Investing Online? Keeping Your Charges Low Can Make as Much Difference as Right Investments
With the end of the tax year approaching quickly, many of us are now having to think seriously about the ISA, SIPP and general investment portfolios we hold with online stock brokers and investment platforms. Procrastination is unfortunately a particularly common trait many of us share but the downside to it is that limited time can lead to skipping over details. And among the most important details when it comes to investing online successfully is the level of fees that are being sucked out of investment returns. A difference of half a percent to one percent a year might not sound like a huge sum but when added up over many years, including the impact on compounded returns, not paying attention to fees can make a difference of thousands of pounds to an investment portfolio.
£100,000 invested over 10 years, returning 5%, will grow to £162, 890 if no fees are involved. If 1% a year is lost to fees, the drops to £148,020, a difference of around £15,000. If the fees drain is 2%, the final total would only be £134, 390, a difference of almost £30,000. So taking steps to limit what is lost in fees is certainly worth it. Which are the main ways you can reduce fees when investing online?
Passive funds: building all or the bulk of an investment portfolio held with an online stock broker out of passive, index-tracker funds (ETFs), can make a massive difference on how much of your investments are lost to fees. These funds aim to track major indices or markets, such as the FTSE 100. Actively managed funds aim to beat the market, while passive funds look to match it. The teams of analysts that work for actively managed funds mean their fees are much higher, usually between 0.5% and 2%, than ETFs, whose fees can be as low as 0.1%.
Statistically, most active funds also don’t actually consistently outperform the market so unless you choose very well, it’s unlikely that you’ll get your money’s worth when paying for an actively managed fund. There are so many different ETFs available now that it is easy to build a very nicely diversified investment portfolio out of them while slashing your portfolio’s fees drain.
Review Your Platform’s Charges: there can be significant variance in the fees charged by online stock brokers and they are not always as transparent as they should be or consistent across different portfolio sizes and products. Some investment platforms charge a flat fee and others a percentage and some are cheaper or more expensive for SIPPs and ISAs but not necessarily both. It is the case that cheapest is not always best and sometimes it can be worth paying a little more for a range of services you feel your investments benefit from, such as access to research. However, make sure you are not overpaying for these add-ons as you could always take out a subscription for a third-party research service that is better value. Take some time to work out exactly what fees you would pay for your portfolio with different online stock brokers and if there is a better value option, don’t be afraid to switch.
Review Your Existing Products: if you have investments in your portfolio you have held for a long time, or even older wrapper products such as ISAs and SIPPs, review their fees. Fees have dropped a lot over the past several years and often older products are not competitively priced. Even older ETFs often have much higher fees than more recent versions of what is essentially exactly the same index tracker. So don’t just pay attention to the fees attached to new investments and cast an eye over your existing portfolio.
Please remember that financial investments may rise or fall and past performance does not guarantee future performance in respect of income or capital growth; you may not get back the amount you invested.
There is no obligation to purchase anything but, if you decide to do so, you are strongly advised to consult a professional adviser before making any investment decisions.