Confused by fees and charges!

dunstonh

Considering the risk that comes with investing in stocks the longterm returns look a bit low after fees and charges.

Published returns are after charges though.

Reaper

jmaddison wrote: »

And this is before the investor pays tax.

Few investors pay much tax, at least on the growth part as they tend to be in a S&S ISA or pension, and even if outside not many exceed the annual capital gains allowances.

jmaddison_2

dunstonh wrote: »

Published returns are after charges though.

That is a bit more reassuring.

Rollinghome

jmaddison wrote: »

If stocks go up on average 5-6% per annum over the long haul, but total fees, charges and expenses add up to 2.5% or 3%, then if the investor gets the 2.5-3% remaining that will keep up with inflation. And this is before the investor pays tax. Considering the risk that comes with investing in stocks the longterm returns look a bit low after fees and charges.

The performance figures for individual funds are generally given after annual costs but not for initial buying costs. Many funds have a single price now with the initial costs being absorbed within the annual charges but for UT funds with dual bid/offer prices the performance is shown on a "bid to bid" basis i.e. ignoring the initial buying costs.

As a result of RDR funds we'll eventually see only "clean" funds which won't include annual platform and advisor charges in the performance figures.

But if by that 5-6% figure you are referring to returns on equities in general however, rather than specific funds, then yes, you are quite right that you would have to deduct all costs, both initial and annual, from that figure.

Quite what the actual returns for equities will be is unknown of course although the FSA did recently revise traditional assumptions down. You can find the details of their new projections in their document "Rates of return for FSA prescribed projections". That gives their assumptions for medium term returns on equities after inflation but before all costs as 4–5½%

The average return on funds is of course less than the return on equities in general because of the management charges. The return on a portfolio of both equities and other asset classes will depend on the mix. The real return on corporate bonds is projected as 1½–3% before all buying/management costs which may be very optimistic.

Smaller investors generally don't pay much tax especially if they maximise use of ISAs and CGT allowances though it is more likely to be a problem for higher rate tax payers and bigger investors.

jmaddison_2

Rollinghome wrote: »

The performance figures for individual funds are generally given after annual costs but not for initial buying costs. Many funds have a single price now with the initial costs being absorbed within the annual charges but for UT funds with dual bid/offer prices the performance is shown on a "bid to bid" basis i.e. ignoring the initial buying costs.

As a result of RDR funds we'll eventually see only "clean" funds which won't include annual platform and advisor charges in the performance figures.

But if by that 5-6% figure you are referring to returns on equities in general however, rather than specific funds, then yes, you are quite right that you would have to deduct all costs, both initial and annual, from that figure.

Quite what the actual returns for equities will be is unknown of course although the FSA did recently revise traditional assumptions down. You can find the details of their new projections in their document "Rates of return for FSA prescribed projections". That gives their assumptions for medium term returns on equities after inflation but before all costs as 4–5½%

The average return on funds is of course less than the return on equities in general because of the management charges. The return on a portfolio of both equities and other asset classes will depend on the mix. The real return on corporate bonds is projected as 1½–3% before all buying/management costs which may be very optimistic.

Smaller investors generally don't pay much tax especially if they maximise use of ISAs and CGT allowances though it is more likely to be a problem for higher rate tax payers and bigger investors.

This is interesting, but a bit concerning. I has thought typical stock market returns were assumed to be closer to 6-7%. If the return investors can expect is really only 4–5½% before costs this changes the risk v reward significantly. When I checked some of my funds on the site posted by Reaper the fees and charges on some were as much as 3%. In that scenario the fund would be getting more than me: fund 3%, me: 1-2½%. Not much considering it's MY capital at stake and the fund manager gets their fees even if my capital goes down.

Totton

I worry little about charges these days, I am more interested in performance and what I actually receive rather than what somebody is getting paid. It might sound daft but why bother about a 1.85% if the fund makes me 10% in a year compared to one costing 0.65% that makes 7% in the same year.

It's all about returns after costs, little else matters.

jmaddison_2

Totton wrote: »

I worry little about charges these days, I am more interested in performance and what I actually receive rather than what somebody is getting paid. It might sound daft but why bother about a 1.85% if the fund makes me 10% in a year compared to one costing 0.65% that makes 7% in the same year.

It's all about returns after costs, little else matters.

Yes returns after costs matter most. But having looked into it a bit I now understand that 'Total Expenses Ratio' and 'Annual Management Charges' on the published investor information tend to understate the true total deductions.

During a bull market I suppose an investor may be happy with 10% annual return, and not feel too bad if they know it would have been 12-13% before fees and charges. But when markets are not returning high returns, then 2-3% fees could be taking most of the returns.

While I agree that performance is very important, investors should look closely at the real amount by which their investment growth is reduced by fees and charges. If another fund is achieving similar growth, and the fees are lower, then the compound effect of fees will make a significant difference to the long term investor.

Ark_Welder

What I look for, first and foremost, is whether a particular investment is likely to deliver to my objectives. It is rare that I bother with charges, and then it is likely to be how a performance fee is structured (not even whether a performance fee applies). It doesn't matter how cheap or expensive a fund is, if it doesn't fit the bill then it is [STRIKE]on [/STRIKE] of little practical use.