A fully flexible way to invest
Fund charges have got much cheaper over the years, which is good news for investors. But it’s still vital to understand the different fees involved and the impact they can have on your investment returns.
The value of investments can fall as well as rise and you could get back less than you invest. If you’re not sure about investing, seek independent advice.
Regulations that came into force at the start of 2013 overhauled the way consumers pay for investing in funds such as Unit Trusts and Open Ended Investment Companies (OEICs). The aim of the Financial Conduct Authority’s initiative, known as the Retail Distribution Review (RDR), was to give investors greater transparency. It makes it clearer how much they pay fund managers for running the fund and how much they pay any broker, investment service, or advisor who buys and looks after their holding for them.
The key outcome of this shake-up is that fund charges are now generally much cheaper and far more transparent.
But even with lower charges, some investors are disappointed by the impact investment costs have on their total returns. This is why monitoring charges is important - you need to know at the outset what costs you'll have to pay, then offset these against anticipated returns.
Asset management groups levy an annual charge for running a fund, which they deduct from the value of the portfolio.
Before the regulator’s overhaul this fee typically averaged about 1.5% a year for actively managed equity funds, while the cost was lower for passive or tracker funds. Fund managers generally paid part of this fee to brokers and financial advisers who sold their products - this was known as trail commission. But this ‘bundled’ fees structure meant the end investor had no clear idea of who was receiving what.
The RDR opened up ‘clean’ or ‘unbundled’ share classes, which include only charges for running the portfolio. So now the fund manager charges you one fee paid from the fund, while an intermediary or broker charges you another. If you take financial advice, or invest through a website, you pay a separate fee to them, but even with the two charges combined, you should be getting a better deal than before.
In addition, there are now ‘super-clean’ or ‘preferential’ share classes, which describe funds where brokers have negotiated special deals with management companies to access even cheaper share classes, reducing the costs yet further.
The result of these changes is that fund fees are a lot cheaper. For example, today a fund manager might charge just 0.75% for an actively managed equity fund and even as little as 0.1% for a passive portfolio.
When it comes to selecting funds, you need to ensure you understand the jargon that comes with the territory. Below we highlight the main charges and what they mean.
Most funds issue a Key Investor Information Document (KIID), or otherwise a Simplified Prospectus, which outlines the fund's key features and charges. You must confirm you’ve read this document before you place any fund purchase. You should look to the KIID for the fullest detail on the costs you might pay through the fund manager.
The one-off charges that may be taken when you buy or sell are listed as entry and exit charges, although through Smart Investor you’ll rarely have to pay these. Next will be the charges taken from the fund over the course of a year - so the OCF expressed as a percentage - followed by any other charges taken from the fund under specific conditions, including a performance fee if one is charged. Performance fees are charges taken if a fund’s investment return is better than a specified level or benchmark. You should also check the accompanying text for any other fees that may be applied in specific circumstances.
The value of investments can fall as well as rise. You may get back less than you invest.
A fully flexible way to invest
If you're starting to build your portfolio, these often low-cost options can help make sure you’re sufficiently diversified from the outset.
You can choose from thousands of investments to build a portfolio to match your needs, and with our expert insight, tools, tips and more, we can help guide you on your investment journey, although we can’t advise you on investments that might be suitable for you.