Closing Bell: Without those costly middlemen, we'd all be in deep trouble

Nobody loves the middleman who stands between the investor and his money and takes a cut, year-in, year-out, regardless of investment performance.

However, for any investment more complex than buying your son a bike to do his paper round the middleman has an absolutely vital job to do.

Even when you deposit money in the bank, someone has to decide how to lend that money so as to make the return which pays your interest. More complex investments require a longer chain of middlemen and often they have rare and marketable skills which further bumps up the costs. This is relevant not just to those who invest in stocks and shares but to everyone who has a pension fund or an endowment policy.

As one of these middlemen I have a vested interest, but I am also a customer with investments of my own and as such I can see things from both sides. On the basis that poachers make good gamekeepers, my views about fees and costs are fairly solidly rooted in the facts (and could perhaps save you money).

The first and rather obvious comment is that fees and costs have a much bigger impact when returns are low. The bull markets of the 1980s and 1990s made many investors indifferent to costs (and some fund managers greedy on fees). When you are making 15 per cent or more year-in, year-out, paying 5 per cent up front and 1.5 per cent a year might not seem such a big deal.

Returns have been much more meagre and volatile since 2000 and though we are more optimistic about the next decade we certainly do not expect a return of the glory years. The problem gets worse if you add in the impact of very low interest rates on cash and stubbornly high inflation; the investor has to run so much faster just to stand still.

Changes in the rules governing the way financial advisers get paid are coming into force in December 2012 and may have some impact on overall cost levels, but advisers who provide a useful service will still require to be paid.

The real pressure point seems to be fees charged by big fund management houses on unit trusts sold to small investors. Here, 1.5 per cent for mainstream investments is quite common, which with unavoidable administration and dealing costs can take the so-called total expense ratio (TER) closer to 2 per cent.

As in many other walks of life, bulk buying saves money; these big fund firms usually offer significantly discounted fees to investors willing and able to commit really big six or even seven figure sums, which over a long holding period can represent a substantial saving in money terms.

Those whose means do not stretch so far should look at three alternatives. Firstly, so-called tracker or index funds which do not attempt to beat an index but simply to mirror its returns can be run much more cheaply, since they do not pay highly trained fund managers to spend their days analysing stocks. These savings are passed on to investors, with fees as low as 0.15 per cent.

Secondly, investors who still believe there are managers who can outperform the market over the long-term should look at investment trusts rather than unit trusts; for various reasons their costs are usually well below those of unit trusts investing in the same types of asset.

Thirdly, and this is often overlooked, avoid excessive dealing. It's been fashionable in recent years to proclaim the death of "buy and hold" investing and to claim that the smart way to make money is to trade nimbly in and out of the markets. Well, just as the majority of drivers assess their own skills as "above average", a similar process of mass self-delusion is going on here.

An extensive survey of US investors showed that over a 20-year period, someone who bought and held a cheap index fund made more than twice as much money as the average investor with a holding period of less than four years. When markets are dull or depressed and the value of your investments is falling, it is human nature to get fretful and impatient and give in to the temptation to chase the latest artfully marketed investment fad, but every such change costs money and loads a bigger burden on the portfolio.

Do monitor your investments, but don't overpay and don't overtrade.

• Gareth Howlett is fund manager director at Brooks Macdonald Asset Management.