Investors should always be conscious of charges incurred in running their portfolio. Costs such as annual management charges on investment products, platform fees and share dealing charges can all eat into your investment returns.
Say you invest £10,000 over 10 years with an annual return of 5%. With no charges your £10,000 will have increased to £16,289, but annual charges of 1% would reduce the end amount to £14,802 and 2% would reduce it to £13,439.
Over longer periods the effect becomes greater still, so it is important not to overpay for your investment or platform fees. Here are some ways that could help reduce the friction of charges on your investments.
Consider passive funds
One of the easiest ways to reduce your costs is by using passive funds. Passives, also known as tracker funds, aim to replicate the performance of a stock market index, such as the FTSE 100 – the largest companies listed on the London Stock Exchange – rather than trying to beat it.
By contrast, active funds employ a fund manager, or more often a team of people headed by a fund manager, to make the investment decisions. This more complicated and labour-intensive process means higher charges but does not guarantee superior results.
Finding fund managers that consistently outperform is the goal of our Collectives Research Team when selecting active funds, but we would suggest it is only worth paying active fees (which are typically around 0.75% a year) where there is a reasonable probability of superior performance over the long term. In particular, in less well-researched areas of the market such as smaller companies, active management can work well.
Meanwhile, the cheapest trackers have annual charges of around 0.1% and can represent a good option in areas where fund managers struggle to perform consistently. You will find both active and passive funds listed in our Foundation Fundlist of preferred investments across the major sectors.
Examine older products
If you have longstanding tracker funds in your portfolio it is worth checking the charges. Some older passive funds have relatively high annual costs, sometimes in excess of 1%. Investors in these funds should consider alternative funds as the relatively high charges will be a drag on performance and over the long term could result in poorer returns.
Similarly, it is worth examining any older ISAs or personal pension accounts to check the charges are competitive. If not you could consider a transfer to a lower-cost provider. However, there may be exit charges or other costs imposed by your existing provider to administer a transfer.
Reduce platform charges
Investment platforms allow you to hold various investments in one place. If you have investments on an expensive platform consider using a different one. Charles Stanley Direct's annual platform fee of up to 0.25% per annum is significantly lower than most major competitors who charge up to 0.45%. You can find full details of the charges here.
Transferring existing assets to another platform could also be worthwhile to save money on charges – though exit charges or other costs may apply from the existing provider. In addition your portfolio may be easier to administer if more of your assets are held in one place. With investments and pensions scattered around it may be harder to monitor your investments and make any changes you think are necessary.
This article is not personal advice based on your circumstances. No news or research item is a personal recommendation to deal. Past performance is not a reliable indicator of future results and that the price of shares and other investments, and the income derived from them, may fall as well as rise and the amount realised may be less than the original sum invested. Investment decisions in collectives should only be made after reading the Key Investor Information Document or Key Information Document, Supplementary Information Document and Prospectus. If you are unsure of the suitability of your investment please seek professional advice.