Uncovering the hidden costs of investing – and how to limit them for your clients
When managing money for clients, the focus is of course on portfolio performance and resultant financial returns. Yet fund transaction costs are another important aspect to consider. Even small charges, when compounded, can lead to markedly different outcomes in the long term. For advisers, understanding these costs and being transparent about their impact is essential to delivering value and building trust with clients.
What to watch for
Fund transactions fees typically aren’t included in the ongoing charge fee (OCF) shown on Key Investor Information Documents (KIIDs). They are deducted from the fund’s value and therefore reduce returns – and under MiFID II and FCA rules require transparency.
Key examples of fund transaction costs are outlined below:
1. Broker fees and commissions
These are explicit costs paid to brokers for executing trades. They apply whenever a fund manager buys or sells securities within the fund.
2. Taxes on trades
Stamp duty and other taxes incurred when buying or selling certain types of investments. These vary by asset class and jurisdiction.
3. Slippage
Fund managers are responsible for assessing when is the right time to place a trade to minimise implicit costs while still meeting the fund’s objectives and delivering value. Slippage is the difference between the expected price of a trade and the actual execution price, often caused by market volatility or delays. This can result in the fund paying more or receiving less than anticipated when executing transactions.
Although not a transaction cost specifically, advisers may also want to consider what a fund provider charges by way of transition fees. When a fund undergoes significant changes, such as switching investment managers or restructuring assets, a transition manager may be appointed to handle the process efficiently.
Understanding fund transaction costs and being transparent about their impact is essential to delivering value and building trust with clients.
How to limit transaction costs
Understanding these costs is the first step. Next comes managing them effectively. Transaction costs can vary greatly between funds, influenced by their investment strategy and trading frequency. They should always be considered in the context of the fund’s objectives, strategy, and risk profile – never in isolation. Here are some practical ways in which advisers can help keep transaction costs under control.
1. Consider fund type
The type of fund sets the foundation for cost efficiency. Low-cost index funds and ETFs typically have lower turnover and transaction costs than actively managed funds. While active funds often incur higher costs, they also have the potential to deliver stronger long-term returns – although this is not guaranteed.
2. Partner with providers committed to cost control
Choose providers that prioritise efficient implementation and robust governance. Look for solutions that combine transparency with disciplined cost management and avoid unnecessary turnover. Providers that aggregate trades or use institutional execution can often secure better pricing
3. Limit unnecessary turnover
Frequent trading can quickly increase costs without improving returns. Encourage a disciplined approach to portfolio changes and avoid reactive decisions during periods of market volatility.
4. Optimise trade execution
Execution design matters. Executing trades during periods of high liquidity can help reduce bid-offer spreads and slippage. Avoid trading during market stress or outside normal trading hours when spreads tend to widen. For larger trading volumes, sizing or ‘tranching’ into more absorbable chunks for the market can help keep market impact and slippage costs low.
5. Regularly review cost disclosures
Costs can change over time. Periodic reviews of OCFs and transaction cost disclosures ensure they remain aligned with client objectives and regulatory requirements.
Simplifying cost control with multi-asset solutions
Multi-asset funds can help tackle transaction costs by consolidating portfolio management into a single solution. Instead of advisers executing multiple trades across different funds to maintain diversification and rebalance, these steps happen internally within the fund – often at institutional pricing. This reduces broker fees, bid-offer spreads, and market impact costs, while economies of scale further lower execution costs. With fewer external trades and less turnover, advisers can simplify administration and keep overall costs under control without compromising client objectives. Explore our insights on multi-asset investing here.
Final thoughts
Ultimately, cost transparency isn’t just about meeting regulatory requirements – it’s about building trust and delivering better outcomes for clients. Advisers who clearly explain the full picture of costs, including ongoing charges and transaction costs, demonstrate real value.
By prioritising clarity and efficiency – whether through disciplined trading, cost-conscious fund selection, or streamlined multi-asset solutions – advisers can reduce unnecessary drag on performance and simplify portfolio management. In doing so, you not only comply with MiFID II and FCA standards but also strengthen client relationships and position your advice as truly client-centric.
