Buyer beware: how fund charges erode your gains

Many investors do not know the total cost of their investments, partly because asset managers do not make it easy to check how much a fund costs in total. But the chart below shows how much the charges levied by fund groups and intermediaries can take from your returns.

A recent review by the City watchdog found that the average total charge for funds was 1.13pc a year. This figure included the asset manager’s fee, the cost of the fund manager’s trading, and admin fees. However, many investors pay more, particularly when the costs of an investor’s own broker are added in.

The average fee charged by the manager of an active fund is 0.9pc a year, before all admin and trading costs, compared with 0.15pc for the average passive fund, which simply tracks the performance of an index, the Financial Conduct Authority’s research found.

Fund managers must provide investors with an “ongoing charge figure” (OCF) to state what the fund costs will be for the year. While this industry-standard figure is useful when comparing funds, it does not include the costs of buying and selling the fund’s holdings, certain admin and accounting fees, or, of course, the charges levied by your broker.

The chart, based on figures provided by Candid Financial Advice, shows how much fees eat away at investment growth, particularly over long periods of time.

Our analysis found that £10,000 invested for 20 years and earning 5pc a year but with annual costs of 2pc would be worth £17,873 at the end of the period, with the charges accounting for £5,368. If the fee is cut to 1pc the costs fall to £3,006 and the investment is worth £21,759 at the end of the period.

An active fund with the average fee of 0.9pc a year would, on a £10,000 investment with returns of 5pc a year, cost a total of £1,100 over 10 years, £2,737 over 20 years, £5,177 over 30 years and £14,227 over 50 years.