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Investment fees – how they affect your returns

Investment fees are often overlooked, and yet they impact your returns over the long term!
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Reading time: 3 mins

In the world of investing, people can seem more preoccupied by the performance of their investments than the fees they pay. But fees shouldn’t be ignored as they can affect your potential returns. Now could be the perfect time to look at your fees and check you’re not paying too much.


Multiple investment fees
The types of investment fees you need to pay can depend on the way you invest your money. When you invest via an investment management service, a percentage of your total investment is taken out either monthly, quarterly, semi-annually or annually, so you can have access to key services and expertise. If you choose to hire an active asset manager who thoroughly analyses markets’ performances and picks individual investments (shares, bonds, property, commodities, or cash) with the intention to beat the market, you can expect to pay fees for having your portfolio built and adjusted when needed, withdrawing funds, and being given financial advice. Alternatively, robo-investing services, which tend to favour passive funds (baskets with investments from markets across the globe), would charge you for the daily monitoring of your portfolio and funds. At Wealthify, in addition to a fund charge, you pay an annual management fee covering things like adjustments made to your Plan, the buying and selling of your investments, continual customer service, 24/7 access to your Plan, and free withdrawals. If you choose to invest on your own via a trading platform, you can pay a fixed charge every time you buy or sell investments. In addition, you could also expect to pay a platform fee, an admin fee, a fixed set-up fee, and a dealing fee for funds and shares. Whatever way you choose to invest, you should keep a close eye on your fees.


The impact of fees on your returns
The difference between an annual fee of 0.6% and a 1% charge per year may seem negligible to many, but it can add up over time. For example, let’s assume you invest £20,000 and your yearly return is 7.5%. After 20 years, with the power of compound interest (interest earned on interest), you’d get £89,216.34. But let’s imagine, you’re paying an annual fee of 1%, you’d get back around £16,000 less as your returns would reach £73,128.93. You might think there’s nothing much you can do against this and don’t really believe a lower fee would make any big difference. If we take the previous example of a £20k investment, assuming a 7.5% annual growth rate but this time with an annual fee of 0.6%, you’d end up with £79,184.45 after 2 decades, keeping an extra £6,055.52 compared to when you had to pay a 1% fee. As a result, keeping your investment costs to a minimum could lead to higher potential returns.


Make sure you compare fees
Whilst you can’t influence the performance of your investments, you can influence your returns by keeping your fees low. And to do so, you could shop around and compare fees from different management services. Choosing an active asset manager to deal with your investments would typically cost 2.56%1 of your total investment every year (all costs and charges included). On the other hand, robo-investing services rarely charge annual fees over 1%. At Wealthify, we charge an annual management fee of 0.6%. And as with most investments, other costs, including fund charges and transactions, will apply. Technology allows robo-investing services to keep costs as low as possible. Using computers to monitor markets and help investment managers make decisions is cheaper than having one person searching for winners and trying to memorise everything that’s happening across markets. If you want to invest by yourself, you could just buy a cheap tracker fund via a fund provider and your fees could be lower. For instance, Vanguard, a low-cost fund provider would charge you an annual account fee of 0.15%2 and a fund charge varying between 0.06%2 and 0.80%2. However, with Vanguard you need to choose funds, review your investments, and rebalance your investment Plan when necessary, meaning you need to spend some time analysing market data and searching for the right investments. With investment management services, like Wealthify, the hard work is done for you and the additional price you pay for this is often quite small.


1: Investment Week, Aug 2016 - https://www.investmentweek.co.uk/investment-week/news/2469025/retail-investment-fees-in-uk-remain-above-25-a-year-study

2: https://www.vanguardinvestor.co.uk/what-we-offer/fees-explained


Please remember that the value of your investments can go down as well as up and you could get back less than invested.

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