Make sure fees don’t shrink your profits

As the City watchdog encourages millions to start investing...

THE Financial Conduct Authority (FCA) has now warned too many savers are losing out by not investing. Last week the watchdog said too many nest eggs were being kept in ordinary cash accounts paying well below the rate of inflation.

Money Mail is running a series of articles to help savers beat inflation and rock-bottom interest rates through investing. Today we look at how charges levied by investment platforms can eat away at a portfolio if you aren’t careful.

It comes after the FCA said it did not make sense for many savers to hold their money in cash savings accounts. Its research found that 37 pc of savers with more than £ 10,000 were not investing, and another 18 pc were holding 75 pc of their money in ordinary savings accounts.

The watchdog also said in its report that the wealthy were enjoying the benefits of investing, while middleincome households missed out. It said more people could benefit from investing if they took financial advice, but that the wealthy were much more likely to do so, with 38 pc of savers with more than £250,000 seeking advice, compared with 17 pc of those with more than £10,000.

The report said: ‘These consumers are missing out on the opportunity of potentially higher returns. We view this as a harm to consumers as, depending on individual circumstances, holding money in cash will see its value eroded by inflation and will miss the historically higher returns available from investing.’

Yet savers investing for the first time need to pay close attention to the fees charged by investment platforms such as AJ Bell or Hargreaves Lansdown. They make their money by charging you to invest. Although these fees are (usually) small, they will affect your overall portfolio and, ultimately, your returns.

Justin Modray, of Candid Financial Advice, says: ‘ While investment platforms provide a similar service, charges can vary widely. It’s well worth shopping around to find the best deal for you, as choosing an expensive option could end up costing hundreds or even thousands of pounds extra over time.’

Investors using platforms can expect to pay an annual management fee, as well as costs for individual trades, and perhaps exit fees if they move to another provider.

As with a mobile contract, the ‘best’ deal for you will likely depend on your circumstances. For example, let’s assume you open a Youinvest account with AJ Bell and deposit £10,000. You then split the money evenly across five investment funds. This will mean paying five trading fees: a total of £7.50 in this case. Although those fees are one-off, AJ Bell will charge 0.25 pc of your overall portfolio each year (capped at £3.50 per month).

Of course, this should be only a small share of your gains. If we assume those funds grow by 3 pc in the first year, your portfolio will have risen by £300. That makes 0.25 pc of your total portfolio around £26 — less than 10 pc of your gains. The charge doesn’t change based on how your funds perform.

NEXT WEEK: HOW TO INVEST LIKE THE BEST