Investors already caught out by hefty adviser or management charges may be tempted to simply chalk them up to experience, however, there is no reason to continue ending up out-of-pocket - even if you want to keep the same investment.
From getting your commission back, to making a judicious shift to cleaner funds, or ditching an expensive adviser for a state-of-the-art online wealth manager, we explain some options.
Financial advisers are no longer allowed to be paid for their services through commission on new products they recommend, however, they can continue to take commission on investments sold before the 31 December 2012 cut-off date.
These payments, known as trail commission, are claimed to be to cover the cost of reviewing investments each year, however, in practice they have often simply provided juicy ongoing rewards for selling particular investments to advisers who offer no real service beyond the initial sale.
Most funds, the collective name for unit trusts and OEICS, charge an annual management fee of typically 1.5 per cent, of which 0.75 per cent goes to the fund manager, 0.5 per cent in trail commission to the adviser who sold the fund and 0.25 per cent to the investing platform on which it sits.
While much of the focus of the drive to bring investing costs down is aimed squarely at funds, and rightly so in many instances, there can be greater mileage in doing something about expensive investment bonds and with-profits pension plans that you have signed up to pay into for a considerable time.
This is because it is far easier to switch existing investment funds or platforms to cheaper options that perform as well, if not better in many cases.
With investment bonds, with-profits plans and life policies, however, investors are typically signed up to that plan for a set period and can face hefty penalties for leaving early.
It is also far harder to actually keep tabs on how investment bonds and with-profits plans are performing, as their returns can differ substantially from stock market rises and falls, and it can be trickier to see how much of your investment is being eaten by commission.
A solution to the problem has been cooked up by Commission Cleanser, a service set up by financial advice entrepreneur Ivan Massow. It offers to track down all your investments and re-register them with itself as the adviser, crucially it then returns all ongoing commission from that point on back to you.
This may sound like a convoluted way of doing things, but with many products set up to pay commission, simply ending the kick-backs and keeping the investment is not possible in many cases. Investors are also unable to get round the problem by registering as an agent and just taking the commission themselves, as only FCA authorised agents can be paid commission.
To sign up investors must normally pay a one-off fee of £120 plus VAT, but This is Money has negotiated a special offer for interested readers of £95 plus VAT. You can find more details of this and Commission Cleanser here.
Fund charges have evolved into a slightly bizarre mess that is fortunately in the process of being cleaned up.
As explained above traditionally funds have charged an annual management charge, levied on your entire investment, part of which then finds its way back to the adviser who sold you the fund and the platform it sits on.
For investors who no longer use advisers but have taken advantage of the lower charges offered by fund supermarkets and platforms, the situation gets even murkier.
They have no adviser, so the adviser chunk goes to the platform, which also collects the platform chunk. This is how most had traditionally made money, with many offering investors ‘free’ investing in return with no administration or dealing fees for funds.
In this competitive market place, however, platforms began to compete to attract new customers by returning some of their cut to investors. Some offered small rebates, some took things a step further and offered to hand all of their take back and instead charge clear administration fees for their service instead.
If that sounds confusing, that’s because it is.
That will soon change, however. Firstly, the rules banning fund commission to advisers led to the advent of clean funds that simply levy an annual management charge that goes to the fund manager.
On top of this, another set of rules will ban fund trail and platform commission payments to platforms from April 2014 – meaning clean funds should become the norm there too.
In the meantime, investors are stuck in the middle ground and both advisers and platforms can collect commission from funds they are already invested in.
The clean fund options
This means that if you have a reasonable holding in funds it is worth considering moving them to clean versions. In some instances, investors with the few platforms that rebate all trail and platform commission in full may end up slightly worse off as the clean funds annual management charge may be slightly higher than the old fund’s annual management charge minus their rebate.
What they will gain, however, is simplicity.
Ask your platform when it will be introducing clean funds and when it plans to move you over to them. If you cannot go clean there, it is worth looking at moving to a rival although you may encounter exit fees.
Some platforms that now only offer clean funds include Alliance Trust, SippDeal, Charles Stanley Direct, TD Direct, Frequent Trader from Club Finance and Interactive Investor.
As noted above, however, if you absolutely want to cut the cost of your investments above all else and are willing to accept being in limbo for a while, you can go even cheaper. Some platforms that only offer funds will rebate almost all commission and charge you very little.
Cavendish Online has no admin or dealing fees for funds and will rebate all trail commission.
RPlan, which describes itself more as an investing app than a platform offers some excellent analysis tools to help people build their portfolio and see how much risk they are taking for potential rewards.
It rebates 50 per cent of all trail commission but crucially caps its charges at £5 per month, meaning you will never pay more than £60 and you will get everything else paid back to you. Above this the only charge investors will currently pay is a 0.25 per cent switching fee if they move from one fund to another – charged by the underlying cofunds platform.
Opt for an investing platform that does it for you
There is one element of investing that it is very difficult to put a finger on how much it costs you – making good or bad decisions.
Ultimately, picking the wrong mix of investments, the wrong funds or trusts, trying to time the market, or simply doing nothing, can end up hitting your pot much harder than fees or charges.
One answer to this problem is to start paying more attention to your investments, to learn about asset allocation and the art of not having all your eggs in one basket, to analyse what you invest in carefully and to make sure your investments are competitive on both price and performance.
The other option is to take advantage of a new breed of services that will do all this for you at a low cost – far lower than the traditional wealth manager charges that would have been levied for such a service.
One such option is Nutmeg. This is essentially a DIY investing platform that turns the entire concept on its head and does it for you.
Nutmeg is essentially an online wealth manager. Investors can use its engaging website to deliver a profile of how much risk they are willing to take, what they are investing for and over what timescale.
They can set investment goals, allocate monthly contributions to different pots, for example, a riskier one for a far-off pension and a safer one for a house deposit, and Nutmeg will then deliver an investment plan, allocating either a lump sum or regular contributions to a basket of exchange traded funds.
You put your money in, from a minimum of £1,000 and Nutmeg does the rest for you, managing your investments, typically in low cost exchange traded funds that track an index, and constantly updating you on your portfolio.
Crucially, Nutmeg constantly evaluates investment choices as market conditions change and will rebalance your investments every month as needed. It also pays plenty of attention to asset allocation, making sure you don’t have all your eggs in one basket.
Nutmeg does all this for a 1 per cent annual charge on your whole portfolio. Investors also need to bear in mind that they will pay the underlying cost of the funds they are invested in, which Nutmeg says is typically 0.25 per cent. This will not show up as an annual fee from Nutmeg but as a deduction from the performance of the fund.
Underlying the technology, is the investing expertise of a panel of experts, and ultimately for all its clever wizardry, this is where Nutmeg will succeed or not as performance will depend on their choices.
For those who want to get more involved but would still prefer the experts to be helping choose their investments, there is a growing number of guidance models being offered.
Fidelity’s service asks a series of questions to work out how much risk you are happy to take and how much you will invest over what length of time.
Its system then recommends Pathfinder funds, which aim to get the best out of the investing world by investing in other funds rather than shares themselves.
These draw on Fidelity’s global investing expertise and the mix of investments when a change in the markets is predicted. The idea is to make hay when the sun is shining and protect your pot even in tough times.
Charges range from 1.3 per cent for Pathfinder Foundation basic portfolios that use trackers to 2.14 per cent for Pathfinder Freedom portfolios which are invested in active funds run by managers.
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