Are high fees chipping away at your investment returns?

Inflation, tax and fees: three factors that, if left unchecked, will gnaw away at your investment returns.

The harmful impact posed by this trio isn’t going unnoticed. The episode of red-hot inflation earlier this decade offered a stark reminder about the silent menace of price rises, while the UK’s tax burden continues its surge to historic highs, fuelled by tough fiscal measures announced at the government’s past two Budgets.

• Invest with ii: SIPP Account | Stocks & Shares ISA | See all Investment Accounts

Not to be left out, investing fees have also been thrust further into the spotlight, with the pitfalls of not managing portfolio costs reaching the ears of more consumers.

This is far from a recent development. As a Financial Conduct Authority (FCA) discussion paper, published in the mid-2010s, warned: “Over extended periods, apparently small differences in the cost of investing can make a material difference to the value of individuals’ long-term savings: over a working lifetime, a 1% annual charge could slice the value of a pension pot by a quarter.”

There is, however, an important distinction to make between fees and the other two. That is, while we can respond to and attempt to navigate unwelcome tax reforms and macroeconomic trends, these are largely out of our hands; we can’t control them. The picture contrasts when it comes to charges. If high costs are hurting portfolio performance, we typically have the power to reduce them.

In recent months things have been heating up in the investment fee space, with platforms and fund houses moving to shake up their offerings. People are wising up to the need to pay a fair price for their long-term investments. Providers are taking note.

Let’s take a closer look at what’s been going on and explain why this all matters.

Fee focus ramps up

The noise surrounding the importance of monitoring investing costs has been cranking up for some time. It’s a core reason why investors are flocking to cheaper passive strategies at the expense of active solutions. Vanguard’s decision last month to nudge down the annual management fee (AMC) on its popular LifeStrategy range from 0.22% to 0.20% is the most recent example of competition ramping up in the fund space.

• Vanguard LifeStrategy to reduce ‘home bias’ and cut fees
• Investment outlook: expert opinion, analysis and ideas

Investment platforms have also been placing their fee propositions under the microscope. interactive investor’s (ii) new pricing structure took effect earlier this week, while another major platform recently announced major cost changes.

These events are happening for good reason. Investors are placing costs front and centre, an assertion that’s backed up by new research from ii, which surveyed 1,000 UK adults (18+) who hold investment products including stocks & shares ISAs with a balance of at least £20,000.

We asked people what they look for when comparing investment platforms, finding that more than six in 10 (62%) said fees and charges. Elsewhere, some 48% regularly compare investment platforms, a figure that’s just 22% for gym memberships.

Being clear about what you’re paying

Making sure you pay a fair price for your investments has been a long-standing focus for the financial industry’s watchdogs. Long before the FCA’s ongoing Value for Money Framework consultation, which seeks to “reduce the number of savers with workplace personal pensions that are delivering poor value”, came the retail distribution review (RDR).  

For those who may recall, this initiative, introduced in 2012, sought to revolutionise the financial planning market. Among other things, the RDR raised the minimum qualification levels for financial advisers and perhaps more notably, banned commission payments for delivering regulated pension and investment advice.

Financial planners instead must now charge a fee, a move chiefly designed to remove conflicts of interest. But there was another crucial element to the FCA’s advice cost overhaul: greater transparency. Until the RDR took effect, adviser commissions were typically wrapped up in the products, making it tricky for some customers to know exactly what they were paying.

Advice firms must explain their fees upfront, laying out what they are and how they will be collected. Common charging structures include a percentage based on the size of client’s initial investment and/or their portfolio, an hourly fee, and a fixed amount for a specific piece of work reflecting the time and labour involved.  

• Retirement case study: how I manage a £2.5m SIPP and ISA portfolio
• Sign up to our free newsletter for share, fund and trust ideas, and the latest news and analysis

As you can see, and may even have experienced, charging structures for advice firms are disparate, a situation that’s also evident in the platform space. Some, like ii, collect a flat fee which remains constant no matter whether your portfolio rises or falls in value. Most other platforms, however, charge a percentage based on the size of your assets, which means as your investments grow, your platform costs increase with it.

A further benefit of a flat, monthly fee is that, in the spirit of the RDR, it removes cost opacity. At the end of the year, you don’t need to whip out a calculator to work out exactly how much you’ve paid a firm to look after your investments. For example, investors on ii’s Plus account pay £14.99 whether their portfolio is worth £150,000 or £1.5 million.

Appetite for fee transparency is racing up the agenda for retail investors; those in the dark about what they’re forking out are prepared to vote with their feet. ii’s new research found that almost one third (32%) of respondents would be motivated to switch platforms for clearer costs, versus 28% last year.

How do I know if I’m paying too much?

To save you having to dust off your Microsoft Excel skills and build a fancy spreadsheet, we have a couple of handy comparison tools - one for ISAs and another for SIPPs. These can help you gauge how the largest platforms’ fees stack up against each other based on your current valuations.

We must be mindful that an account fee isn’t the only cost involved with investing. There are others, too, such as those charged by the funds, exchange-traded funds (ETF) and investment trusts you own, plus the fees for any trades you make.

And it’s the aggregate of these costs that truly matters.

Fund and trust fees can vary wildly, so it’s important to keep these under review. Passive funds - which essentially replicate and track an index, such as the S&P 500 in the US - are the low-cost option.

• 10 shares to give you a £10,000 annual income in 2026
• 10 funds to produce a £10,000 income in 2026

At the pricier end of the scale are active funds. Managers of these strategies aim to beat the market, something you pay a premium for, but the reality is many of them fail to, which explains much of the shift to passive funds in recent years. That doesn’t mean you should swerve active solutions, but it’s vital to monitor performance to make sure the extra fees translate to good value.

One concluding thing to flag is that you shouldn’t prioritise low fees at the expense of everything else. The platform must cater for your preferred investing style and offer suitable products, tools and services for your personal financial goals. Also be sure to look underneath the bonnet of each plan as it may provide other valuable features and perks, such as free accounts and Junior ISAs for loved ones. Some platforms, like ii, are tuning into the reality that wealth management is very much a family affair.

The overriding message is a simple one: keeping a close eye on fees over long periods can save you thousands of pounds in the long run. Most importantly, this is money that you get to spend doing the things you enjoy.