This article was first published on 8th June
Annual Management Charge (‘AMC’)
The AMC is the fee taken by the manager of your fund or unit trust. It is expressed as a percentage of the value of the fund, calculated daily and deducted automatically from the value of the fund. You probably won’t notice it reducing your wealth unless the investment performance of the fund is poor. For example, if the value of your investment falls by 2% then part of this may be investment losses but part of it will be the fees that the manager has charged.
The typical AMC for an actively managed fund investing in shares used to be 1.5% per annum. However, this practice obscured the fact that the manager paid some of the AMC as a “kick-back” to financial advisers, brokers or investment platforms for introducing customers.
The Financial Conduct Authority (FCA) banned this practice from April 2014.
Managers, advisers, brokers and platforms are now required to disclose separately the fees they take (see Investment Platform fees, below).
The ‘clean’ AMC for actively managed funds now averages 0.75%. If you invest in passively managed or index-tracking funds the average AMC is around 0.1%.
Other charges and costs
If you invest in a fund, you gain immediate exposure to the shares of many companies instead of having to buy them one-by-one. However, there are some charges incurred by funds – for example, legal fees, audit fees and printing of annual reports etc – that you would not incur if investing directly yourself.
On average, these amount to around 0.1% per annum.
I think this is a reasonable price to pay for diversification. But, beware investing in funds at launch and small funds generally. In this case, when expressed as a percentage of a small fund value, the affect of such charges can be significant.
Funds also incur trading costs whenever they buy and sell shares. A recent Which report concluded these could be as high as 1.8% per annum if the manager changed investments frequently. If this is true, I suggest you avoid managers who trade too often.
Most passive or index-tracking managers – e.g. LGIM, Vanguard, Blackrock – aim to match the performance of the stock market after all costs including trading have been deducted. Check their historical performance to see if they have achieved this!
Some active managers buy and hold shares for the long term and rarely trade – this can benefit their long term performance.
Investment Platform Fees
There are thousands of funds available for investment in the UK and over 100 managers. In recent years, brokers, investment houses and pure technology companies have established independent web-based ‘portals’ or ‘investment platforms’ to facilitate the buying and selling of these funds. You may be using one if you have a self-invested pension plan (SIPP), ISA or other share portfolio. And, if you delegate to an independent financial adviser they will almost certainly invest your money via an investment platform.
Investment platforms charge a combination of a fund administration fee for funds, an annual management fee for shares and other investments and a brokerage fee for buying and selling shares and other securities.
The fees vary considerably and depend on the size of your portfolio, whether you invest in funds, shares or a combination of funds and shares and how often you change your investments.
For a £100,000 portfolio, fees can vary from £100 (0.1%) to £400 (0.4%) per annum depending on the platform you choose.
Note: if you subscribe to Which, search for their very good and up to date comparison of investment platforms and their fees.