Selling fund shares to pay ISA fees

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Hi,

Since the changes came in on fund commissions due to the RDR, I'm puzzled whether this has actually been better for investors in managed funds or not.
Obviously instead of having commission rebated from the fund manager to the fund supermarket/bank etc... the investor now pays a management fee directly to the fund supermarket/bank etc.
Unless I have spare cash to pay this fee each month, all I can do is sell shares to the value of the management charge so I can pay what I owe in fees.

I'm starting think that as I'm having to sell shares in the funds, those shares I've sold no longer benefit from the compounded gains over the longterm, 10 - 20 years and therefore end up costing me more money than if the previous system of commission rebated to the fund supermarkets was left in place with the fees part of the funds annual charge.

Anyone else think this? Or do you think the old way costs more over the long term?

Comments

  • bowlhead99
    bowlhead99 Posts: 12,295 Forumite
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    How do you think it worked before?

    Previously, you had a load of assets in the fund. Say you had 1000 units of the fund at a unit price of £3 each, valued at £3000 total. The £3000 total assets that the fund holds is a mixture of shares in all the companies like HSBC and Microsoft and Tesco or whatever which the manager invested in to try to make you money. Maybe £1000 in each of 3 companies.

    At the end of the year the fund manager needed to pay commission to the platform for platform costs and trail commission etc, say 1% (£30). So to get the £30 of cash, the fund manager arranges to sell a few shares each of HSBC and Microsoft and Tesco, leaving the fund with £990 HSBC and £990 Microsoft and £990 Tesco (£2970 total) and £30 of cash. He gives the cash to the platform and they spend it on whatever they like. Now the fund only has £2970 of assets so your 1000 units in the fund are now only worth £2.97 each instead of £3.

    So basically what you would be left with under the pre-RDR rules was a piece of the fund worth £2970 representing £990 each of three different companies, and the platform had been paid off and didn't need to ask you for money.

    Then let's run it again with the new rules after RDR.

    You had 1000 units of the fund at a unit price of £3 each, valued at £3000 total. The fund holds £1000 of shares in each of 3 companies as before.

    Now at the end of the year the fund manager does not need to pay commission to help the platform run its business because the platform is going to be paid by you. But you do not have any spare cash so you decide to sell some units in the fund to pay the platform its £30.

    You have 1000 shares worth £3000 and your 1% fee is going to cost you £30. You decide you will sell 10 shares to get the £30.

    The fund manager says OK, sure, you can cash in those shares and have a smaller value of fund and have more cash in your hand. Give me the shares and I'll get you the £30.

    The fund manager then arranges to sell £10 each of HSBC and Microsoft and Tesco, leaving the fund with £990+£990+£990 =£2970 of investments, and £30 of cash. The fund manager then lets you redeem your 10 units in exchange for the £30. You give up the shares and he gives you the £30. Leaving the fund with £2970 of investments.

    You now have 990 shares, still valued at £3 each, for a total value of £2970, and you have £30 cash in your hand.

    The platform then demands their £30 fee. You pay them with the £30 you just got for cashing in your shares. You are now left with no cash but have units in a fund worth £2970 which represents £990 each of HSBC, Microsoft and Tesco.

    So whether you use the pre-RDR or post-RDR rules, you are going to be left with units in a fund worth £2970 which represents £990 each of HSBC, Microsoft and Tesco. There cannot be anything about either of those situations which is worse from the perspective of "no longer benefit from the compounded gains over the longterm, 10 - 20 years and therefore end up costing me more money". You have the exact same assets in the fund at the end of the year in both situations. So you will get the exact same income and capital growth over the next year.

    The only difference is that in the first example you had 1000 fund units valued at £2.97 each, and in the second example you had 990 units valued at £3.00 each. In both cases the exact same £2970 of underlying assets are being put to work on your behalf by the investment manager over the following year and the returns will be the same.

    So there is nothing from an 'investment returns' point of view that is different in the fund paying the platform a £30 commission and having to use some of its investments or income to find the £30 to do it, versus you selling some of your investments or using your income to find the £30 to do it. In both cases you started with £3000 of fund assets and are left with £2970 of fund assets.

    The benefit of course after RDR is that it is a bit easier to see what is going on because instead of your assets being silently eroded by fees and you not noticing because it gets lost in the gains and losses of the share prices all the time, the fund platform now keeps asking you for the money and it is all transparent.

    This helps to drive down costs because now it is all more visible, people can more easily decide whether their £3000 investment should be put on a platform with Youinvest at £6 a year or Charles Stanley at £7.50 or TD Direct at £9 or Fidelity at £10.50 or Hargreaves Lansdown at £13.50, instead of the fund just paying the platforms £30 and the platforms saying they would rebate to you the money they didn't want to keep for themselves and being a bit quiet about the detail.

    So, this extra transparency helps you ensure that you are not suffering too much in the way of rip off fees, meaning that the new way costs less. But you only save money because of making sure you shop around and pay lower costs, and NOT because the fee comes from you instead of the fund. As proved above, you can't trick the system and beat the basic maths that says if you incur a fee you will end up with lower assets.

    One of the positive things about the new system is that constantly selling the assets yourself to pay the platform, instead of letting the fund manager sell the assets to pay the platform via commission, is you can see how much money you're pulling away from the investments in HSBC and Microsoft and Tesco, because you can instantly see that £2970 is a lower investment than £3000. £2970 invested into the future will give you a lower return than £3000. So perhaps the wise thing to do if you want to keep £3000 invested is pay those fees out of £30 of new money from your bank account instead of selling units in the fund. This lets you keep £3000 invested.

    But that is no different than the old way. In the old system you could have still chosen to invest another £30 manually into the fund from your bank account at the end of the year to top it back up from £3000 once the fund manager drained it down to £2970 via commissions.

    But perhaps you didn't think to do that because you didn't realise that the manager was using up your fund assets to pay commissions to cover the platform running costs. Which is why transparency and the RDR and Platform Review is generally a good thing.
  • LXdaddy
    LXdaddy Posts: 693 Forumite
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    As ever an excellent post by bowlhead.

    Not changing the point of that post at all but...

    On Fidelity, the platform fee is automatically taken by selling part of the largest holding. So I don't need to select which fund or fund to sell to make the cash available. (I don't have cash sitting in my portfolio so don't know if they would take the fee from there first)
  • greenglide
    greenglide Posts: 3,301 Forumite
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    I don't have cash sitting in my portfolio so don't know if they would take the fee from there first
    No, they dont seem to.

    I have a small amount in the ISA Cash park (only £100 or so) and they still insist on selling small amounts of the largest holding every month.

    Most odd.
  • jimjames
    jimjames Posts: 17,669 Forumite
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    In addition to the post by Bowlhead the other thing to note is that (generally) fees have come down since RDR so that rather than paying 1.5% pa you can now get many of the same funds for under 1% including the platform fee.

    What is frustrating is that fees are taken from inside the wrapper by many platforms. On some other investments fees are taken separately by direct debit which to me seems a far better way as it doesn't impact on the value inside the tax efficient ISA wrapper.
    Remember the saying: if it looks too good to be true it almost certainly is.
  • bowlhead99
    bowlhead99 Posts: 12,295 Forumite
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    Whether you want to pay fees inside or outside a wrapper depends on type of wrapper.

    With an ISA you would want to be able to put the full £15k or whatever ISA limit into investments and then separately meet the charges from your own bank account, to maximise the amount invested.

    However with a pension (SIPP) you would want to pay for all your charges from inside the wrapper because you get 20% or 40% tax relief on them, as you've paid them out of grossed-up contributions. A £10 fee only costs you £8 or £6 if you can pay it from inside the wrapper.

    So given the choice, someone with both a SIPP and ISA would probably be quite happy paying all admin fees out of the product. It's not so great for ISA-only customers, but if RDR had never happened it would be how they were paying for their ISA platform fee anyhow, so no harm done really.
  • ColdIron
    ColdIron Posts: 9,154 Forumite
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    FWIW HL and CSD allow you to take ISA fees out of their Fund and Share account and Investment account respectively
  • Plus
    Plus Posts: 433 Forumite
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    greenglide wrote: »
    I have a small amount in the ISA Cash park (only £100 or so) and they still insist on selling small amounts of the largest holding every month.

    That seems to be the default, but you can ask them (via your 'adviser') to change it to come from your cash fund.
  • BeansOnToast_2
    BeansOnToast_2 Posts: 93 Forumite
    edited 15 February 2016 at 9:04PM
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    Best Invest take it out of cash if there is any. Else they sell from the largest holding.

    I often get small cash credits with descriptions such as "Cash Receipt - Cash Receipt Admin Refund via MEMO" or "Cash Receipt - Tax Refund via MEMO", and these help toward the fee.
  • Linton
    Linton Posts: 17,239 Forumite
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    Plus wrote: »
    That seems to be the default, but you can ask them (via your 'adviser') to change it to come from your cash fund.

    If you are talking about Fidelity, they wont take it from the Cash Fund. I have asked them - they only support taking miniscule bits from your largest fund which is a real annoyance to keep track of. For that reason and the general awfulness of the Fidelity platform I am looking to transfer elsewhere.
  • ChiefGrasscutter
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    ....yes, it's the keeping track that is the problem with their system
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