One subject that comes up from time to time with prospective clients concerns the matter of investment charges.
We will often be challenged along the lines of what they are , why they exist, and whether they are necessary. Sometimes, there will be a barbed comment along the lines of: “Everyone seems to get paid a fee to manage my money.”
Given how important your investment portfolio is, it’s perfectly understandable if you spend time analysing it, and have concerns about the cost of managing it.
So, I thought I’d take the opportunity to break it down for you, explaining what the different charges are that you should expect and what they relate to, why they are applied, and why I believe them to be reasonable given the responsibilities they entail.
You should note that the figures in brackets are a typical amount we would expect to see in the market. The amount you’re charged will be subject to your individual circumstances.
Investment advisory, investment management, or adviser charge (0.75% – 1% annually)
What it’s for
This is the fee that that your financial intermediary is paid for advising on or managing your investment portfolio.
If they are just managing the investments, it’s a fairly straightforward deduction of the funds under management to get to the net cost of investing.
However, if this charge also covers wider financial planning services, as is the case with Charlton House, it’s not quite so straightforward to make that assessment as there is a lot of value delivered through the wider financial planning that we undertake for our clients.
Why the charge is made
This charge is to remunerate your financial planner for the services that they provide in relation to your investments and financial planning and having it facilitated from your investments is a straightforward way to deal with this for all concerned. The alternative would be having to settle this with an invoice every month or year.
Justifying the cost
Choosing whether or not you want to manage your own investments will depend upon your level of investment expertise and the amount of time and resource you have for this. Even if you have expertise and time it will also depend upon whether you have the inclination to do the job yourself.
In all honesty, I could imagine having better things to do in my own retirement than sweating over my Bloomberg app each time there is any dramatic fluctuation in the markets. Although I do accept that some people may enjoy that, in the same way some people enjoy riding rollercoasters or parachuting!
To be fair, some people can manage it very well and, with a mixture of luck and skill, can achieve great results. However, I’ve seen many more make serious errors of judgement and, as a result, end up with serious irrecoverable losses.
Discretionary investment fee (0.1% – 0.5% annually)
What it’s for
This will be payable if your financial planner decides to outsource investment decisions and trading to a specialist investment manager who can manage your entire portfolio on your behalf.
Because you give them full discretion to make investment decisions for you, they are often referred to as discretionary fund managers (DFMs).
We utilise DFMs for some of our clients for a number of reasons, such as the size of the investment portfolio and specific investment objectives.
Why the charge is made
This charge provides you with access to specialist investment managers, backed by research teams and fund managers with a wealth of experience in managing client portfolios. It can also mean you enjoy lower overall investment costs as DFMs may often be able to access the cheapest institutional share classes of funds that simply would not be available directly.
Justifying the cost
The best way to appreciate the benefit you get from using a DFM is to consider the alternative, which is to have your investments managed on an advisory basis.
This can result in a situation where the following scenario could easily play out:
- You get an investment recommendation from your investment adviser/ financial planner
- You spend time thinking about it
- You are chased you for a response (you might be on holiday)
- You finally provide your affirmative instructions, and the trade is executed.
That process could take some time, which could easily result in you missing out on an investment opportunity as the value that existed has closed. By granting discretionary powers to a fund manager, you can avoid this and have decisions made on your behalf, within agreed risk parameters, in a timely manner.
Investment platform fees (0.1% – 0.5% a year)
What it’s for
This fee provides you with access to a centralised trading platform for all your investments.
Often, you can hold different accounts on such a platform, such as a General Investment Account (GIA), Individual Savings Account( ISA), and your pension fund.
Why the charge is made
Put simply, using an investment platform, and having all of your holdings in one place, can help you avoid a logistical nightmare.
The alternative would be for you to have a diversified portfolio of, say, 20 to 30 funds held with a series of different fund houses. You would have to deal with multiple companies and have to receive and collate data from all of them to get an overview of your investment assets.
In addition, many investment platforms can give you access to institutional shares that are cheaper than standard shares. As a result, you could save money.
Justifying the charge
To be fair, I would never dream of constructing an investment portfolio of holdings directly with fund management companies, and I would strongly recommend that you avoid creating such a potential headache for yourself.
As well as being problematic in terms of the time it would take to manage your investments, it would make the running of our financial advisory practice unprofitable – something that could only be addressed through charging clients increased fees to cover our time costs, which would almost certainly be in excess of the standard investment platform fee!
So using a platform is better for everyone and keeps total costs down.
Dealing fees (£0 – £20 for each trade)
What it’s forÂ
Every time you buy or sell investment assets, you could be liable to pay a dealing fee. This is payable to the investment platform, but it can also cover the costs incurred by the platform to some of the other investment institutions involved in the settlement and execution of your trade.
Why the charge is made
There are costs involved with the trading of any goods and services, and investments are no different. Platforms do enjoy economies of scale which mean their dealing fees tend to be lower than if you were dealing directly with fund houses and other investment providers.
Justifying the charge
To my mind, the benefit you get from having your investments managed centrally on a platform is clear justification for the relatively low dealing costs you enjoy.
The alternative is to either face potentially higher costs elsewhere or hold the same funds all the time and never rebalance or switch.
Other underlying investment costs
The various active, passive, and exchange-traded funds (ETFs) you hold in your portfolio are likely to attract annual management charges (AMCs).
Unlike the other charges you’ve read about, these are not explicitly outlined on any statements you’ll see.
They can be justified in terms of being the cost to the investment company of running the various strategies that underpin each of their funds.
The more complex the investment, the higher the charge is likely to be. This is why passive and tracker funds – that are often based on computer algorithms – can carry lower AMCs than their active counterparts.
Get in touch
If you’d like to talk to us about your own investments and the issues you’ve read about here, then please get in touch.
You can contact us by email or, if you prefer to speak to us, you can reach us in the UK on +44 (0) 208 0044900 or in Hong Kong on +852 39039004.
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