THAT SHRINKING FEELING

City watchdog is encouraging millions to invest, but it’s vital to check fees don’t devour profits

THE financial watchdog has now warned too many savers are losing out by not investing. Last week the Financial Conduct Authority (FCA) said too many nest eggs were 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 your portfolio if you are not careful.

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

The watchdog also said in its report that the wealthy were enjoying the benefits of investing, while middle-income households missed out.

It said more people could benefit from investing if they took financial advice, but it said the wealthy were much more likely to do so – with 38pc of savers with more than £250,000 seeking advice, compared to only 17pc of those with more than £10,000.

The report said: ‘These consumers are missing out on 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.’

Yet savers investing for the first time need to pay close attention to the fees charged by investment platforms. Investment platforms, such as AJ Bell or Hargreaves Lansdown, make their money by charging you to invest.

Although these fees are (usually) small, they will still affect your overall portfolio and, ultimately, your returns.

Justin Modray, of Candid Financial Advice, says: ‘Whilst investment platforms provide a similar service, charges can vary widely. It’s well worth shopping around to find the best deal for you.’

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

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 0.25pc of your overall portfolio each year.

Of course, all being well, this should only be a small share of your gains.

If we assume those funds grow by 3pc in the first year, your portfolio will have

risen by £ 300. That makes 0.25pc of your total portfolio around £26 – less than 10pc of your actual gains.

But remember, the charge levied doesn’t change based on how well or badly your chosen funds perform. Management fees can also end up eating into your returns.

A £10,000 investment that grew 4pc every year for ten years would be worth £13,500 with an annual charge of 0.91pc.

Yet the same investment, with a 0.59pc fee, would be worth £500 more, at £14,000.

moneymail@dailymail.co.uk

NEXT WEEK: HOW TO INVEST LIKE THE BEST