5 April is the deadline to make use of the UK governments tax-free savings allowances for individuals*. You’re spoiled for choice with the range of Individual Savings Accounts (ISAs), which are similar to the Tax Free Investment (TFI) accounts in South Africa. But if you’re looking for a good one, keep in mind that tax isn’t the only thing that eats away at the return you earn; the fees you pay do too.
Fees erode return
It’s easy to overlook how much you’re paying for an
investment when you’re happy with its performance. But market cycles change and
performance fluctuates, often significantly. When you have to sit tight through
a period of underperformance, you may find that the impact of fees becomes a
lot more important to you.
Look for layers of
An ISA is essentially an account that can hold investments.
This means that there may be charges for running the account as well as the
investments within it. There may also be additional fees for transacting on
your account, and all these costs add up. Make sure you know exactly what
you’re paying, and consider whether it’s worth the money.
Value beats price
Working out whether your ISA offers value for money by
looking at cost in isolation is tempting, assuming lower must mean better. This
isn’t always the case, especially when considering the investment charges –
cheap investments can perform poorly too. Rather than just looking at the fee
level, the fee structure is important in order to understand the likely impact of
fees on your investment over time and identify the investments that offer real
value, and those that don’t.
Aside from the pure impact on return, the fee structure can
also influence the investment manager’s behaviour. For example, flat fees offer
an easy-to-compare total, but the FCA’s Asset Management Market Study warned
that this fee structure can incentivise investment managers to gather assets,
rather than work in the investor’s best interests.
The other option is a performance-based fee that changes
depending on how the investment performs. It makes sense to pay more when your
investment performs well and less when it doesn’t. But be careful of poorly
designed performance-based fees that could end up costing you more.
A fee that is fully performance-based and symmetrical rewards managers for outperformance (and only
outperformance) while equally penalising them for underperformance. This type
of fee mitigates the potential negative impact of other structures and, by
aligning the interests of managers with those of investors, can keep managers
focused on sustainable performance.
Insist on value for
Unfair fees are widespread, and entrenched in the investment
industry. But more and more people are starting to demand value for their
money. The array of choices and complexity can make this feel challenging, but
may be well worth the effort in the long run.
Remember that the value of investments may go up as well as
down, so you may not get back your original investment.
*The level of tax savings depends on your personal
circumstances and tax rules can change over time.
Orbis Investments: We offer an ISA and a Junior ISA with no account fees, no transaction fees, no fees at all unless we outperform. Our fee structure in our two long-term global funds is not only completely performance-based (zero ongoing charges), it’s symmetrical – we refund fees when we underperform.