“Fees can be high because the costs of securing an investment, paying for an expert to advise or an intermediary commission when making a purchase,” says Adrian Lowcock, senior research analyst at Hargreaves Lansdown.
“Other costs you should be aware of are ongoing maintenance costs, storage, insurance costs. As an example of directly investing in wine, investors will need to consider storage: will they pay to have a wine cellar installed or pay for the wine to be held elsewhere?”
Fees tend to break down into four main categories, adds Brett Williams, managing partner of Old Burlington Investments, an initial fund raising fee, an annual management charge, and a performance fee or ‘carried interest’.
“In large scale fund management, the initial fee might be 1-2% with annual charges also of 1-2%, and the fund manager may walk away with 20% of the investor’s profits as a carried interest,” he says.
“The carried interest acts as an incentive for the manager to invest, manage and dispose of the asset well. With smaller funds, given the cost of developing the product and managing the subsequent investment, fees are typically higher when expressed as a percentage.”
He notes that EIS funds, for example, have traditionally charged anything between 4-7% of the fund’s raised as an initial fee, out of which – pre RDR – they have had to pass on commissions to IFAs.
He adds: “Some promoters, or fund managers, have also made fees from a fourth source and these typically tend to be unquantified fees charged to the underlying investee company, for example.”
In these cases, he explains, investors may never know quite how much the fund manager has earned – although more providers are making public their intention to to be fully transparent on fees and charges.
“Investors and their advisers should pay careful attention to the fee structure of the investments as these can substantially impact the returns of the underlying investments,” adds Mr Williams.
“It is also beneficial to make sure that the interests of the investment manager and investor are aligned through the fee structure, including the structure of the performance fee or carry.”
“As it is sometimes difficult to identify fees within an investor structure, advisers and investors should, where possible make decisions on figures disclosed after fees have been deducted as these will be more indicative of actual returns.”
