Trustnet Magazine Issue 24 December 2016 | Page 28
IN THE BACK
STING
IN
THETAIL
John Blowers reveals how the many “tiny”
charges associated with investing can add up
to tens of thousands of pounds
I
WILL LET YOU IN TO
A SECRET. The
investment industry
doesn’t use
percentages – it uses
basis points (bps), with 100 bps
equal to 1 percentage point. And
the reason that the investment
industry uses basis points is that
they all add up to a huge amount of
money over time when you are
dealing with billions of pounds.
For private investors, the
basis point is a terrible thing
because we are conditioned to
think that 0.2 per cent, for
example, isn’t much – how can it
be? It’s such a tiny, insignificant
number.
Well, think again. There are three
little numbers that affect the value
of your retirement pot that you
need to familiarise yourself with.
• Annual management charge
Also known as the AMC. This is
charged by the fund manager and
deducted from the value of your
investments every year.
• Ongoing charges figure
This is the estimated figure
that the fund manager actually
deducts from the value of
your investments each year. It
incorporates some variable costs
such as research fees which are
passed on to you and is almost
always higher than the quoted
AMC of the fund.
/ PLATFORMS /
All of these fees barely register
on the Richter Scale when you
first look at them – they seem so
small. A fund manager usually
levies a 0.75 per cent annual
management charge – what
harm can that do when they
are increasing the value of your
money by, say, 8 per cent per
annum? Money well spent.
Expertise like that doesn’t come
for nothing, you know.
However, the true cost of
investing is invariably more
than the quoted AMC. The
Jupiter Emerging European
Opportunities fund (picked at
random) quotes a 0.75 per cent
AMC, but will actually charge
you 1.2 per cent with other costs
added in. Another popular fund
manager, Fidelity, will quote 0.75
per cent but actually charges a
more reasonable 0.95 per cent.
But it’s still 0.2 percentage points
more than 0.75 per cent – or 20
basis points.
IT ALL ADDS UP
Then there are the platform fees.
There is a wide variation across
platforms of between 0.25 per
cent and 0.45 per cent and as this
is levied on your entire portfolio,
it can add up to quite a sizeable
number.
Let me provide an example. If
you have a £250,000 portfolio, it
can cost you at least £500 more
every year if you’re paying 0.45 per
cent in platform fees as opposed to
0.25 per cent. And usually if your
portfolio is growing, so are the
charges you’re paying out.
If you combine fund manager
charges and platform fees and
compare the low with the high, it
makes frightening reading.
So the funds you choose and
the platform you put them on can
make a significant difference to
how much you pay in charges.
The money
deducted from
you each year
is money that is
gone. It won’t
stay in your
portfolio and
compound
But that isn’t even half of the
story. The money that is deducted
from you each year is money
that is gone. It won’t stay in
your portfolio and compound
over time and, every year,
more gets taken out. As your
portfolio grows, so does the
amount of money they take from
you in fees and charges. How
can that be? They’re doing no
more work with your £50,000
investment than they were when it
stood at £40,000.
COMPOUNDING CHARGES
Let’s look at the effect of charges
over time.
We’re all familiar with
compounding where your “growth
grows” and so on. It’s definitely a
good thing. However, the modern
investment world sees our charges
compounding too. Now if your
• Platform fees
If you use an investment
platform, you’ll almost certainly
be paying a fixed or percentagebased charge on the value of your
investments each year.
IMPACT OF CHARGES ON £500K INVESTMENT
Fund
OCF
Platform fee
Annual investment cost
Jupiter Global Emerging Markets
1.38%
0.45%
£9,150
CF Woodford Equity Income
0.75%
0.35%
£5,500
Vanguard Life Strategy 80% Equity 0.24%
0.25%
£2,450
Source: Trustnet Direct
26
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trustnetdirect.com
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