How Fund Charges Work For Investors


Estimated reading time: 7 minutes

Investing comes at a cost, but you need to keep your profits as much as possible.

No matter how you invest, charges, risk and inflation will try and nibble away at your gains.

Most investors have strategies for dealing with risk and the rising cost of living, but many are unaware of how much fees and commissions take away – and even who gets the money.

The target is investing while keeping your expenses low. It is possible to minimise fees, charges and commissions.

And here’s how to do it.

What Are Investment Fees?

So, here are a few things to remember when investing your money.

Investment costs include brokerage fees, commissions, management and advice charges.

Most investment transactions come with a fee because it’s the easiest way most banks and financial firms can make money.

It’s important to remember that there’s no industry fee standard. Some fees are negotiable, and the cost can vary between firms.

Robo-advisers are worth thinking about. The platforms are run by complicated algorithms that sometimes allow providers to charge low or even no fees.

You have to look long and hard for an investment that comes without charges. Even savings accounts demand a fee if your balance drops below a minimum amount.

Savvy investors who know what to look for can keep these charges low, but before revealing how here are explanations of the most common costs:

Brokerage fees

Brokerage fees are common across the spectrum of financial service companies. The fee covers the costs of maintaining client accounts, providing telephone or online help and paying for research.

The fee is either a percentage of investments held in your portfolio on a specific date or a flat fee.

Commissions or trading fees

Commissions – sometimes called trading fees – are charged by investment funds to cover the cost of advice or to execute buying or selling of stocks, commodities, options or other types of investment. Firms set their tariffs.

Management and advice fees

Management and advice fees are rewards for fund managers who look after your portfolio. Look for a line in the terms and conditions which takes a fee based on a percentage of the value of AUM (assets under management). Again, firms can set their charges.

Please read our guide about how to invest in funds.

Trading Expenses Explained

How banks, brokers and investment firms set their charges is as clear as mud.

The system is a free-for-all where firms set their prices. Different brokers can charge $10 or $100 for carrying out the same work.

Remember how much you pay depends on how much you invest rather than how often you trade.

Say you have $1,000 to invest. The broker charges take a $20 fee for each trade, which is 2 per cent of the investment on entering the position. The broker charges another $20 when you sell, making the cost of the entire investment $40 or 4 per cent of your stake.

To break even, an investor would have to make a 4 per cent gain and even more to move into profit.

Some brokers discount charges for regular investors, which kicks in after a certain number of trades.

Others charge an annual fixed fee based not on trade frequency but fund value.

Investors need an awareness of how these charges impact their wealth and should shop around for the fee structure that best matches their trading model.

How To Keep Trading Charges Down

Saving money on trading charges is not about how much you invest but how you invest.

Think about investing with a firm that charges no commission or fees for trading stocks and shares or exchange-traded funds (ETFs). Small firms trying to get a finger-hold in a crowded market offer these low or no-cost deals to attract customers.

However, watch out for steep charges on other products they offer to make up the difference.

Robo-advice platforms often have low fees because they take advantage of automation.

Also note that there is a difference between trading and investing, so understand your goals.

How Much Do Charges Cost Investors?

Two facts irk investors – there’s no proof that a superstar fund manager can consistently deliver a winning investment performance, and they take the same fee if they are successful.

Take this example from the UK’s government-backed Money Advice Service. John and Jo both invest $10,000 with a gross annual return of 5 per cent.

But John pays 1.25 per cent a year in management and trading fees, while Jo pays 0.5 per cent.

After 20 years, John’s fund less fees is worth $20,696, while Jo’s totals $24,014. John’s fees come to $3,318 more than Jo’s

High fees are not necessarily bad if you are receiving better service or performance, but past performance is no guarantee of future profits and investments promising higher returns come with higher risk of losing your money.

Check out ongoing charges for UK funds

How Fund Charges Work For Investors FAQ

Which funds are the cheapest investments?

Investing is not about the cheapest funds but the best. Expect to pay fees in these ranges:

Investment productsTypical yearly cost
Actively managed funds0.75% – 1.25%
Tracker funds and ETFs0.25 – 0.85%
Investment trusts0.8% – 1.8%

How much does advice from an IFA cost?

If you take investment advice from a financial advisor, you will pay a fee. For expats, this expense depends on where the IFA is based.

In the UK, expect an hourly rate of around £150 an hour or 0.5 per cent of your fund value.

How to compare trading costs

The ongoing charge figure (OCF) is the most common way to compare fund commissions and expenses.

The amount and how they are arrived at should be on any key investor information provided at the start of your relationship.

The OCF is considered a better gauge of ongoing costs than the annual management charge as more fees are included.

The Money Advice Service example shows that charges can impact a fund’s value thousands of pounds over the years.

Are trading fees the same in every country?

Commissions and trading fees vary between countries and firms. The charging structure is more formal in places like Australia, the USA and Europe, where the financial services industry is more tightly regulated.

Always ask your broker or financial adviser for a list of charges you should expect before parting with any money.

Are cheap funds better than more expensive outfits?

Research suggests that lower-cost funds tend to perform better than high-cost funds. Research also favours a buy-and-hold strategy rather than frequent trading.

Don’t forget tax is an investment cost

Depending on where you live, income and capital gains taxes can take a large bite from the value of an investment portfolio. Professional tax advice is vital as different investment wrappers have varied tax incentives and penalties.

Watch out for single or dual priced funds

When an investor trades within a fund, administering the trade generates a cost.

The charge is shared across the fund in a single-priced fund – this is called dilution.

In a dual-priced fund, the cost is borne by the investor initiating the trade.

Below is a list of some related articles, guides and insights you may find interesting.

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