- We reveal the true cost of investing
- Active vs passive investing
- Don't be caught out by high fees and hidden charges
- Lots of charges quickly add up to expensive fees
There's no such thing as a free lunch.
All investments come with costs, usually in the form of annual fees, but some investments are far more expensive than others.
This blog looks at some of the fees charged by different types of investment funds and advisers, the impact they can have on your savings and how to avoid them.
What is an investment fund?
When you invest money, the cash is put into a big pot – known as an investment fund. There are different funds such as bonds, cash and equity which all work differently.
For example, an equity investment fund buys a basket of shares in different companies. The investors make money as these shares increase in value and the companies dish out their profits with their shareholders in the form of dividends.
There are two basic types of funds: active and passive.
Active funds are managed by fund managers and involve large research teams. When you invest in an active fund, you are trusting the fund managers and their research teams to buy and sell investments regularly to try and beat the market and bring in the best returns for investors.
Active funds tend to be more expensive than passive funds because investors are paying for all the professionals involved, in the form of higher annual fund fees. In addition, the more frequent buying and selling of investments in active funds can incur transaction fees and taxes which are then passed on to you.
You may have heard about these fund managers. They often have expensive offices in Mayfair and can earn eye-watering bonuses, the cost of these are ultimately passed on to investors.
You might expect that these more expensive funds would generate better returns for investors, but this isn't necessarily the case. In fact, it's a common misconception that by paying more, you're getting better returns.
The findings in the most recent Asset Management Review by the FCA seem to support this. They stated "We find that many active funds offer similar exposure to passive funds, but some charge significantly more for this. We estimate that there is around £109bn in 'active' funds that closely mirror the market which are significantly more expensive than passive funds".
In reality it's very hard to consistently beat the market. Only a tiny minority of fund managers are able to earn their keep and outperform in the long run.
Passive tracker funds track a target benchmark by purchasing a whole market such as the FTSE-100 or the S&P 500. No skill is required. In his book about investment, John C Boyle compared the market to a haystack… active managers are trying to find the needle in a haystack (i.e. the best fund) whereas passive managers are buying the whole haystack!
And because there are no expensive fund managers to pay, there are no big fees to pass on to you.
The typical cost for an actively managed fund might be 0.75 per cent. For a passive tracker, you can expect to pay as little as 0.2 per cent or less.
This is one of the ways that we keep costs down. At evestor, we invest your cash into a selection of passive funds that are provided by three of the five largest asset management companies in the world: Vanguard, Fidelity and Blackrock.
What about the cost of advice?
The choice between active and passive funds is not the only differing factor in the cost of investing. Each adviser will also have their own costs which can further impact how much of your returns end up in your pocket!
Independent Financial Advisers (IFA) can use either active or passive funds, depending on the adviser but the average cost of traditional IFA including fund costs is 2.56% annually. The fee structure of evestor is made up of the following and totals just 0.48% annually.
|Annual management fee||0.25%|
|Maximum investment annual fee||0.13%|
And with evestor, there are no hidden charges.
Let's see how much that could save you on adviser fees on the infographic below.