Understanding investment charges
When looking to make investments, as well as considering the potential returns of the proposed holdings you should also make sure that you fully understand the costs involved.
Naturally there are a variety of different charges that can be applicable in the financial planning space and with the industry ‘jargon’ it can be difficult to understand what you are actually paying. We have therefore covered some of the main costs that you could incur with an advised investment portfolio.
From 2013, adviser fees must be discussed up front and agreed with the client using a pre-determined payment structure based on the service provided rather than the product recommended. Advisers can charge both initial and ongoing adviser fees. Initial charges may be on an hourly basis or a fixed fee for a piece of work which will depend on the complexity of the work and the time it will take. Ongoing adviser charges are either expressed as a fixed percentage charge based on the asset value, or they can be a pre-agreed annual fee – it is only possible for an adviser to levy an ongoing charge if an ongoing service is provided to the client. If ongoing adviser charges are expressed as a fixed percentage, e.g. 0.5% of the total investment value per annum, the fee will increase or decrease in line with the value of your portfolio.
Many financial advisers will offer an initial meeting free of charge, and this gives a good opportunity for both parties to work out if they feel it to be a good fit. You should normally have the choice whether to pay both initial and ongoing adviser charges directly from your investment portfolio or separately from your cash balances.
It has not been possible for financial advisers to receive commission on new investment products purchased after 31st December 2012. Trail commission was an annual fee paid to financial advisers over the lifetime of the investment product, therefore it can still be in place on investments set up prior to this date. Commission was a percentage fee and was included in the annual management charge of the investment, so it was not always clear how much was being paid. Other considerations which led to it no longer being used were that it was also paid to financial advisers each year without requiring them to review the investment or provide further advice to the client, and it was thought that commission payments provided an incentive for advisers to recommend investments which paid the highest fees, rather than because it was the best solution for clients. It is still possible to receive commission on non-investment products such as mortgages, insurance or protection products (e.g life insurance, critical illness cover, income protection)
Most investments these days are held on a platform – think of a platform like a supermarket, allowing you to buy all your different brands and products under one roof, rather than having to visit multiple establishments. Using a platform simplifies the management of your investments but it does come with a cost. Platform fees are most commonly charged as a percentage of the assets you have invested on the platform. Charges are often tiered, reducing the total percentage charged as the size of the investment portfolio increases, and are usually taken from a cash balance held within the plans. Sometimes platforms will charge a fixed annual administration fee charges in addition to or instead of the percentage charge. They may also charge further for ad hoc activities such as transferring in or out of your portfolio, withdrawing monies or for buying and selling certain investments.
If you are investing in funds (e.g. Unit Trusts or OEICs) then you will incur a fee known as the ongoing charge figure (OCF) – this is made up of the annual management charge levied by the fund house as well as various additional costs such as administration, accounting and regulation (not including transaction costs). The OCF has to be published by the fund managers on the fund Key Information Document (KID). This charge is expressed as a percentage of the asset value and is taken from within the investment as a price adjustment, rather than coming from a cash balance. Due to economies of scale, many platforms can access institutional classes of investment funds which have a lower annual charge, or OCF.
Entry and Exit Fees:
In addition to an OCF you may also have to pay entry and exit charges when you buy or sell an investment fund. This is very similar to a ‘bid offer spread’ which is the difference between the price at which you buy an investment and the price at which you sell it.
Some financial advisers will also charge exit fees, particularly if you wish to sell a plan or transfer away within the first few years. They are often on a sliding scale, reducing over the period the investments are held for. Exit fees are currently being reviewed by the FCA as they believe that unreasonable exit fees discourage consumers from leaving products or services which are not right for them. Firms are bound by the FCA rules and principles to treat their customers fairly and for this reason Five Wealth will never charge an exit fee.
This article does not cover all possible charges but is intended to be a guide to the most common. You may come across charges which have not been covered here, especially on older style investment or pension plans.
Whilst you will always pay fees for holding investments, it is important to understand what you are paying and to factor in the costs when making decisions. If you are paying more than you need to, compounding charges can make a big difference to the value of your investments over the longer term. Five Wealth take the overall cost of plans we recommend into consideration for all our clients, and aim to provide a service that is good value over the long term.
If you would like further information on anything covered in this article, please get in touch via the contact page.