Since the Retail Distribution Review raised a lack of transparency in investment fees as a major issue, focus has shifted to calls for a simplified fee structure by investment managers.
There has been too little progress since RDR, however, Stead argues. He says there are ten fee types particularly confusing for UK investors.
“At the end of another tax year, investors still face an intimidating wall of investment charges. There are dozens of different charges, and new fee types have appeared in the last 12 months. Progress in simplifying fees is too slow, and customers are suffering, he said.
“As a general rule of thumb, you should be very wary if you’re paying more than 1 per cent in investment management fees per annum. That applies to those investing for the first time and for those with large portfolios and a great deal of experience.”
Below, Stead reveals 10 of the most common and confusing fee types faced by UK investors:
1.Fixed monthly fees
Fixed monthly fees levied by micro-investing apps, where the sums invested are small, can look trivial Stead says but the fees can represent a relatively high percentage of a customer’s total investment.
“£1/month represents 1 per cent of a £1,200 portfolio over a year, a high charge before typical platform fees and underlying charges are taken into account.”
These are charges for just starting an account – sometimes as high as 7 per cent but more often around 5 per cent of the total investment – “this is a steep cost just to get started,” he said.
Stead said: “A charge for doing nothing – most common on options trading platforms, this fee also features on some do-it-yourself stocks and shares trading platforms.”
Administering a deceased customer account fee
The only certainties in life are death and taxes, as the well-known saying goes, but some investment managers combine both. “[This is] a charge designed to hit people at their lowest point,” Stead said.
This is a charge just to use the platform. “Platform fees tend not to include the costs of actually investing in a fund, which will carry charges of its own. It's just a charge that the platform picks up for doing nothing.”
A charge to reinvest your own dividends or rebalance your portfolio
These are less common but when administered can be detrimental to long term returns. “Failing to reinvest dividends or rebalance a portfolio can significantly affect long-term returns, so this charge nudges customers into worse investing behaviours. These should be intelligently automated processes, offered as standard.”
There are more DIY investors than ever but platforms such as Hargeaves Lansdown charge customers per trade when buying or selling stocks or bonds (although not open-ended funds). Typical charges are around £10-12 per trade, which can be strongly detrimental for investors with smaller pots.
Missed direct debit payment
If your direct debit payment isn’t received, for whatever reason (for example, if a customer couldn’t afford to invest that month, but forgot to cancel the payment), some firms charge a penalty of up to £25, according to Stead
Some firms charge for every product. ISAs, JISAs, SIPPS and more can each carry hidden charges of its own. These can “stack up rapidly” when making investments in a range of separate wrappers, Stead says.
Sometimes you want to just take your money and run, or at least to park it somewhere else. This is a fee for choosing to take your business elsewhere, or simply for deciding to use one’s own money.
“It’s anti-competitive and allows firms to under-serve their existing clients, because they know they can’t afford to leave,” Stead said.
Nutmeg charges two fees, a management fee and an investment fund fee. The latter covers the costs of ETF providers.
“We separate this fee off because it varies week by week – if we can move into a new, better, cheaper ETF, we will do so immediately – and we can cut the costs to the customer immediately too, without having to constantly change Nutmeg’s own management fee,” he said.