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Fund fees

This is an article about fees and how they relate to investing in general.

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Fund fees

Some are hard to spot

To make sensible investments you need to be aware of any costs involved. That may seem obvious, but the fact is many people aren’t.

First off, if you invest in funds you won’t be presented a bill. This doesn’t mean the service is free though. Instead, you’ll find the value of your fund is reduced to cover the charges.

Also, be aware that the quoted headline fee may not reflect the full tally of costs you face. And while some fees may be easy to spot, others aren’t.

Average Ongoing Charge (annual)

Active Funds: 1.57%

Passive Funds: 0.54%

Average TER, IA UK All Companies Sector in Q4 2014. Data Source: Lipper for IM

Typical fees

Most active equity funds charge flat fees. For example, a flat fee of 1.5% means you would be charged £15 each year for every £1,000 invested. The advantage of flat fees is that you know exactly what you’ll be charged in advance. However, it does mean that fund managers get paid irrespective of their performance.

A few active funds charge fees based on their performance. The idea here is to provide the fund manager with an incentive to do well. The drawback is that you won’t know exactly how much you’ll be paying in advance.

Passive funds (which include index and tracker funds) charge flat fees. Managing these funds requires little in the way of analysis and research, so their fees tend to be lower.

Why fees matter

Fees of 1% or 2% of your investments may not sound like a lot, but they can make a big difference to your returns if you’re investing over the long term. So it’s worth finding out why fees matter.

Fees are an important factor to consider when picking a fund. They are listed on Fund Factsheets and Key Investor Information Document (KIID), published by every UK regulated fund.

Types of fund fees and expenses

Fee typeDescriptionActive fundsPassive funds

Entry and exit fees

Some funds charge a one-off initial fee or an exit fee. 

Usually zero, but 2% - 5% is possible

Usually zero

Annual Management Charge (AMC)

This is a flat fee fund managers charge for running the fund. It’s usually expressed as a percentage of the entire fund, payable annually. It is deducted from the value of the fund, so you don’t pay it directly.

1.22% (average)

 

0.45% (average)[1]

Performance fee

This is a variable fee charged by fund managers based on their performance. It is usually expressed as a percentage of outperformance, rather than your overall investment. As with the AMC, it’s deducted from the value of your fund, so you don’t pay directly. Performance fees are not the norm. In fact, 96.6% of active funds don’t apply performance fees.[2] And if they do, they usually charge a fixed AMC as well.

Variable (when applicable, but rare)

 

n/a

Ongoing charge

 

This figure includes the AMC as well as additional expenses incurred by the fund, such as legal fees and custodian fees, which aren’t covered within the narrower AMC. This figure is similar to an older measure called the Total Expense Ratio (TER).

1.57% (average)

 

0.54% (average)

Trading costs

The ongoing charge doesn’t tell the whole story though, because it excludes costs generated when assets within a fund are bought and sold. These include trading fees, commissions and stamp duty tax (on UK shares). The volume of trading may vary greatly from fund to fund – and year to year – and so will the associated costs. It is still quite rare for a fund to highlight this expense and it can be tricky finding it out.

0.36% (typical, but varies a lot)

 

0.09% (typical)[3]

[1] Source: Lipper for IM. All retail IA funds available in the UK, date Q4 2014
[2] Source: Investment Association (IA). All IA sectors, onshore funds reported use of performance fees
[3] Source: Fidelity, as at 27/01/12 via Investors Chronicle

In addition to the fund management fees, be aware that other costs may be associated with investing. These include:

Fee typeDescriptionFees
Platform fees

Online fund supermarkets and brokerages have different pricing models, so costs can be difficult to compare. They may include:

  • A one-off set up fee – though this is getting rarer
  • An annual account fee – as a percentage of your investment or fixed charge
  • Dealing fees for buying and selling shares. Some charge dealing fees for buying and selling funds, and may count a switch between funds as two deals 

 

Can be 0.25%

Independent Financial Adviser fees

If you use advisers. Costs vary depending on where you live as well as the specialisms and qualifications of the adviser.

£150 per hour (average)[1]

Discretionary Manager fees

For selecting an appropriate mix of funds/assets for your investments – often used in conjunction with an adviser.

Typically 0.25 – 0.5%

[1] Source: unbiased.co.uk. Figure is average hourly cost of financial advice in the UK

Related links

  • Funds charges and costs

    Detail on the different types of charges and what they're for.

    The Investment Association

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  • Calculator: The effect of fees

    Fund and Isa charges calculator: How fees can eat your investment - and the boost cutting them can deliver.

    This is Money

  • New rules on fund charges let you know what you're paying for

    Investment-fund charges have always been complicated and controversial, but it is hoped the sweeping changes will help make the process more straightforward and cheaper.

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