How to avoid the 'fees iceberg' when investing in tracker funds

Most people who invest in passively run tracker funds (which simply track an underlying market) do so because the management fees are lower than for actively managed funds (which try but often fail to beat the market).

But if you're not careful, the fees your broker or fund platform charges to hold your tracker funds can outweigh the benefits.

This matters right now, because the rules on such charges are changing. Fund platforms have historically made their money from commissions paid out of the annual management fees on active funds. This is being banned by the regulator.

Instead, platforms must charge openly for their services, meaning funds of all types can now compete on a level playing field.

Unfortunately, the new charges spelled out by the likes of Hargreaves Lansdown, Fidelity and Barclays are designed with active funds in mind threatening to leave tracker fund and exchange-traded funds (ETF) investors at a disadvantage.

Active fund owners, who had paid 1.3%-1.5% a year in fees (up to half of which was rebated to the platform), now face paying a bit less in total.

With Hargreaves, for example, the average active fund will charge 0.65%-0.75%, and you'll pay 0.45% a year for the platform itself (on fund holdings of up to £250,000).

But Hargreaves now levies the same 0.45% a year on index funds held within a tax-advantaged wrapper such as an individual savings account (Isa) or self-invested personal pension (Sipp).

What does this mean? Say you hold £250,000 in Vanguard's UK Equity Index Fund via a Hargreaves Lansdown Sipp. You currently pay £375 (0.15%) in annual fees to Vanguard and £24 a year for the platform. But under the newcharges, from 1 March, the platform charge leaps to 0.45% a year, or £1,125, three times the fund fee and a near 50-fold jump on today's level.

It's an extreme example, but it shows why holders of low-cost funds need to be wary.

In time, cheaper platforms specifically for trackers will emerge. But meanwhile, you need to pay close attention to new pricing policies. No one provider is best value across the board it depends on your account size, type of holding, tax wrapper and trading frequency.

My colleague Cris Sholto Heaton looked at a number of promising options in last week's issue. But always ensure you can switch at minimal cost from firms offering a bad deal.

Paul Amery, formerly a fund manager and trader, is now a freelance journalist.