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Lesson seven: Investment charges, fees and costs

Like most things in life, investing isn’t free. Investment companies charge for different things. High fees can really eat into your returns over time, so you should make sure you’re aware of the different charges and how much you might end up paying before you invest. There can be a few to keep your eye on.

How much does it cost to invest?

Many people think investing is only for rich people. Yes, this might have been true in the past, but advances in technology and competition between companies have really reduced the cost of investing. It’s now quite affordable for most people.

Having said that, fees vary between investment companies and certain types of investments will also be more expensive than others. This is why it’s important to get your homework done and find out how much you might pay before you start investing.

What are the different types of investment fees?

There are several different fees that you may need to pay when investing, so we’ve broken down the most common ones below.

Platform or account fee

The company you invest through will charge an annual fee to keep your account open and look after your money. Some companies will charge a flat fee regardless of how much you invest, while others will charge you a small percentage of your account balance. Make sure you shop around to find out which company offers the best value for how much you’re investing.

Administration fee

Some investment companies also charge an administration fee – it pays for the behind-the-scenes admin work such as ensuring all the paperwork is filed with HMRC.

Fund management charges

You usually have to pay for people to look after your investments – unsurprisingly. Usually there’s an ongoing charge, but certain funds can also charge upfront fees, performance fees or transaction fees.

All funds will show you an OCF or ‘Ongoing Charges Figure’. It represents all the ongoing charges within the fund. It’s designed to make it easier to pit funds off against each other…

Dealing fees

Most investment companies won’t charge you to buy or sell funds. But if you want to buy or sell shares on the stock market, they’ll usually charge you to place this trade. Telephone share dealing tends to be more expensive than online dealing.

Foreign exchange fees

When you trade non-UK shares, the share price needs to be converted into sterling. Most investment companies charge a fee for this conversion (our fee is 0.95%). Some investment companies also charge a foreign exchange fee for dividend reinvestment or pay out. However, at Bestinvest we do not charge a foreign exchange fee for this.

Exit or transfer fees

Many investment companies charge a fee to close your account or transfer your investments to another company. These fees tend to vary but it is important to make sure you are aware of them before you open an account and start investing.

Government charges

You might also need to pay the Government when you buy and sell certain investments. The two most common charges are:

  • UK Stamp Duty – a 0.5% charge when you buy UK shares (not on buying stamps)
  • PTM Levy – a £1 fee when you buy or sell UK shares with a value of more than £10,000 (you can probably afford the fee by this point…)

Cheaper is not always better

When it comes to investment companies, it’s important to remember that cheapest isn’t always best, and that you will often get what you pay for. A company might be more expensive, but could have a website that is easier to use, has telephone support and even sends research out so you can make decisions that you feel confident about. Other providers charge lower fees for a more basic service.

You need to weigh the fees (and the reasons for them) up when choosing where to put your money. Either way make sure you aren’t paying too much for the service you receive – after all, high fees will eat into your returns over time. Think Pac-Man.

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