When on your weekly shop at the local supermarket, you like to think there will be a wide range of goods in stock at low prices, in order to find the best deal. In the same vein, you'd hope fund supermarkets have a similar proposition when it comes to shopping for investments.
Instead of going direct to a fund management group who can charge initial fees of around 5 per cent as well as annual management fees of around 1.5 per cent for a unit trust, you can skip straight to a fund supermarket to save on these costs, with some scrapping the initial fee altogether while cutting the annual charge.
And if you don't need advice from an independent financial adviser, then going to an execution-only supermarket or discount broker can seemingly bring you the biggest savings.
But, despite being perceived as a panacea for cheap investing, some supermarkets have of late been adding extra charges, in some cases to justify offering funds which don't tend to pay them commission. For investors, this means it could cost you more to hold a small amount of money in some products such as tracker funds, which aim to reflect the performance of an index like the FTSE 100.
Hargreaves Lansdown, one of the largest fund supermarkets, has attached a flat-fee charge of up to £2 a month per share for investing in certain tracker funds, although this also applies to a few actively managed funds. Prior to this change, which came into force at the end of December, charges for tracker funds varied, from some having no fees to others costing around 0.5 per cent a year.
Ben Yearsley, an investment manager at Hargreaves Lansdown, says: "We've introduced the fee to offer clients a wider range of funds. Historically these trackers don't pay commission, so it's a case of being able to widen the service."
The supermarket is now offering a tracker fund range from Vanguard, with some of these funds charging as little as 0.15 per cent a year. However, the Vanguard trackers will incur the new £2 charge, and other trackers are also subject to the flat-fee of £1 or £2 per share a month, depending on the commission from the product paid to Hargreaves. For example, the Fidelity MoneyBuilder UK Index has a £2 fee and the Legal & General UK 100 index has a £1 fee. These new costs will hit those savers with less money invested harder than if they were being charged, for example, 0.5 per cent a year on their trackers.
On the positive side, though, supermarkets that are switching to charge flat-fees rather than taking a percentage of your investment mean customers can see what they are paying and where the costs are going, as part of a push spearheaded by the Financial Services Authority (FSA).
But another fee causing controversy is something called trail commission, a fee of around 0.5 per cent of the value of your funds a year, paid by fund management firms to IFAs and fund supermarkets, with the aim – in theory – of covering the cost of on-going financial advice. There are fund supermarkets which rebate this fee, either in part or in full, as they do not provide this advice. However, the FSA is banning the payment of on-going trail commission from 2013, making way for up-front fees for advice.
Mr Yearsley says Hargreaves Lansdown refunds, or provides an average annual "loyalty bonus", of around 0.25 per cent – or half the fee – and up to 0.5 per cent at most. Bestinvest also offers a rebate, or loyalty bonus, of up to 0.5 per cent a year, although this is only paid out if the value of your account, which can include that of others in your household, amounts to £50,000 or more, on the anniversary of opening your first account.
Adrian Lowcock, a senior investment adviser at Bestinvest, says the firm is also looking to turn this annual rebate into a monthly payment.
However, despite the shift towards trail commissions rebates, other firms still do not offer this payment, including Barclays Stockbrokers, which says it is looking to change this over the next couple of months.
In contrast, Alliance Trust offers a full rebate. Malcolm Dodds, its head of platform development, says: "Trail commission is rebated in cash, directly into the client's account. The client or IFA can then choose what to do with the rebate. It could be used to cover account charges, pay IFA fees, re-invest or can be withdrawn, where the product rules allow."
Even if you can get a rebate on this commission, there are other fees to consider. Investing in shares, investment trusts, exchange-traded funds, gilts and bonds can often incur a charge. Hargreaves Lansdown, for example, charges 0.5 per cent of your investments a year on these products, capped at £45 if you're investing through an ISA. In comparison, Bestinvest charges £12.50 every quarter plus VAT for holdings in ETFs, shares and those investments which do not pay an annual commission.
Indeed, some charges are based on how much money you save, as well as the type of investment you buy. Barclays Stockbrokers charges £30 plus VAT a year for up to £7,500 invested in funds via an ISA, which are not in the firm's Funds Market range. If you have more than £7,500 invested, the charge is £50 plus VAT. Alliance Trust Savings charges an administration fee of £25 plus VAT a year for investing in an ISA, although it offers one free online trade, for which it would normally charge £12.50.
One way to boost your returns is through dividend reinvestment, although this can also incur a cost and is not offered by some supermarkets. Alliance Trust charges £5 for dividend reinvestment, and Barclays charges 1 per cent of the value, or a maximum of £7.50. Hargreaves Lansdown allows for dividend reinvestment free of charge, and Bestinvest does not yet offer this service.
But this is not simply a case of comparing apples with apples, because there are other factors to consider when shopping around for the best supermarket, such as the number of funds available and what other services are included, such as access to comprehensive investment research, if this is something you require.
For those who are not confident investors, seeking advice from an IFA is a wise move. Martin Bamford, the managing director at IFA firm Informed Choice, says although going through a supermarket can seemingly help cut fees, trading charges can exacerbate your overall costs. For example, trading shares can incur a commission charge of up to £13 per online deal.
Colin Turton, a director at MarketWatch and AdviserAsset, says you can keep an eye out for charges each year, so that if there is a significant change in pricing policies or the value of your portfolio, it might be more efficient to move to another platform or supermarket. "But you also need to consider the functionality of the platform," says Mr Turton. "What do you need from a platform versus the relative charges – it's a judgement call."
He says look to see if the platform or supermarket has access to the funds you require, and if there is tax wrapper selection guidance, for example.
Emma Dunkley is a reporter at citywire.co.uk