As the annual decision on ISA investments approaches, it is important to remember that high management fees are the ‘silent killer’ of long-term investment returns.  Many investors anticipate that future returns may be more modest, and if so, it is important that they economise, especially when it comes to fees, according to asset manager Vanguard.

"The less the fund manager takes the more the investor keeps," says Vanguard's Nick Blake.

Many investors and advisers will look towards their favourite fund or fund manager this ISA season, ignoring the impact of fees on their return.  In doing so, they may well be losing far more in fees than they gain in tax benefits from their ISA.

If an investor contributed their £10,680 ISA allowance (for 2011/2012), and assuming a 5% return over ten years, the investor would achieve £17,397 in gross returns.  This compares favourably with what the same investor would achieve had the investor been taxed at 20% outside of an ISA – noticeably 9% less.  The returns would be even less for higher rate taxpayers.

However, the 5% gross return will be subject to fees paid for investment management.  According to Lipper, the average fund cost for an equity fund in the UK is 1.6% per annum.  This is 32% of the 5% growth achieved, and the 1.6% applies not just on the “growth” on the fund, but on the whole balance, including the investors starting capital every year.  Eventually, this compounds to produce significant gaps in return, and after 30 years, the investor’s potential return has reduced from £46,158 to £29,120 – a loss of 37%.

Nick Blake, Head of Retail at Vanguard Asset Management, says, “Increasingly, investors are searching out investments with low fees to control the impact of charges.  The less the fund manager takes the more the investor keeps.   The 1.6% TER quoted as the average fund cost in the UK typically includes the cost of paying commission to an adviser, and for the administration of the product.  This means that we typically see true investment-only costs totalling 0.75%.  Over ten years, this still represents 7% of the growth earned – a considerable chunk of the tax benefit.