Cut your unit trust charges

By THIS IS MONEY
Updated: 19:00 EST, 2 August 1999

Hundreds of pounds in charges may be saved by investors prepared to carry out their own unit trust or Isa research and buy through discount brokers.

'We had already put money in a number of UK investment funds and had some extra cash to invest in 1997,' says Suzanne. 'Rather than use a commission-based financial adviser, we decided to research the market and choose another investment ourselves.

'This way, the bulk of our money would go into the investment rather than a large amount going on charges.' Providing a fund manager pays commission, a discount broker will offer discounts on its funds, be they open ended investment companies (Oeics), unit trusts or Isas. Investment trust shares are bought through the stock market, so no commission is available unless a new trust is being launched. Typically, fund managers take a 3% to 5% initial charge on an investment in a unit trust fund. Most of this money goes to the financial adviser or broker who introduces the business. If an investor buys direct, the initial charge is pocketed by the fund management firm.

On top of this, the fund manager pays renewal - or 'trail' - commission each year to the broker. Typically, this is 0.5% of the value of the investor's stake. Discount brokers usually refund all the initial commission to the investor but keep the trail commission, which is what happened in the Pryors' case.

Some discount brokers require a minimum lump-sum investment before they offer discounts and will not accept regular savings business. Others accept regular savings but may offer lower discounts on these investments. The discounts offered will depend on individual brokers and any special deals they are able to negotiate with fund managers. So it is worth shopping around. Discounts are only one aspect of investment, however, and it is more important for investors to choose funds that best suit their needs rather than those with the best discounts. Suzanne, who looks after the couple's three children, and Stephen, a computer salesman, decided Europe was the place for their money. They put £5,000 in the Jupiter European Pep. The normal initial charge was 5%, or £250. But TQ Direct Choice refunded the first year's 4% commission it received from the deal. This meant that £4,950 of the Pryor's money was invested in the fund.

Since then, the Pryors, from High Wycombe, Buckinghamshire, have invested in the fund regularly. They now pay £150 a month into a Jupiter European Isa and TQ gives them a 2% discount on the charges and a 1% cash rebate. This means £1,746 of this year's £1,800 contributions will be invested in the fund and they will receive a rebate cheque for £18. Without the discount, just £1,710 of their £1,800 would be invested. Most discount brokers provide an execution-only service which means they do not give advice, though they may offer guidance in the form of regular newsletters and fund analysis information.

Many investors will need advice and may be better off seeing an adviser and paying commission. But Don Clark, managing director of TQ Direct Choice, says that where investors are prepared to do their homework and have experience of investing, discount brokers can provide added value.

'Our service is not for first-time investors, but for those with experience of funds who are looking to keep down charges on future investments,' he says. 'In some cases they may feel they have had mediocre advice and can do just as well investing for themselves.' A number of discount brokers will, however, provide advice for an additional charge. And there are some who will even provide independent advice free. These include Best Investment, Garrison Investment and Unitas.

• Best Investment, 0990 112255; Garrison Investment, 0114 250 0720; TQ Direct Choice, 0800 413186; Unitas, 01724 849481.