Understanding investment fees

As with anything, when it comes to investing, there’s no such thing as a free lunch. Whilst fees are certainly not the most interesting topic of conversation, fees and charges have a real impact on your net investment return. It is therefore important to understand exactly what you’re paying, and to whom, as part of your overall investment strategy. In this article, we cover some of the main fees and charges you can expect when investing.

Investment fees are, simply put, the costs that you pay to own and trade financial instruments. The fees you pay will depend on the type of investments that you hold, where you hold them and whether or not you are receiving any advice. Broadly speaking, fees and charges can be split into three main categories; product fees, platform fees and advice fees.

Product fees: determined by what you’re buying

Product fees are the charges associated with the financial instruments that you’re buying. Typically, this will be fund management charges but will also cover government taxes and levies.

• Fund manager fees - formally the Ongoing Charges Figure (OCF) - this is an annual fee expressed as a percentage to cover the costs of running a fund, investment trust or ETF. It is charged directly by the asset manager and is usually ‘built in’ to the pricing of the fund. This means that you won’t see a deduction from your investment account for fund manager fees. In some cases, there may be additional fees charged by the asset manager, such as performance fees, up front entry costs or exit charges, although these are becoming less common.
• Stamp Duty - The UK Government levies a 0.5% one-off tax when you buy stocks or investment trusts listed on the UK stock exchange. The duty is usually rounded up to the nearest penny. You do not pay Stamp Duty on open ended funds or ETFs.
• PTM Levy - The Panel of Mergers and Takeovers levy, known as the PMT Levy for short, is a £1 charge applied when you buy or sell more than £10,000 of stock in a UK listed company or investment trust.

Platform fees: determined by where you’re placing your trades

You will usually pay platform fees when investing; they are set and charged by the company that is executing your trades on your behalf. Sometimes swapping from one platform to another can have a material impact on the overall fees you pay each year.

• Custody charges - this is the fee charged for the safekeeping of your assets. Custody charges can be confusing as some companies charge different fees for different account types (e.g. GIA, ISA or SIPP) or account values. Some companies also charge different fees depending on whether you’re buying shares or funds.
• Dealing fees - these are charged by the platform for executing the buy and sell orders that you request. Again, this is an area that can be confusing and, if you trade frequently, can quickly add up to a significant cost each year. Some companies charge different fees depending on whether you’re buying shares or funds.
• Foreign Exchange fees - if you’re looking to buy non-UK domiciled stocks or funds, you will usually be charged for the foreign exchange conversion to do so. For example, if you’re a UK investor buying Disney shares in the US market, your platform will need to convert your GB Sterling to US Dollars in order to complete the buy-trade. Similarly when you sell, your platform will need to convert the US Dollars back to GB Sterling.

Advice fees: not always applicable

Advice fees are, perhaps obviously, charged when you are receiving advice or recommendations from a financial services company (note, we do not provide advice at TILLIT). Sometimes, the advice is provided by the platform that you’re using (for example with robo-advisors) and so the advice fee and custody fee may be rolled together.

However, it is more common for a wealth manager to charge a separate fee. This can sometimes be a flat cost (e.g. £5,000 per year) or a percentage cost based on the amount of money that they manage on your behalf (e.g. 1% per annum). Some wealth management firms may also charge commission on investment trades (i.e. purchases and sales), implementation fees, entry charges or exit charges.

As with some of the other costs that we’ve discussed already, advice and wealth management fees can be a grey area that’s difficult to navigate, as most companies have their own way of structuring their fees and remuneration. The good news is that as a result of improving regulation, financial services companies are now obliged to provide a clear and easy-to-understand illustration of any charges you should expect to pay before you sign on the dotted line.

Fees at TILLIT

At TILLIT, we like to keep things simple. We only charge one fee, a platform fee of 0.4% per annum on the total assets held in your TILLIT account(s). The fee is the same regardless of what you buy (funds, investment trusts or ETFs) and regardless of whether you have an ISA, a GIA or both.

We also believe in rewarding long-term investing and so each year that you invest with us, we’ll reduce our platform fee by 0.01% until it reaches 0.25%. This discount is applied at the client level, not at the account level.

Example 1: After five years of being a TILLIT customer, you would only pay 0.35% per annum. The maximum discount is achieved after 15 years when you would pay 0.25% per annum.

Example 2: You open a Stocks & Shares ISA today and pay 0.40% per annum. In three years time you decide to open a General Investment Account as well, at which point you pay 0.37% on the total assets in your accounts, not just on those in your ISA.

You will still pay product costs at TILLIT, including fund manager fees, stamp duty and the PTM levy where applicable, but we do not apply any additional trading costs.

When markets are volatile, it’s almost impossible to say whether your investments will rise or fall on any given day. The one thing that’s certain is that you’ll pay investment fees. Wherever you decide to invest, making sure you’re clear on your total fees and charges is a sure-fire way to ensure you aren’t caught unawares with excessive costs eating into your returns.

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