Online investment managers are changing the financial landscape and as new players like InvestEngine enter the scene, those changes are accelerating. Of course, managed funds still dominate the broader market, but investors are being increasingly drawn by the core attraction of online investment managers – small fees leading to bigger returns. But as the category evolves, there has inevitably been confusion about the nature of those low fees and how they’re charged. Different companies use different structures and it’s difficult to compare like with like. Clarity is in short supply.
One confusion surrounds the nature of the fund cost, which the industry calls the OCF or ongoing charges figure. This isn’t in fact, charged by online investment managers but by the fund or ETF (exchange traded fund) companies. Like any firm, ETF companies need to cover costs such as salaries, overheads and research expenses. They calculate the charge on a daily basis and then adjust down the gross assets of a fund to produce the all-important Net Asset Value – the listed worth of the fund.
Crucially, these fund costs, which are handled internally by the ETF company, can be as high as 1% per annum so they clearly can have an impact on investments. By selecting their ETFs carefully however, online investment managers can keep costs down and for that reason InvestEngine only uses ETFs that deduct on average just 0.17% p.a.
Another factor that impacts an investor’s returns is market spread, which all trading activity is subject to. This is the difference between the buy and sell price when trades are executed in the market. InvestEngine uses a buy and hold investment strategy, which lowers turnover. InvestEngine also selects liquid ETFs with smaller market spreads, and only deals when the spreads are narrowest, keeping the expected average impact of market spread to 0.04% per annum.
Then there is the knotty issue of fees charged by online investment managers themselves. As potential investors have discovered, these fees come in many shapes and sizes. Most online investment managers have an annual management fee. That said, some are fixed whereas others work on a sliding scale, spanning anything from 0.75% for small investment to 0.1% for large investment of £2 million plus.
Alongside these, some investment managers charge set up fees and others may ask for an exit fee. And of course, some levy the most fluid charge of all – transaction fees. As a consequence, comparisons are difficult to make because the implications of some fee-structures aren’t immediately obvious.
Running counter to this confusion however, is the awareness that simplicity and clarity are extremely important to investors to help them make decisions. For that reason, InvestEngine has taken a lead by going to market with an offering that is refreshingly clear – a flat management fee – which is a compelling 0.45% per annum. It is calculated daily and is based on the value of the portfolio and paid monthly.
As far as any other fees are concerned – set up, exit, maintenance, rebalancing or transactional – InvestEngine doesn’t charge any. It’s as simple as that. InvestEngine believes investing shouldn’t be hard work for the investor and the cost structure reflects that. So in a world, where investing is becoming increasingly complex, it’s reassuring to know there is at least one organisation committed to growing investors returns and keeping things clearer and easier.