At Nutmeg we aim to keep our fees low and simple. We don’t take you to play golf and we don’t hang expensive art on our walls, so we can afford to keep our annual management charge well below the industry average (see chart). This means much better returns for you.
As well as the annual management charge, there are other fees which can affect your returns. Almost all investment managers and private banks, including Nutmeg, allocate customers’ money to holdings which also charge fees. These are unavoidable costs that drag down your returns. We always search for providers delivering the best performance at the right price.
For the funds that we buy, the total expense ratios (TERs) range from 0.09 to 0.75 per cent, the difference generally reflecting the complexity of constructing the fund. For example, an emerging markets fund may have a higher expense ratio than a FTSE100 fund, as it is more costly to assemble the basket of underlying assets. However, the performance of the emerging markets fund, and its value in diversifying your portfolio, should justify its higher costs.
These expenses do not show up as a separate charge, but in the form of reduced returns – a tracking error versus the performance of the underlying index. For example, if we buy an ETF tracking the FTSE 100, and the FTSE goes up by 7% over the year, after expenses, the return on the ETF may be 6.65% rather than 7%.
As you can see from the chart above, the Nutmeg investment team aims to select funds whose expenses compare favourably to the industry average.
Commissions and other costs
Many wealth managers work with brokers that charge additional buy-in fees, commissions and account closing fees. You won’t see any of those charges; they are all included within our annual management fee.
When trading in the open market you are subject to what is known as a bid-ask spread. The “bid” is the price that a buyer is willing to pay for an asset, while the “ask” is the price at which a seller is willing to sell. The spread is the difference between the two. The ask price is always higher than the bid.
Because we trade in bulk at Nutmeg, we are able to match buyers and sellers among our own customers. When we cannot match a buyer with a seller, we can normally transact at what is known as mid-price, which is always more favourable than the open market.
All and all, this means much better returns.
Getting the right tax wrapper can also make a significant difference to your returns. With Nutmeg, you can invest using a stocks and shares ISA, reducing the tax you pay. ISAs can be an effective way of saving and investing, allowing you to shelter up to £11,520 from the taxman in the tax year 2013/2014. However, they may not be the most tax efficient approach for everyone, and tax legislation could change in the future. We acknowledge everyone's personal tax situation is unique. If you are unsure if an investment is right for you, please seek independent financial advice.