interactive investor on the hidden wealth tax

Our research shows that older investors - those aged 55 or over - are most likely to be unstuck by percentage fees.

More than three-quarters of UK adults struggle to understand financial jargon (1). More than five million say they have lost out on good deals because of it.

When it comes to the world of investment, things are arguably even worse, because fluency in Latin and a knack for percentage conversions is often a required skill.

Research from interactive investor (2), the UK’s second-largest direct to consumer investment platform, using Opinium Research, suggests that only 54% of UK adults can calculate that 0.5% of £50,000 is £250. 

Meanwhile, 83% of consumers have no idea what ‘ad valorem’ means, despite its frequent use in the investment world (wealth managers and accountants seem particularly partial). Some 14% of respondents think ‘ad valorem’ is a term used to describe bravery on the battlefield.

In fact, ‘ad valorem’ means ‘in proportion to the value’ - charges go up and down as the value of the goods (i.e. shares or funds) on which it is charged goes up and down. It’s important to know what it means – because it can have a huge impact on the amount investors can shell out in charges, particularly over the long term.   

Those aged 55 and over were the least able to answer the question of what 0.5% of £50,000 is (only 51% got it right) – that's concerning given this is the age group most likely to be hit hardest by percentage-based charging structures on their investments. 

That’s because as investment pots grow over time, a percentage-based charging structure is likely to hit your wallet the hardest, whereas for investors with smaller pot sizes, a percentage-based charging structure may work in your favour.

Moira O’Neill, Head of Personal Finance, interactive investor, says: “A year ago, the FCA put investment jargon under the microscope when it laid down new rules and guidance to improve the quality of information available to consumers. But in something of an own goal, the ball was thrown firmly in the investment industry’s own back yard as it was told to put its house in order. It’s no surprise that one year on, the ball is still sat there.

“Latin – whether it’s ad valorem; caveat emptor; or anything else, is excluding and elitist. But whether in Latin or plain old English, percentage fees - which most of the investment industry still clings to – create huge scope for confusion and could cost investors thousands of pounds over the long term.

“A flat fee structure, in pounds and pence, is far easier to understand as it means that as your investment pot grows, the amount you pay stays the same. As a flat fee provider, it costs us no more or less to administer our customers’ assets, so we think a flat fee structure, in pounds and pence, is fair, simple and transparent. 

“Expecting investors to be able to work out the compounding effect of percentage-based fees over time, never mind anything else, is a big ask. Flat fees won’t be the most cost effective for investors with small pots, but it’s crucial for investors to be able to make informed choices. The industry needs to do a much better job of educating consumers.”

Adding it all up

While only 17% of consumers do know what ad valorem means (and sadly more men than women – 19% versus 16%), younger people were better versed, with 20% of 18- to 34-year-olds getting this answer right. 

But it was 35- to 54-year-olds who were niftier with their mental maths, with 57% able to work out that 0.5% of £50,000 is £250, compared to the average (54%) and just 51% of those in the 55 plus category knew the answer.

(1) Source: Credit check provider Noddle in 2019.

(2) Source: Opinium Research surveyed 2,004 UK adults between 17 and 21 January 2020.