ISA customers alerted to running costs

Choosing an Individual Savings Account is closer to buying a fridge than individuals might first think, as both require a weighing up of the initial price- tag in addition to the running costs over time.

Issuing this advice, TCF Investment said such running costs can “make a huge difference” between the expected and actual finances of people who invest in most stocks and shares ISAs.

That’s because, having normally undergone 16 layers of commissions and fees in a single year, a typical equity ISA can impose a total cost drag of 3.5% - more than twice the stated annual fee on such funds.

This running or ‘hidden’ cost is fed by expenses associated with running the fund, such as fees for administration, accounting, depositary fees, marketing, legal advice and the costs and taxes of buying and selling the stocks and shares inside the fund.

So, exampled TCF co-founder David Norman, while an investor with £10,000 over 20 years in a typical fund may see their ISA pot grow by £12,770 (to return a total of £22,770), approximately £16,000 of value is “destroyed” by charges.

Longer term investors are even more  vulnerable, as he said that after 50 years the same ISA fund would be worth £295,000 with no charges but, factoring in an average hidden cost rate, would dip in value to approximately £79,000 (a staggering drop of £216,000).

“Funds costs are not dissimilar to those of your fridge or car,” Norman said. “You need to not only consider the initial cost but also the running costs over time - they can make a huge difference to your finances.”

 

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