The investment landscape is not the simplest. It becomes even more confusing when financial advice is added into the mix. This is why HMRC launched the Financial Advice Market Review. But why are providers not being clear on pricing and the implications of pricing?
Why does pricing matter?
The pricing of your investment can have a huge knock on effect to your returns. If your investment were to achieve 5% returns but your provider is charging you 1% and the funds you are invested in have an underlying cost of 0.2% that means your real returns are more like 3.8%.
In this situation if you had £15,000 in your investment account you would receive £750 returns in a year but £180 would be spent on all of your fees, so your returns would actually feel like £570.
With many providers you would also be charged to close your account. At one provider this can be as much as £20 per investment, so if you had a diversified portfolio and were invested in 7 different assets that would be £140.
When you close your account after a year you would have £15,430 as opposed to the £15,750 you might have expected.
What does low-cost mean?
At Moneyfarm we believe that everyone should be able to manage their wealth free of worry. A big barrier to entering the traditional wealth management market for many Brits is the expensive fees some asset managers charge.
Investors can also find themselves landed with surprise charges for running the platform or withdrawing their money. These costs can quickly stack up and eat into investor returns.
At Moneyfarm we keep our pricing structure simple and transparent – that means you won’t be charged any hidden fees, just the management and fund charges.
At Moneyfarm, you pay just 0.7% in management fees on your investments up to £20,000, and then 0.6% on anything from £20,000 -£100,000. You’ll pay just 0.5% on investments from £100,000-£500,000, and 0.4% on anything over £500,000.
There is, of course, an underlying Exchange-Traded Fund (ETF) charge averaging 0.3% – depending on the portfolio, but this is the case with any fund you buy. This means you won’t pay over 1% in total fees when you invest with Moneyfarm.
What will you always have to pay for?
Regardless of whether you set up an account with an independent financial adviser (IFA), bank, online wealth manager or you set it up yourself you will always have to pay that underlying fund cost. That underlying cost depends on the type of fund. Moneyfarm only invest in ETFs, which are typically cheaper than other types of funds, a mutual fund can charge as much as 1% in fund fees alone.
What is in the cheapest way to invest?
The cheapest way to invest is to do it yourself as then you will not incur any management fees. However, investing can be quite complicated and time consuming so if you do not have a good understanding of financial markets we would recommend using a provider to help maximise your returns.
Many discretionary providers (where they manage your investment on your behalf) will charge around 1% or lower on large investments (around £250,000). An IFA will offer completely tailored advice but at a cost of £75-£250 an hour.
5 tips for efficient investments:
- Make sure you understand the pricing – know the difference between management, fund, and on going fund charges.
- Shop around to make sure you get the deal that is right for you.
- Think about the length of your investment – if you are investing for the long term those costs can really add up.
- Consider which funds you’re investing in and balance out anticipated returns against the cost of the fund.
- If in doubt ask the provider, at Moneyfarm we have a team ready to answer any of your questions.
*These calculations do not take tax into consideration.
*The returns discussed in this post are illustrative, the value of your investments could go down as well as up. If you would like to know more please call our consultants on 0800 433 4574