UK investors are paying almost three times as much for stocks and funds as investors in the US.
The average cost of a stocks and shares investment fund was 1.24 per cent in the UK, according to the asset manager Vanguard. The average for a bond fund was 0.71 per cent. In the US equity funds cost an average of 0.42 per cent while bond funds charged 0.37 per cent.
The analysis for The Times involved all the funds available to invest in now — those that are actively managed by expensive human fund managers as well as passive tracker products that simply replicate the holdings of a stock market index. Older versions of funds that have additional charges were discounted and the averages were weighted to reflect the sums invested in each fund.
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It is the clearest indication yet that UK investors are losing out. And this is despite the fact that costs are coming down amid greater scrutiny from the Financial Conduct Authority (FCA), the City regulator.
James Norton from Vanguard UK said: “In many industries costs can be a marker of quality, but in investing the opposite is true. Costs are a hurdle. Every pound you pay in fees is a pound out of your future returns. UK investors are waking up to this reality and becoming increasingly cost-conscious, but in the US this has been the case for decades.”
Why do we pay more?
One reason that UK investors tend to pay more is that they are more likely to buy active funds, which are run by highly paid stock pickers. The average active share fund charges about 0.71 per cent (0.42 per cent for bonds), according to Morningstar. The average equity tracker fund costs 0.09 per cent (0.07 per cent for bonds).
US investors tend to use tracker funds, which can cost less than 0.1 per cent. About 51.2 per cent of investments made by Americans were in passive funds as of May, up from 43.6 per cent in June 2021, according to Morningstar, a funds analyst.
By contrast only 23.8 per cent of UK investments are in trackers, although this has almost doubled from a decade ago.
Vanguard said that the size of the American market gave it a greater ability to pass on economies of scale and keep fees down. The UK funds industry is the second largest with £10.3 trillion under management, according to the Boston Consulting Group, an analyst. But it is a quarter of the size of the US market, which has £39 trillion under management.
Costs across the Pond are also driven down by competition, because more money is held in shares than in cash. About 22 per cent of household wealth in America is in investment funds and about 12 per cent in cash. It’s the reverse in Europe with 32 per cent of household wealth in cash and 10 per cent in funds.
The FCA has warned that people are not investing enough. Its 2022 Financial Lives Survey found that 4.2 million people held £10,000 or more in cash that could be invested.
A lack of social welfare and a much smaller state pension has encouraged Americans to invest more, said Susannah Streeter from the wealth manager Hargreaves Lansdown: “The tradition of being more self-sufficient to pay for medical bills and college education is likely to have persuaded more Americans to start investing earlier.”
Fewer US citizens are signed up to a workplace pension scheme (about 53 per cent compared with 79 per cent in the UK), which could also explain why they are more likely to invest for themselves.
Will fees get cheaper in the UK?
The introduction of the Consumer Duty rules last year, which require asset managers to ensure “good outcomes” for clients, should start to push down costs. For example, the FCA is cracking down on the practice of fund managers charging for advice that is not actually being provided.
Norton said: “The Consumer Duty has introduced an obligation to help investors achieve their financial goals. We have also seen the industry become more transparent, particularly around fees, and more customer-oriented.
“The rise of managed services, and so-called robo-advisers are all making it easier to invest, especially for those who might lack the time or willingness to manage their own portfolios. Again, this is a nascent industry in the UK, compared with the US, but the US experience is an indicator of what the future could look like.”
Miranda Seath from the industry body Investment Association said: “The UK funds market is one of the most competitive in the world and independent analysis shows that fees have been steadily coming down.” She said that more UK investors were making use of cheap tracker funds “with £13.8 billion invested in 2023, representing almost a quarter of funds under management”.
Why costs matter
Any investment fees you pay will eat into your returns. The more you pay in charges, the lower your gains.
An investor with £10,000 held through an investment platform charging 0.45 per cent a year, and paying 1.24 per cent fund charges on top — total fees of 1.69 per cent — would have £19,254 after 20 years, assuming 5 per cent a year growth, according to Vanguard. They would have paid £7,278 in fees.
An investor paying no platform fees, and 0.42 per cent charges for funds, would have £24,489 after 20 years, having paid £2,043 in fees.
There is one benefit to UK investing, however, which is that it is easier to work out exactly what you are paying. Platform, fund and adviser fees have been separated in the UK since 2013 whereas in the US, wealth managers can still bundle up costs into a single figure.
How to find the cheapest options
When choosing a platform and investment, make sure to work out the total cost of investing — the annual management fee for the product as well as platform, advice and dealing fees. All charges should be clear. If they are not, ask for details.
If you are paying more than 1.68 per cent a year in fees and charges on your investments or pension you are likely to be losing more than half your potential profits to the firms looking after your money.
Active funds are often appealing because there is an expert choosing your investments, but be sure to check their track record and performance against a comparable tracker fund — you might be able to achieve the same returns for a lot less.
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The most popular investment fund on the Interactive Investor platform is the L&G Global Technology Index Trust, which has a relatively low annual charge of 0.32 per cent. It is primarily invested in US companies such as Microsoft, Apple and Nvidia but has about 3 per cent of its portfolio in the Taiwan Semiconductor Manufacturing company.
Another popular but more diversified option is Vanguard’s Lifestrategy 80 per cent fund, which has (as the name suggests) 80 per cent of its portfolio in shares and 20 per cent in bonds. Its investments are spread across regions with 40 per cent in America and 20 per cent in the UK. It has an annual fee of 0.22 per cent.
You will have to add the cost of the investment platform on top. Most charge a percentage of the value of your investments per year. Interactive Investor charges a fixed amount of £4.99 a month if you have £50,000 or less invested — equivalent to 0.12 per cent a year for that amount. If your portfolio is larger, you will pay £11.99 a month. Trades typically cost £3.99 each.
A fixed annual fee is usually better for those with larger portfolios than a percentage charge.
Buy off the shelf
If you want a professional stock picker to make investment decisions, you can buy ready-made portfolios depending on your goals and the level of risk you are happy to take.
These pool a basket of different funds into one place. Most DIY platforms will have a selection of ready-made portfolios in actively managed or tracker funds, or both. AJ Bell charges 0.6 per cent to 0.8 per cent a year for its actively managed portfolios but as little as 0.31 per cent for its tracker funds, on top of its platform fee of up to 0.25 per cent a year.
Do-it-yourself investors can limit costs by plumping for a commission-free platform such as Freetrade, which offers general investment accounts for nothing, but charges for Isas and Sipps (self-invested personal pensions). The platform iWeb also has no general fee, but you have to pay £5 per trade.
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Robo-advisers cater for investors seeking ready-made portfolios. They use cheap index-tracking funds to keep charges down and build portfolios automatically based on answers to a questionnaire to determine your aims. The portfolios are similar to the ready-made ones available on the DIY platforms above. Firms include Nutmeg, Moneyfarm and Wealthify, and they tend to have an all-inclusive annual charge. Nutmeg’s charges range from 0.7 to 1.15 per cent for a more managed service.
The problem with robo-advice is that it does not tailor investments to your specific needs.
If you want a more personal service, try a financial adviser or planner. But expect to pay up to 5 per cent for an initial review and then annual costs of about 0.5 per cent of the value of your investments if you have regular annual reviews.
