This content is for information and educational purposes only. It should not be taken as financial advice or investment advice. To receive tailored, regulated financial advice regarding your affairs please consult us here at Hanson Financial Services (financial advice in Liverpool).
Over the long term, investing has the potential to generate strong levels of wealth for the wise, patient investor. Close by, however, are governments looking to tax it and also companies which seek to take a cut. These fees have the potential to eat significantly into your investment returns without careful attention and management. In this article, our financial planning team at Hanson Financial Services (financial advisers in Liverpool) explain some of the common fees an investor might come across. We also offer some ideas on how to mitigate them and keep costs down.
Fund management fees
Some investors like to pick individual stocks. Long-term investors, however, will likely benefit more from including good funds within their portfolio. These “pool” your money with that of other investors into 100s – even 1000s – of companies to spread out your risk. Generally, funds like these come in two forms: passive and active. The former tracks a market index such as the FTSE 100, requiring little fund management and so keeps costs down (e.g. less than 0.20%). Active funds, however, tend to be costlier (e.g. over 1%) as they employ a professional fund manager and research team to buy and sell stocks on their investors’ behalf. To keep costs down, therefore, consider going through your list of funds with a financial adviser. It may be that you can save by moving to other funds which offer lower fees without lowering performance.
Trading fees & stamp duty
Each time a fund purchases a share – or sells one – this incurs a trading fee. This helps to cover the fund’s broker costs for placing trades in the stock market, and are typically passed on to the investor. There is also potentially stamp duty to pay on purchased shares; typically levied at 0.5% on the transaction (Stamp Duty Reserve Tax (SDRT)). Not much can be done to avoid the SDRT on shares you buy unless shares are given to you for free, or you subscribe to a new issue of shares in a company. However, you can mitigate trading fees by selecting funds with lower buying/selling activity. Certain actively-managed funds place a self-imposed limit to keep costs down for investors, whilst passive funds naturally switch investments less often.
If an investment manager is able to demonstrate exceptional returns for their fund to investors in a given period, then this can lead to a performance fee. This “rewards” the manager for the hard work put into producing such strong returns, and is typically a percentage of investment profits. A specified “hurdle” must usually be crossed for a performance fee to trigger. Many funds do not use performance fees any longer, with critics such as Warren Buffett pointing out that it lets fund managers take a share of the fund’s profits – but not its losses. If you wish to mitigate this fee in your portfolio, you can ask your financial adviser about replacing those funds which use them.
Whether you invest through a pension or a general investment account, your funds will need to be “housed” on a platform of some kind. These services also charge a range of fees which you need to be aware of and manage carefully. Fees can include:
- Set up charges. A one-off fee when you open your account.
- Yearly charge. This could be a flat fee (e.g. £75) or a percentage of your investments.
- Spread. A charge levied when you make a trade on the platform. This is often seen in the difference between the market rate for a company share and what you buy/sell it for.
- Inactivity fees. Some platforms charge you if you make no trades within a year or so.
- Foreign exchange fees. If the fund/stock you want to buy deals in US dollars and you transact in British pounds, then the platform may charge you for the conversion.
- Exit charges. If you finally decide to leave the platform and “cash out” your investments or transfer them elsewhere, then you may be charged for doing so. Pension schemes can also impose a transfer/exit charge, so speak with a financial adviser if you want to move your funds to another scheme.
These types of fees can be mitigated by surveying the market for good platforms. In 2021, there is a wide range of choice and increasing competition between providers has driven down costs in many areas. Inactivity fees can be avoided by making sure your portfolio is not dormant (e.g. buying/selling minor investments which do not exceed the charge). Exit charges can be lowered by not withdrawing money from your account regularly, and currency exchange fees sometimes are mitigated by waiting for the currency exchange rates to move in your favour.
Conclusion & invitation
Are you interested in talking to a financial adviser about your pension and investment planning needs? We’d love to assist you here at Hanson Financial Services.
Please contact us to arrange a consultation with our team – free and without obligation – to gain more clarity and peace of mind over your financial plan.
You can call us on:
Liverpool Office: 0151 708 7616
Manchester Office: 0161 401 0991
Chester Office: 01244 960 039Or email via: [email protected]