Invest £10,000, pay £14,227 in fees: how fund charges erode your money by stealth

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Many investors do not know the total cost of their investments, partly because asset managers do not make it easy to check how much a fund costs in total. But this chart shows how much the charges levied by fund groups and intermediaries can take from your returns.

A recent review by the City watchdog found that the average total charge for funds was 1.13pc a year. This figure included the asset manager's fee, the cost of the fund manager's trading and admin fees. However, many investors pay more, particularly when the costs of an investor’s own broker are added in.

Investors are increasingly focusing on costs, which has led to a rise in the popularity of low-cost “passive” funds that simply track the performance of an index. “Active” funds, which charge more, select specific stocks with the aim of producing a greater return than the market average.

The average fee charged by the manager of an active fund is 0.9pc a year, before all admin and trading costs, compared with 0.15pc for the average passive fund, the Financial Conduct Authority's research found.

Fund managers must provide investors with an "ongoing charge figure" (OCF) to state what the fund costs will be for the year. While this industry-standard figure is useful when comparing funds, it does not include the costs of buying and selling the fund's holdings, certain admin and accounting fees, or, of course, the charges levied by your broker.

It also does not take into account the costs the investor can incur when buying and selling funds.

The chart, provided by Candid Money, an advisory firm, shows how much fees eat away at investment growth, particularly over long periods of time.

For example, £10,000 invested for 20 years and earning 5pc a year but with annual costs of 2pc would be worth £17,873 at the end of the period, with the charges accounting for £5,368. If the fee is cut to 1pc the costs fall to £3,006 and the investment is worth £21,759 at the end of the period.

Over 30 years the same £10,000 initial investment, again growing at 5pc a year and with a 2pc annual charge, would be worth £23,894 after costs of £9,473. A drop in the fee to 1.5pc would result in £27,684 at the end of the period - an improvement of almost £4,000.

An active fund that charged the average fee of 0.9pc a year would, on a £10,000 investment with returns of 5pc a year, cost a total of £1,100 over 10 years, £2,737 over 20 years, £5,177 over 30 years and £14,227 over 50 years.

Sean Hagerty, managing director for Europe at Vanguard, the asset management group, said: “Every pound paid in fees is a pound less of return for investors. Investors cannot control the markets, but they can control what they pay to invest, and that makes an enormous difference over time to their returns.”

The City regulator has previously criticised fund management firms for not reducing their fees quickly enough as funds have grown in size and so benefited from economies of scale.