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How to keep your costs down

Don’t be caught out by the numerous charges and fees you’ll encounter along the self-select route. Here’s our guide to what to look out for

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etting up and running a self-select ISA isn’t free, you will be liable for numerous charges and fees along the way. Individually, these charges can seem fairly insignificant – but a 1.5% annual charge can significantly eat into your returns over the years. For example, if you were to invest £10,000 into a fund with a 1.5% annual management fee and achieved 7% growth a year you

The easiest way to cut your costs is to buy funds via a discount broker or fund supermarket – not a fund manager would have £16,930 after 10 years – £1,320 less than if you had invested in a fund with a 0.75% fee.

So what can you do to minimise fees without affecting the quality of your investments?

The first fee to deal with is the first one you will come across – the initial fee.This is levied when you invest in funds and is typically around 5%. Losing this proportion of your investment at the very beginning will have a huge effect on your returns. Luckily, there are ways to dramatically reduce the cost.

The easiest way to cut your costs is to buy funds via a discount broker or fund supermarket rather than direct from the fund manager.That’s because discount brokers and fund supermarkets use their bulk-buying power to cut your costs and offer funds either without an initial fee at all or with a vastly reduced one. For example, if you were to buy the Invesco Perpetual High Income fund direct you would pay a 5% fee but buy it via Fidelity Funds Network and the fee is reduced to 1.25%.

Apart from any initial charge, investors in ISA funds also pay an annual management charge averaging around 1.5%. Half of this usually goes to the fund management company, a small chunk to the fund platform, and the rest – typically 0.5% – to the broker as ‘trail commission’. However, a trend is emerging for brokers to rebate a portion of that trail to the investor on many funds.

Justin Modray, director of Candidmoney.com, recently did some research to compare several brokers offering this deal; he calculated how much an investor is likely to save in total on a £50,000 portfolio over 10 years through the annual rebate. He found that Cavendish Online offers the best value, rebating all the trail commission in return for a £25 one-off fee (saving £4,090). Other contenders include Alliance Trust Savings, which again rebates the whole lot but imposes an annual £30 ISA fee (saving

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