Fees are hot topic in the investment world. At the end of the day, you can’t predict what the stock market is going to do in the future, but you can know the costs you pay to invest.
Simply put, overpaying for an investment eats into your money, whether it's a fund's annual charge, the fee on your Isa account, or the trading costs of buying and selling shares. And in today's world, where transparency is improving all the time, there is no reason to pay more to invest than you need to.
“It is really important that investors keep an eye on charges. Every single penny that goes to an investment firm is a penny lost on your returns,” says Mike Barrett, consulting director at the Lang Cat. “When you start to compound the impact of these charges, you’ll see it can quite profound. A few percentage points here and there today makes a big difference if you are investing for the long-term.”
Many would-be investors are put off from ever starting because there are so many charges to get your head round, and trading costs in particular can be very expensive. But setting up a regular investment plan can be one way to reduce these costs.
What is a Regular Investment Plan?
A regular investing plan means you invest a set amount in your funds or shares each month through your fund supermarket, like any other direct debit. Why is that a good idea? Take Hargreaves Lansdown as an example: it charges £11.95 each time you buy or sell shares, but if you set this up as a regular investment, the charge is just £1.50. Similarly, AJ Bell charges £9.95 for a one-off trade, but only £1.50 on a monthly investment into the same share, investment trust or ETF.
Thanks to technology, setting up a regular investing plan takes minimal effort: you can just log on into your account from your comfortable sofa and choose the investments you want to put money into each month, and the amount you wish to invest in each. These investments do not have to be funds or shares you already hold in your portfolio.
The minimum amount for regular investing varies between providers but, for example, with Hargreaves Lansdown and AJ Bell you can start by committing as little as £25 per month per holding. Typically, there is no notice period for ending your plan or changing it, so you could cancel the instruction after one deal or switch to another investment.
Why is Regular Investing Cheaper?
Regular investing is cheaper because fund supermarkets pool investors’ money together in those shares and funds and bulk buy, passing on the cost savings to their customers. The other benefit, of course, is that you are not tempted to try and time the market and you don't have to remember to manually invest.
Martin Coyle, head of business development at Morningstar, says: “Drip-feeding your money regularly into investments during falling markets, such as we've seen recently, also means you can buy more units or shares when they are cheaper."
Compound interest is another benefit that the experts love to talk about; small sums can add up large amounts when invested over the long-term. Coyle adds: "Combine that with the additional benefit of reduced trading charges - or, in fact, zero trading charges in some cases - and it means more of your money is working for you, and that's a great outcome.”
Meanwhile, Laura Suter, personal finance analyst at AJ Bell, points out setting up a regular investment is a great decision if you get spooked by stock market falls. Anyone worried about putting money into the market at the wrong time will likely find a regular investing plan a welcome relief. She explains: “By automatically investing money on the same day every month, you take away the decision about when to invest in markets, and you take some of the emotion out of investing – it's a great way to restore confidence in investing."
It’s Not All About Trading Costs
However, it's important to bear in mind that fund supermarket providers all have different charges and this is something investors need to carefully look at before deciding which company to use.
“There is a gulf between the highest and lowest charging structures and trading costs are just one aspect to consider,” says Coyle. Some firms, for example, charge a flat annual or quarterly fee to use their services while others charge a percentage of the amount of money you have invested.
Barrett says these platform charges are just as important as trading fees: “Some platforms are pretty cheap and competitive for lump sums, but not if you are investing little and often.” He points to AJ Bell as one example: ”If you are investing a £20,000 lump sum they are quite competitive, but if you put in £100 each month it can be very expensive.” You can compare fund supermarket fees and find the best one for you here.
It's not all about fees, either - the range of funds and shares available to investors, customer service and ease of use are juts some of the things to bear in mind when choosing a fund supermarket. “Ultimately the most important thing for people is to start investing, that’s where you get the long-term benefit – just by start doing it,” says Barrett.
