... but you don’t have to pay a penny.
If you thought you were paying too much in fund management charges, you don't know the half of it. The truth is you're paying even more than you think. Much, much more.
Over the years, fund managers will siphon off tens of thousands of pounds from your portfolio, doing far more damage to your wealth than the odd stock market dip.
At least when the market dips, you might recover your losses in the next rally. But any fee you pay to a fund manager is gone for good, and you will also lose all future growth on that money.
Yet most investors don't realise how much damage they do.
Guilty as charged
Unit trusts are the default fund choice for most people's stocks and shares ISA allowance and some of the worst fee offenders, so let's see what you pay
Say you invest £10,000 in a unit trust with an initial charge of 5.25% (some funds charge even more!). You have instantly gifted the manager £525, and he hasn't done anything yet.
This means you are actually investing just £9,475. You will then typically pay an annual management fee of 1.5% on that money. In the first 12 months, you have paid £667 in total charges.
And that's only the beginning.
Invest £10,000, pay £20,000
It's the annual management fee that does most of the damage, because you pay it year after year after year, and on a rising sum of money.
Let's assume your fund delivers a total return of 6% a year. If you hadn't paid any initial or annual charges, your money would be worth £17,908 after 10 years. Instead, you have just £14,714. Charges have cost you £3,194 in lost growth.
After 20 years, you will have lost £9,220. And after 30 years, you will sacrificed the grand total of £21,947, almost double the sum you originally invested.
Without charges, you would have £57,434. Instead you have just £35,487.
Since you are likely to invest more than £10,000, your losses will be much, much greater than that.
Hidden howlers
True, you can escape that initial charge by investing through a discount broker or fund supermarket. But it's the annual fee that does the real damage, and that is much harder to escape.
Incredibly, fund fees are even more brutal than my figures suggest, according to the True and Fair Campaign, which wants to clean up the fund management industry.
The average investment fund has a total expense ratio of 1.63% a year, but hidden charges, including dealing and performance fees, can push the total costs closer to 3% a year.
That's double the figure I used in my calculations, doubling your losses.
No free lunches
Investment fund charges are a throwback to the days when markets regularly delivered double-digit growth. Investors barely noticed that 1.5% annual charge if their fund was growing at 15% a year.
But in these days of lower growth rates, 1.5% looks plain greedy. Why should fund managers still make merry when their clients have to subsist on a diet of thin gruel?
As ever, there are exceptions. I am still happy to pay a 1.5% annual management fee for the stock-picking skills of Neil Woodford, who runs equity income flyer Invesco-Perpetual Income.
But three out of four fund managers underperform their benchmark index. Who wants to pay for that?
FTSE faves
I wish the True and Fair Campaign good luck in its war against the UK investment industry, but you can take action today.
If you build your own portfolio of high-quality stocks, you don't have to pay any initial charges or, best of all, annual management fee. All you have to pay are trading charges and stamp duty.
You could take your pick from big UK blue chips such as Aviva (LSE: AV), BT Group (LSE: BT-A), GlaxoSmithKline (LSE: GSK), Prudential (LSE: PRU), Reckitt Benckiser (LSE: RB), Royal Dutch Shell (LSE: RDSB), Sainsbury's (LSE: SBRY), Unilever (LSE: ULVR) and Vodafone (LSE: VOD).
Alternatively, you could buy a low-cost FTSE tracker, the cheapest of which charge total fees of just 0.2% a year.
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> Harvey owns Aviva, Glaxo, Prudential, Royal Dutch Shell, Vodafone and Invesco-Perpetual Income. He doesn't own any other investment mentioned in this article.
