How to understand stocks and shares ISA fees

There are layers of ISA fees that investors need to be aware of

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fee  savings money in jar

The easy access and tax efficiency of individual savings accounts (ISA) make them the most popular way to invest but understanding the charges can be tricky.

ISAs are a 'wrapper' for investments and as such there is usually a wrapper charge, sometimes known as a nominee charge. While this is quite straightforward and should be flagged by the ISA provider, the fees become more complex depending on what is held in the wrapper.

Stuart Phillips, chief executive of financial planning firm The Private Office, said understanding fees can be complicated.

"Even the investment professionals find it difficult to compare charges and estimates the charges, and that is someone who know what they are looking for," he said.

Phillips said the stocks and shares ISA wrapper fee will be paid when an ISA is first set up and investors will then have to pay a wrapper fee annually.

If an investor wants to hold company shares in the ISA, there will be a cost for buying that share and registering the share against the investor's name.

However, the majority of investors do not buy shares, they invest in funds, also known as collectives, said Phillips.

While the nominee or wrapper charge stays the same the fees charged by fund managers are more complicated and have to be paid on top.

"[Fund managers] will charge an annual management fee (AMC) [for investing an investor's money] - that is charged every year," said Phillips.

The fund manager doesn't just charge an AMC for investing your cash; the manager incurs costs for buying and selling shares in the fund.

"You could have trading costs and stamp duty [to pay]," said Phillips.

A manager that adds the AMC, the trading costs and stamp duty altogether, the resulting fee is known as the 'ongoing charges figure', which is one of the most comprehensive measures of what you are paying for investing in a fund.

The use of the 'ongoing charges figure' as a way of communicating costs is relatively new and replaced the 'total expense ratio', which was deemed by the European Union not to be comprehensive enough.

Further costs

Another layer of cost comes in if a person takes financial advice on their ISA investment or have entrusted the adviser to make investments on their behalf.

Investors should ensure they add up all the costs they may incur so they do not experience any nasty shocks.

"When someone is investing they should know what they are paying per annual in total and what the constituent parts of the fee are," said Phillips.

There may also be ad hoc costs that investors incur, typically through the administration of their ISA.

"There are firms that have an all encompassing administration charge," said Phillips. "Most modern [ISA providers] will have a free electronic [fund] valuations but they will charge a fee for a paper valuation."

Phillips emphasised that there was no right or wrong level of fees because it depends on the investments made through the ISA, this is particularly true when comparing the cost of passive investments, which track a stock market indices, and active investment – where a fund manager makes decisions about where to invest the money in the fund.

"[The fee] depends on the holdings," said Phillips. "If you choose to invest in a passive way...that cost will be significantly less than an ISA where you have a fund manager who is deciding on whether you are in cash or UK equities.

"The difference could be 0.1% [a year] for passive investment to 1.5% [a year] for active [management]...What everyone should do is understand their overall charges and if you are paying for advice you should be receiving something for that."

Read more:
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The perils of switching trackers
Moves to make charges transparent

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