Fees and charges can have a huge impact on any investor's overall returns, particularly as they compound over time. As financial journalist MOIRA O'NEILL explains in this video though, an important (and often overlooked) fact is that investors can exert far more control over their costs than they may realise.
TRANSCRIPT
Robin Powell: One of the most important factors in the returns you can expect to generate as an investor is how much you’re actually paying to invest. Fees and charges can really add up and, over time, they also compound. So the long-term impact of cost can be very significant.
Moira O'Neill: Investors need to be very, very conscious of the costs they’re paying for investing. In fact, the costs of investing are the one thing you can really control as an investor. You can’t control the ups and downs of the markets, but you can control those incremental fees that you’re paying and, for a lot of investors, they don’t understand the long-term damage that even small fees can do to your end outcome as an investor.
RP: A simple way to reduce how much you pay is to choose what are called passively managed funds as opposed to actively managed funds. Active funds are very much more heavily promoted than passive, and they’re considerably more expensive.
MO: Active management – so, where a professional fund manager is trying to invest your money and that of other investors to beat the average market performance: that does come with an extra price tag usually. And passive funds, which are also called tracker funds, which track a particular stock market index – so, they’re trying to replicate the performance of, say, the FTSE100, the S&P500 in the States, or other well known indices: they can come a lot cheaper. And the costs of investing overall have been coming down across the board. There is price pressure, there is competition; but tracker funds can be super, super cheap these days.
RP: You should also bear in mind that there are several different types of cost, and some are more obvious than others. There are, though, two really significant ones.
MO: There is the fee that you pay to the professional fund manager, but there’s also underlying transaction costs that the manager is incurring through managing the portfolio. So they’re incurring fees for buying and selling the underlying shares, for example, in a shares portfolio. So I think you need to be conscious that a fund manager who trades a lot will be incurring a lot of that.
RP: It’s certainly not true that the cheapest funds always produce the highest returns, but it pays to keep your costs down. A good adviser can identify the funds that provide value for money.
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