Investing has never been easier. You can buy and sell shares and funds on your phone or tablet while you wait for the kettle to boil or in the back of a taxi on the way to meet friends.
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 eats away at your returns.
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.
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What are investment costs?
You pay a platform fee for investment ISAs, general investment accounts and self-invested personal pensions (SIPPs) which can be anything between 0.15 per cent and 0.45 per cent. This covers the cost of the company for operating costs and using its services such as holding your money, trading services and the research and analysis customers 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 in the case of the iShares UK Equity Index Fund and around 0.75% for a typical actively managed fund – though this can be less, or it could be more.
There are more fees to factor in for trades. Every time you buy or sell an investment – shares or funds – there are ‘trading’ or ‘dealing’ charges, which is where costs can really mount for those who are active investors.
There are some trading platforms that let you trade for free. But these tend to offer only direct shares and a much narrower choice of funds – rather than the larger amount of choice on investment platforms. 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. 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.
Don't miss our beginner's guide: how to start investing.
How will charges and expenses affect my investment?
It’s important to keep an eye on fees because they impact your overall returns.
Since charging structures differ between platforms, one investor could pay thousands of pounds more in fees over the years than another for running exactly the same portfolio.
Some charge an annual flat fee for running your money while others apply a percentage. And some charge per trade which will be expensive if you tend to buy and sell lots during the year.
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 the individual investor.
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 pick the risk level you’re comfortable with and that job is done.
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 an ISA and SIPP cashback bonus in a separate article.
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