One of the most common roadblocks for people getting started with investing is fees. You might be interested in what a stocks and shares portfolio can do for your savings and you may have done all your research and picked a product that suits you. When it comes down to parting with your cash and paying fees, though, it can be easier to put it off.
It’s important to understand how fees can impact your returns – the reason any of us invest, at the end of the day. Some providers will offer discounted fees on larger investment amounts, while others will take one clean percentage of your annual returns. Some will charge additional fees under the surface, where others will give them to you as one transparent figure.
With the end of the financial year fast approaching, here is our breakdown of the different fee structures you might find for stocks and shares ISAs. We’ll go into how they can affect your bottom line and why ours is a cheap, efficient option.
Common fee structures
There are a few common types of fee structure that you’ll come across when you get started with investing. They vary both in the amount they take and the impact they have on your investment style. Being aware of the different types is a good first step in choosing a plan that suits you.
The following is a list of the most common fee structures wealth managers use:
Single fee – the most basic fee structure you’ll find is ‘single fee’ or ‘one fee’. As you might expect, this means that no matter the value of the account, you’ll pay the same percentage in fees. So, an account with £200,000 would pay the same percentage in fees as one with £1,500.
Nominal fee – a nominal fee structure means that the company charges a set amount regardless of the value of the account. So, someone with £200,000 in their account would pay exactly the same amount in fees as someone with £1,500. This approach quite clearly favours those with larger amounts to invest.
Commission/trading costs – these are fees associated with the act of investing. So, this means you are charged a fee every time you or your investment manager takes an action, to cover any trading costs or pay for the service on a use-by-use basis. This can add up, particularly if your account is diversified and actively managed.
Zero commission trading – with this approach, the account and trading fees tend to be either low or 0%. In return, your broker will sell your trading information to market participants ahead of any trades you make. This can, in many cases, mean you getting a worse price.
There are a number of additional things to look out for when choosing a wealth manager. These include any hidden fees for trading, depositing, withdrawing, etc. The best wealth managers will charge a transparent, easy to understand fee with no nasty surprises in the small print. Make sure you do your research before going with a provider.
The impact of fees on returns
Something a lot of people don’t necessarily realise when they start investing is how much of an impact fees can have on returns. The difference between half a percentage point might not seem like a lot, but over time it can make a huge difference to the size of your savings.
You might have heard of compounding interest with regard to investing. Well, fees work in the same way, just with the reverse impact. As your wealth grows, the difference in percentage takes on a compounded significance and can, over the years, seriously eat into your real returns.
To give you a better idea of the impact of fees over the long term, we simulated three investments paying 0.5%, 0.8% and 1% in fees respectively. The chart above shows the trajectories of the accounts and demonstrates the cumulative difference made by the fee percentages.
How Moneyfarm’s fee structure works
At Moneyfarm, we take an approach to fees that, we think, is the most beneficial for everyone involved. Put simply, our fees are tiered – as you invest, your money falls into four separate ‘buckets’. These range from the first £10,000 you invest to anything over the £100,000 mark, with the percentage paid in fees getting smaller with each threshold.
So, each ‘bucket’ is charged at a different rate. This means that the more you invest, the lower the real rate of fees will be for your account as a whole. This benefits our clients – as their accounts grow – their fees drop. Past £100,000, the marginal fee on every pound managed is 0.35%.
Our pricing page features a widget that lays out exactly how much you’ll pay in fees depending on the amount you’re looking to invest. You can incrementally increase the amount invested to see the difference it makes to your total percentage.
Investing with Moneyfarm gets cheaper as your wealth grows. We’re also fully transparent about the investment fund fees we charge – you’ll never pay more than 1.04% when you invest with us, as an absolute maximum. You can also get fees down to as little as 0.35%. Included in the price, you get access to our team of investment consultants, who are on hand to discuss your investment decisions and the progress of your portfolio, as and when you need them.
The key takeaway for anyone learning about fees is to do your research. It pays to have a fundamental understanding of the things we’ve discussed in this piece, but you’ll need to interrogate any provider’s fee structure before making a decision. If you want to discuss Moneyfarm’s fee structure in any more detail or find out how much you’ll be paying on a certain amount, feel free to get in touch with our investment consultancy team.