What are the implications of investment fees for Stocks & Shares ISAs? Is it better to opt for an all-inclusive package?

With a Stocks & Shares ISA, some costs are 'all inclusive'; others have additional investment fees. Can you expand on the implications of 'investment fees' please? Is it better/easier to opt for an all inclusive package? Thanks, Simon

Hello Simon,

Thank you for your question.

The amount you pay in fees will be one of the greatest influences on the actual returns you receive. Naturally, everything else being equal, the more you are paying to others in charges the lower your returns. What is more, with investing it isn't true to say that you get what you pay for; often paying more means getting less. There is ample evidence to show that paying a fund manager higher charges to benefit from his or her expertise does NOT generate higher returns after charges.

You can typically expect to pay three different types of fees on an investment (four if you have a financial adviser or planner helping you). Those fees are:
1) Administration fees charged by the pension or investment company for providing the products and administering them for you. This would include taking contributions and applying your investment instructions, paying money out when you request it and, in the case of pensions, applying to HMRC for basic rate tax relief. Anything from 0.25% to 0.45% is typical.
2) Fund management fees/Portfolio fees charged by the fund managers you have selected. Depending upon the type of investment funds you have chosen you may be paying as little as 0.05% pa on the value of your money to over 1% (reference my point above about value).
3) Trading/Transaction costs levied within the funds. Every time you make an investment trade you are buying or selling holdings on the investment markets, and these carry fees. This will also occur when a fund manager buys or sells shares within a portfolio. It is said that money is like a bar of soap, the more you touch it the quicker it erodes and this is particularly true in investing. A fund manager that does more trading will be costing you more in implicit transaction costs. These costs are often implicit and opaque but each fund manager should publish them; annual transaction costs of 0.1% or lower implies low trading. 0.5% and above is a lot of trading.

As a rule of thumb, if you are paying total costs between the three of 0.6% pa or lower you are doing OK. Anything more and it is starting to get costly, probably with little added value.

In terms of inclusive fees or not, hopefully, the above ranges give you a guide. Whether you are paying all-inclusive or separate fees shouldn't make too much difference, it is the total cost that matters.

Another point to make is that some pension and investment companies charge flat fees rather than percentage-based fees. These will be of greater benefit for higher portfolio values because a fixed fee will equate to a lower % base as the fund size increases. You could work out what is best for you by comparing a fixed fee to the value of your ISA.

Also look out for what additional charges are levied for additional administration. For example, the cost of changing your details or paying money out. ISAs are relatively straightforward so additional administration requirements should be lower than a pension.

I hope this helps.

Andrew