Understanding Investment Fees & Charges
Investment costs can significantly impact your long-term returns. Understanding the different types of fees charged by brokers and investment platforms is essential for making informed decisions and maximizing your investment performance.
Even small differences in fees can make a big impact. A 1% difference in annual charges could cost you tens of thousands of pounds over a 30-year investment period.
1. Platform Charges
Platform charges (also known as account fees or custody charges) are annual fees for holding your investments. These are typically the largest ongoing cost for most investors and can be structured in several ways:
Percentage-Based Fees
Most common structure where you pay a percentage of your portfolio value annually, typically ranging from 0.25% to 0.45%. For example, with a 0.35% fee on a £50,000 portfolio, you'd pay £175 per year.
Best for: Smaller portfolios (under £50,000) or investors who trade frequently.
Flat Fees
A fixed annual charge regardless of portfolio size, typically £50-£200 per year. Some platforms charge quarterly (e.g., £25 per quarter = £100 annually).
Best for: Larger portfolios (over £100,000) where percentage fees become expensive.
Tiered Fees
A hybrid approach where the percentage charged decreases as your portfolio grows. For example: 0.35% on the first £250,000, then 0.20% above that.
Best for: Growing portfolios that will eventually exceed certain thresholds.
Capped Fees
Percentage-based fees with a maximum annual charge, such as 0.25% capped at £200 per year. This protects larger investors from escalating costs.
Best for: Medium to large portfolios seeking cost certainty.
Example: Platform Fee Comparison
On a £100,000 portfolio over 10 years:
- 0.45% fee: ~£6,800 total
- 0.25% fee: ~£3,800 total
- £100 flat fee: £1,000 total
For larger portfolios, flat fees can save thousands compared to percentage-based charges.
Important considerations for platform charges:
- Account type variations: Some platforms charge different rates for ISAs, SIPPs, and general investment accounts
- Minimum fees: Watch for minimum quarterly or annual charges that can be expensive for small portfolios
- Free allowances: Some platforms offer free trading credits or reduced fees for regular investors
- Fee-free accounts: A growing number of platforms charge zero platform fees, making money from trading commissions instead
2. Trading Charges
Trading charges are fees paid each time you buy or sell investments. These costs can add up quickly if you trade frequently, but they're less significant for long-term buy-and-hold investors.
UK Shares & ETFs
Typical charges range from £4.95 to £11.95 per trade, though some platforms offer much lower rates:
- Standard commission: £5-£12 per trade for most brokers
- Frequent trader rates: £3-£6 per trade if you make 10+ trades per month
- Premium platforms: £10-£20 per trade but often with better research tools and data
- Zero-commission: Some platforms offer free trading on UK shares and ETFs
US & International Shares
International trading typically costs more, with charges ranging from £10 to £25 per trade. Some platforms also add currency conversion fees or charge different rates for different exchanges.
Funds & Investment Trusts
Charges vary significantly:
- Open-ended funds (OEICs/unit trusts): Often £0-£10 per transaction, sometimes free if held within a fund supermarket
- Investment trusts: Charged the same as UK shares (typically £5-£12 per trade)
- Regular investing: Many platforms offer free or discounted charges (£1-£1.50) for monthly contributions
Trading Cost Examples
- Passive investor (2 trades/year): £16-£24 annually - minimal impact
- Active investor (20 trades/year): £79-£239 annually - £160 potential saving
- Frequent trader (100 trades/year): £295-£995 annually - £700 potential saving
3. Foreign Exchange (FX) Fees
When you invest in overseas markets or buy foreign currency investments, you'll typically incur foreign exchange fees. These are often hidden costs that many investors overlook, but they can be substantial.
How FX Fees Work
Most platforms charge FX fees in one of two ways:
Percentage-Based FX Spread
The most common structure: platforms add a percentage markup to the mid-market exchange rate, typically 0.50% to 1.50%.
Example: Converting £10,000 to USD with a 1% spread costs £100 in FX fees, meaning you receive $12,450 instead of $12,550 (assuming a 1.255 exchange rate).
Fixed Fee Plus Spread
Some platforms charge a fixed fee (e.g., £5-£10) plus a smaller percentage spread (0.25%-0.50%).
Better for: Larger currency conversions where the percentage savings outweigh the fixed fee.
Hidden FX Costs
- Round-trip costs: FX fees apply when buying AND selling, potentially doubling your costs
- Dividend conversions: Foreign dividends are often converted to GBP automatically, incurring FX fees each time
- Currency holding accounts: Some platforms offer currency wallets to hold USD, EUR, etc., avoiding repeated conversion fees
- ETF currency hedging: Currency-hedged ETFs have higher charges but eliminate FX risk and conversion fees
FX Fee Impact Example
An investor with 30% US exposure in a £50,000 portfolio, rebalancing twice yearly:
- At 1.5% FX spread: £90 annual cost
- At 0.5% FX spread: £30 annual cost
- 20-year difference: Over £1,200 in savings
Strategies to Minimize FX Fees
- Use currency accounts: Hold foreign currency to avoid repeated conversions
- Batch conversions: Make larger, less frequent currency exchanges to reduce round-trip costs
- Consider UK-listed funds: Many funds provide global exposure while trading in GBP
- Choose platforms with competitive FX rates: Rates vary from 0.25% to 1.5% - compare carefully
- Regular investors: Some platforms waive FX fees on monthly contributions
4. Product Charges
Product charges are fees embedded within the investments themselves, not charged by your broker or platform. These ongoing costs are deducted from investment returns automatically, so you won't see them on your statements, but they significantly impact your long-term returns.
Understanding Ongoing Charges Figure (OCF)
The OCF represents the annual running costs of a fund, expressed as a percentage of the fund's value. This includes management fees, operational costs, and regulatory expenses.
Passive Funds (Index Trackers & ETFs)
Typical OCF: 0.05% to 0.30%
Passive funds simply track a market index with minimal human intervention, keeping costs very low.
Examples:
- Vanguard FTSE Global All Cap Index: 0.23%
- iShares Core FTSE 100 ETF: 0.07%
- HSBC FTSE All-World Index: 0.13%
Active Funds
Typical OCF: 0.75% to 1.50%+
Active funds employ professional managers who research and select investments, attempting to outperform the market. This active management comes at a significantly higher cost.
Examples:
- Fundsmith Equity Fund: 1.00%
- Scottish Mortgage Investment Trust: 0.36%
- Jupiter India Fund: 1.65%
Product Charges Impact
£50,000 portfolio with £5,000 annual contributions over 25 years:
- 0.10% OCF (passive fund): ~£446,900 final value
- 0.75% OCF (active fund): ~£410,600 final value
- 1.50% OCF (expensive active): ~£375,800 final value
Over £71,000 difference between cheapest and most expensive options.
Active vs Passive: When Higher Charges Might Be Worth It
While passive funds are cheaper, active funds can sometimes justify their higher costs:
- Niche markets: Less efficient markets (emerging markets, small-caps) may offer more opportunities for skilled active managers
- Proven track record: A small minority of managers consistently outperform after costs over long periods
- Specialist strategies: Some investment approaches (ethical investing, specific sectors) may lack good passive options
- Risk management: Some active funds focus on downside protection rather than maximum returns
Other Product Costs to Watch
- Transaction costs: Not included in OCF - typically 0.05%-0.20% annually
- Performance fees: Some active funds charge 10-20% of returns above benchmark
- Stamp duty: 0.5% on UK shares and investment trusts (not funds/ETFs)
Understanding these four types of fees - platform charges, trading costs, FX fees, and product charges - is essential for minimizing your investment costs and maximizing long-term returns.
Calculate Your Exact Costs
Every investor's situation is unique. Use our comparison tools to find out exactly what you'll pay based on your portfolio size, trading frequency, and investment preferences.