In the current investment climate it is more important than ever to ensure that you have an ISA wrapper which is providing value for money. Current low returns in both UK and world equity markets, as well as other asset classes, such as commercial property, mean that and charges you incur in your ISA can have a dramatic effect on the overall performance of your investment.
Take for example a typical UK equity fund in which many people invest. There are typically two sets of charges which will be incurred in investing in such as fund:
The Initial Charge is the charge applied to money at the point it is invested into the fund, sometimes also known as the “bid-offer” spread. This can range from 0% to 6% with a typical value of 5%. So for every £100 entered, you only really have £95 being invested – the effect of this is that the fund has to provide growth of 5.26% just to get you back to your original investment of £100.
Annual Management Charge
These vary depending on the nature of the investment portfolio which the investment manager is looking after. Typical values here can range from 0.5% to 2.0%. It is the annual management charge in our opinion which has the most detrimental effect on the performance of an ISA or other investment.
Consider this hypothetical scenario – you are invested in a managed fund with an annual management charge of 1.5%. Each and every year, the fund manager deducts 1.5% from the effective value of your fund. This is OK in the good years when the stock market could be showing returns of 5%, 7% etc. But in recent years with low or even negative growth, this fixed cost on your investments is even worse.
Is there a Solution?
Yes there is. By investing through a discount broker or fund supermarket not only are you opening yourself up to a very large fund choice from which to invest, you may also benefit from discounts on both “initial” and “annual management” charges.
Can these Savings be Made Just on New Money Invested?
No, many of the fund supermarkets offer the option to transfer in ISA’s and other investments from other providers to benefits from these discounts.
Naturally it would be wise to take independent financial advice before making any investment you are unsure of.