Investment fees: What are they and why do they matter?
Nobody likes paying fees, but fees you don't understand or even know about are worse.
Most services come with fees, it’s how businesses make money.Investment brokers are no different. Although many fees are unavoidable, some fees can be reduced.
We’ve written this guide to help you navigate the choppy waters of investment fees, to help you make your money go further.
What are the different types of investment fee?
One of the main reasons fees are so confusing is because of the investment industries reluctance to be clear or transparent. Each broker seems to give fees by different names and titles. In general though, fees come in 5 different types:
- Custody fee. Does what it says on the tin. This is paid to the people responsible for holding and investing your money.
- Transaction fee. This is the cost of buying stocks and shares, passed onto you in the form of a transaction fee.
- Trustee fee. Usually this is only found with SIPPs, but covers the cost of the legal infrastructure of the investment platform you’ve chosen.
- Advice fee. This is if you have a financial adviser, so not every platform charges this.
These fees can have different names across various platforms. Likewise they can come bundled together or be charged separately to add a bit more confusion. Let’s go into a bit more detail about what each one means.
AKA: Custody Fee, Trustee Fee
This is a similar fee to the Management Fee and in some instances they may be bundled together. This fee will cover the people responsible for holding and investing your money as well as the people managing the associated legal structure of your investments.
AKA: Brokerage Fee, Entry and Exist Costs, Front-End Load or Back-End Load (Mutual fund only)
This fee can be charged every time you make a transaction, whether it be a buy or a sell. These fees can be either a set amount per trade or a percentage of the transaction amount. If you are buying and selling lots of small shares, these fees can add up quickly.
AKA: Ongoing Charges Figure (OCF), Fund Management Fee, Total Expense Ratio (TER), Internal Expenses, Total Annual Charge (TAC), Annual Account Fee.
This fee is generally paid as a percentage of the managed fund and is paid to the fund’s advisor for their advisory and management services. Depending on the company, this fee may also cover administrative services related to the fund as well.
Usually only applies to SIPPs
AKA: Ongoing Advice Fee, Fee For Advice, Financial Advisor fee
This is the fee you will pay if you choose to seek the advice of a financial advisor to assist you with your investments and the related decision making.
Know your fees
As we’ve seen, fees vary hugely between brokers. They can also vary between types of investing. SIPPs for example will often have the management and custodian fees bundled as they will probably be offered by the same provider.
What kind of investing will you be doing?
This is an important question to ask when working out what fees you will pay. Will you buy and sell individual shares or invest as part of a mutual fund? Will you be dealing in lots of small shares or fewer big ones? Will you seek the assistance of a financial advisor or go it alone? These are all questions that will affect the type and amount of investment fees you will pay.
How much will I pay in fees?
This depends on how much you’re planning to invest. Obviously if you’re investing bigger amounts, you will pay more in fees. However you will also (hopefully) be making more profit so maybe the fees will be worth it. If you are hobby investing and dealing in only small amounts of money, you should be especially careful of fees as they may end up adding up quickly and your return may not be enough to make the fees worthwhile. Some total investment fees can be up to 2% per year or even higher of your total investment value, this will really add up over the years.
How important are fees?
Depending on your situation, potentially very. Even a small difference in fees over a long amount of time will add up to a significant amount of money.
However, it’s also important to remember that the amount of fees you pay is not necessarily the most important thing, you also need to consider what you are getting in return for your money. If you find a broker who charges 0.5% annually but does very little to help you grow your investment and you find a broker who charges 2% but spends hours and hours working to improve your financial position, then you may actually be better off for paying that 2%.
How can I find out how much I’m paying?
If you’re already investing then ask your broker directly for a breakdown of the fees they charge. Make sure they include all the admin fees and how much you pay in transaction fees per trade.
If you are thinking about trading, do your homework and some comparisons between brokers. Remember not only to focus on how much each provider is charging, but also what exactly you get for your money.
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