment and strip out all other fees we can see the impact a difference in charges makes. If you take that pot and assume annual charges of 0.25%, 0.35% and 0.45%, and also that the pot grows by 5% a year before those charges, you can see almost a £9,500 difference over 20 years of investing.
The same can be seen in fund charges. If you invest in a cheaper tracker fund you could pay 0.07% or less, but if you want to pay for a fund manager to actively run your fund you will pay around 0.75% to 1.25%, or even more.
Clearly this isn’t comparing apples to apples, as you get a very different investment with each, but the impact of these costs should factor into your decision of what investment
What you should definitely look out for is the cost of the fund you pick relative to its peer group – and make sure that if you’re paying more you’re actually getting something for it.
For example, if you look at the popular UK Equity Income sector, which is a group of funds that invest in a similar way, the charges on this group range from 0.2% to 1.7% a year.
Let’s look at the impact on returns, if we assume you have a lower £20,000 investment but that the money still grows at 5% a year. Over 30 years the difference between the more expensive fund and the cheaper option is a whopping £28,662.
THINK ABOUT THE COST OF BUYING AND SELLING
Trading costs, namely the charges associated with buying and selling an investment, also have to be considered.
They are usually a flat rate rather than a percentage of the amount you invest, so can add up quickly if you’re trading a lot, particularly if you’re investing small amounts. The last thing you want is to rack up so many trading costs that you wipe out any returns you’ve made. On
AJ Bell Youinvest it costs £1.50 to buy a fund but £9.95 to buy a share, investment trust or ETF – the same costs apply when you come to sell.
You might assume (or hope) that the more expensive fund will deliver better performance to more than counteract the charges, but that’s definitely not guaranteed.
For example, if you have a £5,000 pot and you only bought shares or investment trusts (costing £9.95 each time) consider the impact of different amounts of buying and selling over a year, assuming the same 5% annual return.
Even after just five years the difference between five buys and sells a year and 20 buys and sells means you’ve got £866 less in your pot for the latter. This jumps to £3,381 over 15 years, as the gains you make each year struggle to cover your costs.