New fund pricing rules explained

Over the past few months we've seen a plethora of announcements from fund providers who have made their pricing more transparent. New and very welcome regulations have just come into force to make sure investors know exactly how much they are paying for their investments.

While the impact to those investors who trade shares is negligible, for those investors who own funds, the new pricing has far-reaching implications.

These new announcements mean fund investors are finally aware just how much they have been paying to hold funds in the past and how much they will pay going forward. The opaque nature of funds had meant that some investors thought their account was free and were unaware it was actually being paid for by a percentage of the annual management charge being given back to the provider.

Flat fee or percentage charge

The new charges, which were introduced on 1 April, have resulted in fund platforms being able to charge investors in one of two ways - a flat fee or a percentage charge. The flat fee is a set amount you pay every year to run your account, with trading fees charged separately (though in some cases, like Interactive Investor, the admin fee gives you equivalent trading credit). Percentage-based fees add an additional percentage charge on to your investments and charge you based on the value of your holdings.

Some providers have chosen to levy the percentage fee on all your investments, including equities, while some providers levy them just on funds. In addition, most providers cap the total amount payable; and while some cap their charges at a relatively low level, with others the cap kicks in at silly levels. Typically, percentage-based providers have elected to make fund purchases free.

Unfortunately, the new pricing announcements don't come with a magic wand that works out which provider is the best one for you to hold your funds with but it's worth bearing in mind some general ideas. Do please note that you should do your own analysis to work out how much you are paying for your investments and whether you could be better off with a different provider.

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Your first big decision will typically be choosing whether you pay for your funds by a flat fee or through percentage charges. Whether you're better off with a percentage-based provider or one charging a flat fee very much depends on how much you have invested. For example, larger investors who have more than around £20,000 are typically better off with a flat fee provider and those just starting out better off with the percentage fee model.

Another factor to consider is whether these charges are made at an account or customer level because if you're charged for having an Isa account separately to a Sipp or investment account, then this could leave you paying significantly more.

You also need to consider how often you trade. If you're very active and are making fund trades on a regular basis, then you should look at whether you could take advantage of cheaper regular investment plans, or alternatively consider a provider that doesn't charge you to trade funds.

Is price everything?

Absolutely not, security and service are paramount when it comes to your life savings. Security means your investments are held with registrars and are ring-fenced from your provider. Security also means any cash you have within the account is held in trust and is also independent.

Service is also an important factor but while many people assume this is defined by how quickly your provider might answer their phone, it is actually more important to be able to log in, fund and trade online securely and without difficulty - though it's also nice to know there is someone available on the phone to help if you have any queries.

Ideally, you should try to work out how much you're currently paying and what your options are elsewhere. If there's not that much in it and you're happy where you are, then sticking with your current provider is perfectly fine. If you do discover that you'd actually be much better off elsewhere, you could consider transferring.

It might seem a scary process but all it requires is 15 minutes' effort and then your new provider will do all the heavy lifting on your behalf.

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