'The Isa switch that will save us £10,000'

Rebecca and Andrew Thelwell, who run their own consultancy businesses in Cheshire, were among those who fell into the direct-investor trap. Mrs Thelwell, 39, naturally thought that by going direct to the fund company, in this case M&G, Britain’s biggest fund management company, she would get a “wholesale” price, which would be cheaper than a broker.

The Thelwells save £300 a month for their two children, Eleanor, 10, and William, three, with the aim that it could be used when they are young adults as a deposit on a property. Their Isa was set up directly with M&G nine years ago.

“We had been with M&G for a number of years but it was not until I started doing some research a couple of months ago, and familiarised myself with investment charges, that I realised substantial savings could be made,” said Mrs Thelwell.

She quickly realised that the recent changes to Britain’s investment regulations – which have brought benefits to many investors, as reported in these pages in recent months – were not going to benefit their investments.

There were two ways in which the Thelwells were overpaying. First, by going direct to M&G, they were losing 4pc of their contributions in the form of an upfront charge. So each £300 was immediately being reduced to £288, and the underlying investments would have to grow by 4pc just to claw back that charge. But the upfront charge could be easily and entirely avoided by investing via a broker.

Second, the annual costs applied by M&G to its direct investors are higher than if you invest in exactly the same M&G fund via a middleman. M&G charges 1.66pc per year. Buying exactly the same fund through a low-cost broker, such as Cavendish online, results in a total charge of 1.17pc. Of this, Cavendish keeps 0.25pc and 0.92pc goes to M&G. Last month Mrs Thelwell, who tends to oversee the family’s savings, moved her money from M&G to Cavendish.

The immediate savings, in the form of the end of the upfront fee, will be £144 per year, based on a £300 per month investment. The savings resulting from the reduced annual charge will be £18 per year.

Both of those figures take no account of investment growth. According to calculations by Candid Money, an independent website that specialises in comparing the costs of long-term investing, if the underlying fund grows an average 5pc per year, sticking with M&G would result in a total pot worth £67,560 in 15 years’ time. Switching now to Cavendish would mean that money would grow to £73,821.

After 20 years, sticking with M&G would produce £98,428, compared with £108,254, a saving of almost £10,000. M&G argued its charges “reflect the average cost of servicing individual clients, including statements and up to date information on all investments via our call centre.”

But Mrs Thelwell said: “The money is better in my children’s back pocket rather than a fund manager’s.”

Why going direct costs more

It seems perverse to savers that if they buy a fund direct from the fund company, they pay more than if they use a middleman or broker. Here’s how the situation arose.

Before recent rule changes, most savers paid a single price when they invested in a fund, charged as a percentage of their savings pot. If they invested via a middleman, some of the charge would be kept by the middleman and some passed back to the fund firm. You wouldn’t know how much went where. If you bought via the fund firm directly, you would pay the same price, but the fund firm would keep all of it. Now, brokers have to charge their own explicit fee, so savers pay two charges – one for the fund and one for the broker. This has reduced the overall costs for the majority of savers, because some brokers charge low fees, and because competition has intensified. But investors who still go direct pay the old, hefty fees to the fund managers.

Richard Bradley of Platforum, an independent consultancy, said as well as paying premium prices investors going direct to fund managers often receive poorer service. “Brokers or fund shops also offer a helping hand when it comes to picking investments.”

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