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 trustnetdirect.com trustnetdirect.com 27