The true cost of investing

Last week, the Financial Times reported on some pretty relevant parliamentary debate. Putting the challenge to David Cameron in Prime Minister’s Questions, MP Tom Tugendhat spoke up on investment fees. Hidden charges, he claimed, can “strip a third off the gains a pension could make over a lifetime”. He later revealed to the Financial Times that his own investments were a good example of this, with his total charges being “more than five percent a year,” or “about triple” what he had calculated. Responding to Tugendhat’s question, Cameron said: “I think one of the things that saps people’s enthusiasm for investing in savings products is just a sense that they don’t understand the fees and charges.” This is true. Never has professional advice been more essential – or in fact profitable – for savers.

So what are these fees and charges and how much are we really paying? A lot has changed for the better in recent years. Since 2012, the Financial Conduct Authority (FCA), the regulatory body responsible for fair treatment of investors, has required companies to publish an ‘Ongoing Charges Figure’ (OCF) for every fund they offer. In theory, the OCF is meant to give investors a clear idea of what they are paying. Unfortunately, while a step forward, it doesn’t cover all the costs of investing. Other hidden costs, over and above the OCF, can include ‘admin fees,’ ‘additional expenses,’ performance charges, entry and exit penalties, and perhaps most significantly, turnover costs. Turnover costs cover the expense of share dealings undertaken by fund managers.

But can these costs really strip away a third of your pension savings? The short answer is yes. Over the long term, the difference they can make to your savings is staggering. As the chart shows, these additional fees can cost investors hundreds of thousands of pounds over a lifetime. Nor is this uncommon. Research by the True and Fair Campaign on fees, found average wealth management charges including transaction costs were 3.65% a year (significantly more than the 1.5% to 2% typically disclosed by asset managers according to the Financial Services Consumer Panel).

So where does this leave us? Some costs cannot be avoided, but need they be so high? At Carbon we don’t think so. We have long understood the importance of keeping costs low and, crucially, we make sure that our clients understand all the costs incurred. By selecting investments with low management fees and transaction charges we typically save our clients 30% to 50% per year in investment fees. The bottom line is our clients face lower than average total costs while also receiving top quality advice from one of the UK’s best qualified teams (see No.3 in our Six steps to successful investing (CONTROL YOUR COSTS), on our video page for further information).

To find out more about our Investment Philosophy and how Carbon can assist, with a review of your current charges – please call us on 0131 220 0000 or email gordon.wilson@carbonfinancial.co.uk.