Investment fees: How do fund managers charge and is performance measured before or after they get paid?
If you are investing via a platform, you will be paying two set of charges, one to your platform provider and another to the fund manager
The fund manager can sometimes be the same firm as your platform provider.
The platform fees are normally deducted direct from your investments, with units in your investment fund(s) sold in order to pay the fees.
Most platforms will do this every month.
The investment fund fee is taken within the fund itself, from all the money that is pooled in the fund overall.
How often this is done will vary according to the fund firm, but the deductions form part of the calculation used to derive the daily fund price.
In most cases performance is shown after the deduction of the investment fund fees, but not after any fees due to your platform provider or financial adviser. This is one time you should check the small print!
Investors typically pay up to three different fees; a fund management fee to the fund provider, an administration to the wrap or fund platform provider, and an ongoing fee to their financial adviser.
In the old days, before the regulator introduced better charging transparency at the end of 2012, this fee was often bundled into a single annual management charge levied by the fund provider.
The fund provider would then pay each party and there would often be rebates too, creating a complex charging structure which investors would find difficult to understand.
Mike Barrett: ‘The investment fund fee is taken within the fund itself, from all the money that is pooled in the fund overall’
Funds express their charges now as an ongoing charges figure. This percentage figure is the measurement of the annual charges for investing money in a fund each year, but excludes any entry or exit costs.
For actively managed funds, it is typically between 0.6 per cent and 1.4 per cent a year.
It can be lower for index tracker funds, as low as 0.15 per cent in some cases, and slightly higher for investment trusts, in the range 0.8 per cent to 1.8 per cent a year.
Fees are deducted from income produced by investments within the fund or from money within the fund itself. Ongoing charges are usually calculated and deducted from the fund on a daily basis and this is reflected in the unit price for the fund.
When funds quote their performance, this is after the deduction of any charges, so net of fund management expenses.
Fund charges are an important consideration for investors, as high charges will erode returns over the longer term.
Investors should however consider a wide range of factors when selecting a suitable investment fund and not get too hung up on charges.
Value for money is always more important than cost, so if a fund is doing the job you expect, it might be worth paying slightly more for that peace of mind.