Investment costs explained – could you save thousands of pounds?

Investing has never been easier. The rise of investing apps means that the top stocks, funds and investment trusts are just the click of a button away for millions of potential investors.

But investing isn’t free in most cases. As well as the amount you want to invest, there’s more to pay thanks to the menu of fees involved when you buy or sell shares, funds or bonds. Crucially, these fees matter because what you pay can make a dent in any gains.

Antonia Medlicott, founder of investing and personal finance advice website Investing Insiders, said: “Investment platform fees can quietly eat into returns far more than many investors realise, especially over the long term. Fees can compound against you just as much as returns can compound in your favour, as a small annual charge today can add up to thousands of pounds over the life of an investment.”

Try 6 free issues of MoneyWeek today

Get unparalleled financial insight, analysis and expert opinion you can profit from.

Start your trial

Sign up for MoneyWeek’s free twice-daily newsletter.

Join more than 165,000 subscribers and keep yourself informed with latest financial news, insights and expert analysis to help you understand what really matters when it comes to your finances.

Join more than 165,000 subscribers and keep yourself informed with latest financial news, insights and expert analysis to help you understand what really matters when it comes to your finances.

Sign up

Before you start investing with an investment platform, it’s important to understand the costs involved, how you might be able to minimise them and get value for money.

What are investment costs and how do they impact returns?

You pay a platform fee for stocks and shares ISAs, general investment accounts and self-invested personal pensions (SIPPs) which can be anything between 0.15% and 0.35%. This covers the costs the provider incurs through you using its services, such as holding your money, trading services and the research and analysis you get access to. Popular investment platforms include AJ Bell, Fidelity, Hargreaves Lansdown and Interactive Investor.

You’ll also pay for the individual funds you hold – as little as 0.05% for plain index trackers (such as the iShares UK Equity Index Fund) and around 0.75% for a typical actively-managed fund – though this can be less or more.

There are more fees to factor in for trades. Many platforms charge ‘trading’ or ‘dealing’ fees every time you buy or sell an investment. This is where costs can really mount for those who are active investors.

There are some trading platforms that let you trade for free. There will be platform fees however, and perhaps others to look out for. So don’t be swayed by free trades alone.

If you buy shares outside the UK, there will be fees to factor in for foreign exchange (FX). This charge is for converting your pounds into whatever currency the investment is traded in.

Another one to look out for is the government’s stamp duty reserve tax when you buy UK shares electronically. You’ll be charged 0.5% of the value of the shares you’re buying. It’s deducted at the same time you buy the shares so you don’t need to pay separately.

Research undertaken for investing platform IG’s Fat Cat Index, which quantifies the gap between the most expensive investment platforms in the market and the five best-value providers, found that more than half (52%) of UK investors are using the 12 most expensive stocks and shares ISA providers on the market, costing the average active investor around £515 in extra fees compared to a lower-cost alternative.

“Our recent Fat Cat Index showed that some UK investors are overpaying by as much as £922 per year on fees and charges,” said Michael Healy, managing director UK and Ireland at IG Group. “If you're unsure about your current provider, or thinking of opening your first account, always check the fees and understand the total cost of investing, including platform fees, FX charges and dealing costs.”

Don't miss our beginner's guide: how to start investing.

What investment costs can I expect?

With more and more investment and trading platforms to choose from today, platform fees and charges to buy funds and shares have come down significantly over the years.

For platforms, a lower fee option might be a no-frills style service with access to an investing account and less emphasis on customer service, research and analysis. These are designed for seasoned investors not looking for or in need of much support, perhaps.

You might pay a percentage of your savings held, or a subscription-style charge with some platforms where you pay a monthly fixed fee.

Costs will vary according to how much money you have invested, and how often you trade, as well as the platform you choose.

So the fixed subscription charge could be more cost effective if you like to trade actively compared to an investor who adopts more of a buy and hold strategy, or if you have a very large amount invested.

To decide which is likely to work out as better value, you’ll need to crunch some numbers.

To give you an idea of how charges can add up over the year, let’s say a portfolio is invested solely in funds with 10 trades of £100 per year.

According to calculations by Compare + Invest, a £25,000 ISA could cost between £48 and £131 in annual fees, depending on the provider.

For a bigger portfolio of £100,000, the fees can be between £50 and £450.

The difference is significant, but remember – cheapest isn’t always best. It’s what’s right for your particular needs.

How to reduce investment costs

You can cut the cost of investing by checking you’re paying the most competitive platform fees for the service you need. You can do this by using a comparison website such as Compare + Invest.

You can also reduce costs by choosing low-cost passive tracker funds over actively managed funds. But again, if you believe in the potential of active funds where skilled managers offer the potential to generate above-average investment returns that beat the market (and trackers) then you can still find well-priced active funds.

Some platforms offer ready-made fund ranges for investors who don’t have the time or inclination to select their own investments. Essentially they are a pre-selected bundle of funds wrapped up and ready to buy, usually according to differing levels of risk. You then pick the risk level you’re comfortable with.

However, you’ll pay a little bit extra for the convenience of having someone else do the hard work for you. If you really wanted to save money, you might make the time to do your own fund selection.

How much should I pay in investment fees?

There’s no right or wrong amount. It’s about getting value for money and having the service that’s right for you, even if that means paying a little more.

The best value platform for you will depend on what you want to invest in and how often you plan to trade (buy or sell) stocks or funds.

However, it’s worth making sure that you’re not paying more than you need to. If you haven’t reviewed your existing service for a number of years, you may be paying too much.

If you find that is indeed the case, switching is an option. To do this you need to open a new account – either an ISA, general investment account or SIPP – and fill in a transfer form with the existing provider that you want to leave.

If you do intend to switch, it’s worth investigating if there will be an exit penalty. The City watchdog, the Financial Conduct Authority (FCA) clamped down on this in recent years and so many providers cut their fees or scrapped them altogether. But they do exist. Some charge as a percentage of a portfolio and others charge per holding.

If you have a sizable amount invested – or many holdings – it’s important to understand the fees you’ll face by leaving.

We explain how to get a cashback bonus via pension and ISA transfer offers in a separate article.

What are the big firms’ investment fees?

We’ve analysed the big investment firms’ investment fees to give you an idea of what you can expect to pay.

We’ve looked at annual platform fees, trading/dealing fees, regular investing charges and FX fees across their stocks and shares ISAs.

You can also use an online ISA fee calculator, which will tell you how much you’re likely to pay in fees depending on the provider.

AJ Bell

AJ Bell’s annual platform fee if you hold shares is 0.25%, which is payable monthly (maximum £3.50 a month).

If you hold funds, you are charged 0.25% on a portfolio worth up to £250,000, 0.10% on the next £250,000 to £500,000 and nothing on a portfolio worth more than £500,000.

The shares dealing fee is £5, or £3.50 if you had 10 or more share deals in the previous month. The fund dealing fee is £1.50.

There is no regular investing fee. FX fees are capped at 0.75%.

Fidelity

Fidelity’s annual platform fee is 0.35% on a portfolio worth between £25,000 and £250,000, or if you have signed up to a regular savings plan. If your portfolio is worth less than £25,000, you pay a £7.50 per month fee.

Accounts with £250,000 or more invested are charged a platform fee of 0.2%.

Customers are charged £7.50 for each deal placed online or £1.50 per deal if you are signed up to a regular savings or withdrawals plan. There are no fees for buying or selling funds.

FX fees are tiered based on the amount you are dealing, capped at 0.75%.

Hargreaves Lansdown

Hargreaves Lansdown’s annual platform fee is up to 0.35%, which is charged monthly and based on the percentage of the value of your investments.

You are charged 0.35% on funds held worth up to £250,000. Above this threshold, the fee lowers on a sliding scale based on the value of your funds. No charge is applied on any funds over the £2 million threshold.

If you’re dealing in shares including ETFs, the annual platform fee is 0.35% (capped at £12.50 per month).

Customers pay a £6.95 dealing charge on shares that are bought or sold, which reduces to £3.95 if you’ve placed 20 or more trades the previous month. A charge of £1.95 applies to bought and sold funds.

It’s free to regularly invest with Hargreaves Lansdown while FX fees are capped at 1%.

Interactive Investor

Interactive Investor’s fees work slightly differently in that you sign up to a monthly plan. The Core plan costs £5.99 per month, the Plus plan is £14.99 per month and the Premium plan is £39.99 a month.

Under the Core plan, you have a portfolio value limit of £100,000, it costs £3.99 to buy and sell funds and shares, and there’s no fee for regular investing. FX fees are capped at 0.75%.

Vanguard

Vanguard has different annual platform fees depending on whether the account is self-managed or managed.

If you have a balance under £32,000, there is a £4 a month fee for a self-managed account. Managed accounts are charged 0.15% of the total value of any investments.

For balances of £32,000 and over, there is a 0.15% fee (maximum £350 a year) for both self-managed and managed accounts.

There is also an additional fund management charge of 0.06% to 0.79% for self-managed accounts, depending on the funds you pick. For managed accounts, the average fee is 0.17%, according to Fidelity.

You are also charged up to 0.26% when trading ETFs. You aren’t charged for trades of Vanguard funds.