What does it cost to invest?
- Julia Docker
- Jan 9, 2012
- 2 min read
When it comes to investing money, there are three distinct costs.
Investment funds have an annual management charge (AMC) which pays for the cost of managing the investment fund.
The level of this annual management charge will depend on the nature of the fund, whether it adopts a passive or active management style, or something in between.
Investors also have to pay for the cost of administering investments. This increasingly takes the form of a ‘platform’ or ‘supermarket’ charge.
Finally, if an investor receives the benefit of financial advice, there is a cost of associated with this.
The level of these costs will vary. Historically it has been the case that investors have seen all three costs bundled into one annual management charge.
It has been typical for an investor to pay perhaps 1.5% per annum for an actively managed fund, and from this annual charge each of the three parties is paid.
The fund manager will typically receive 0.75%, the investment platform 0.25% and the financial adviser 0.5%.
As we move ever closer to a more transparent world of retail financial services, with new regulations being introduced on 31st December, the trend is towards an ‘unbundling’ of these three charges.
Unbundling might not reduce the total cost of investing, but it does make it easier for the investor to see where their money is going.
For example, if you are not receiving financial advice, you should not be paying for the cost of this advice. An investor executing their own investment decisions should reasonably expect to only pay for fund management and platform administration charges.
We share the view of many that investment charges in the UK are too high, particularly when compared to the typical cost of funds in the US.
As we move towards an environment of greater transparency, which is something we have always provided to our own clients, we hope that competitive pressure is increased for fund managers and the total cost of investing can be reduced.
Photo credit: Flickr/J D Mack