Fees, costs and why they matter

Returns are uncertain. Costs are certain. That asymmetry is why cost is the first thing a sensible investor controls.

The layers of cost

1. Fund charges (OCF) - the annual cost of running the fund, taken from returns before you see them. 2. Platform fees - what the provider charges to hold the investments, either a percentage or a flat annual fee. 3. Trading costs - dealing commissions and the spread between buying and selling prices, paid every time you transact. 4. Foreign exchange fees on overseas holdings. 5. Tax - on dividends, interest and gains, depending on your country and whether you use a tax-free wrapper.

Added together this is your total cost of ownership, and it is the only cost figure worth comparing.

Why 1% is not a small number

A 1% annual cost on a portfolio compounding for thirty years typically removes a substantial double-digit percentage of the final value. The fund does not have to underperform for this to happen; the charge is deducted whatever the market does.

Low cost does not guarantee good returns. But across large studies, high cost is one of the most consistent predictors of poor relative outcomes.

Percentage or flat fee?

Percentage platform fees suit small portfolios; flat fees become dramatically cheaper as the portfolio grows. It is worth recalculating which is better every few years - the crossover point arrives sooner than people expect.

Reduce the costs you control

Use tax-efficient wrappers available in your country, prefer low-cost broad funds, trade rarely, and avoid holding many overlapping funds that each carry their own charge for the same underlying exposure.