How much are you paying for your savings?
A large number of people wrongly think their stocks and shares ISA is free to use
hen you took out your investment ISA, were any fees or charges involved?’ That is the question the Financial Conduct Authority asked over 500 investors who had made an investment in the last two years without taking regulated financial advice.
Incredibly, almost half (46%) appeared to believe their ISA was free, while 7% said they didn’t know. Only 47% of respondents thought there were any fees or charges to pay.
So let’s dispel that myth once and for all. If you are saving in an investment ISA, a pension or any other financial product, it is certainly not free.
WHY FEES MATTER
The way you are charged will vary depending on who you save with and what you do, but it’s absolutely vital you understand and are comfortable with the price you are paying.
The effect of charges over time can be significant and reducing your costs by even a tiny amount can save thousands of pounds.
There will usually be two sets of fees you’ll pay to invest your money (assuming you aren’t taking financial advice).
The first is to the provider or platform that administers your savings. Different firms charge in different ways – some will set a fee in pounds and pence; some will charge you a percentage of the assets you invest with them; and some a combination of the two.
You could also pay extra fees for additional services, such as entering drawdown after age 55.
The second is to the fund manager who invests money on your behalf. Some of these will be ‘active’ managers where you pay a premium for the fund selector’s stock picking skill, and some will be ‘passive’ where costs are lower as the fund simply tracks an index or benchmark. In this case, fees are always charged on a percentage basis.
Active managers argue they are worth the extra money because they can potentially outperform an index or benchmark, although this is not guaranteed.
WHICH IS THE MOST IMPORTANT FIGURE?
When assessing fund manager costs the Ongoing Charges Figure (OCF) is probably the most accurate and easily comparable measure currently available.
You should be able to find this figure via your provider’s website or in the Key Features Illustration (KFI) documents they send you.
While reasonably comprehensive, the OCF doesn’t cover things like the costs associated with buying and selling underlying investments (known as ‘transaction costs’).
Once you’ve got this information, you’ll be in a much better position to assess the value for money you’re getting from both your provider and your underlying investments.
Tom Selby, Senior Analyst, AJ Bell