Shock ahead as Brits will soon see the real cost of their investments
Under European legislation introduced last year, investment platforms must send their customers a statement by April 2019 detailing the full cost, in pounds and pence, of their investments over the last year, including the platform fee, fund costs and advice fees.
Previously, platforms have shown their prices, but usually did so as a percentage fee. Regulators believe this hasn’t always been clear for investors. The new statements need to be issued annually.
Anthony Morrow, CEO of online financial advice service OpenMoney, believes investors may be in for a surprise: “For most investors this will be the first time they have received a detailed breakdown in pounds and pence of all the fees they pay for their investment each year – and the total amount may come as a surprise to many.
“There is always a cost to investing, but any charges you pay can have an impact on the size of your pot and the compounding effect of fees over time can make a big difference in the long term. Cheapest isn’t always best, but it is important that you feel you are getting value for the money you are spending.
“Although the figure on the statement may come as a shock to some, this new transparency will help investors understand exactly how much they are paying and decide whether the service they are receiving is worth the overall price or if an alternative option may offer better value.”
How fees impact your investments
Fees can have a significant impact on your long-term returns. For those investing the full £20,000 ISA allowance each year and assuming 5% investment growth per year, paying 1% versus 1.85% a year in charges will mean £9,500 more in the pot after ten years. After 20 years the difference would be £50,000 and after 40 years it would be £340,000.
Even on smaller amounts, the impact of costs adds up: investing £1,200 a year with 1% total charges would see the investment pot worth £500 more after ten years, compared to fees of 1.85%. After 20 years the difference would be £3,000 and after 40 years it would be £20,000.
Platform fees vary significantly and can be complicated. For example, some groups charge a percentage fee of assets under management. Hargreaves Lansdown charges 0.45% on portfolios up to £250,000, but also charges per deal to buy and sell shares. It also charges 1% of the trade value for reinvesting dividends. Other groups, such as Interactive Investor charge a flat fee (currently £22.50 per quarter) and charges £1 for dividend reinvestment.
The right option will depend on the type of portfolio you have. Flat fees are often better for larger portfolios, while smaller portfolios do well from a percentage charge. On an execution-only portfolio of £50,000, investors should expect to pay £100-£250. This may rise to £500 for a ‘robo advice’ service, where there is some guidance on the right way to invest.