When you want a service you obviously have to pay for it, but when it comes to growing your wealth, are your investments ripping you off?
Now cost isn’t everything, it’s the value that’s important. There is no point buying cheap if it doesn’t do the job and you don’t get value. But when it comes to investing and managing money, costs can have a huge effect on your investment returns. So if you’re going to pay a high cost you really need to see big value.
Now this is the problem.
Examples of investments ripping you off
I have recently been reviewing a number of investment portfolios for new clients who have been with other Advisers, and the results are disturbing.
But before I go into the details, I want to remind you of the three main fees that you will be charged when investing your money.
#1 – Platform fee
This is the fee you pay to the provider of your investment account. They will provide all of the technology and administration support to allow you or your Adviser to pick and choose your investments.
The fee is usually a percentage of the money you hold on the platform. For example, if you have £500,000 with a particular platform, they may charge you around 0.40% per year. Meaning £2,000 per year in pounds and pence.
#2 – Investment fund managers charge
Sometimes known as the Annual Management Charge (AMC). This is the fee you pay to each individual fund manager you invest with.
So for example, you may split your investment across a few different fund managers each focusing on a different country or sector. Each manager will charge their own percentage fee per year based on the value of funds you hold with them.
#3 – Financial Adviser fee
Now you don’t really have any choice paying the first two fees but this fee is optional and you will only pay it if you take Financial Advice.
The majority of Financial Advisers still charge based on an old fashioned model of a percentage of the money they advise on. Typically this will range from 0.50% – 1% per year.
There are all sorts of issues with this charging structure and you can read more about this on our Pricing page.
Thankfully, there are a few more modern Financial Advisers who charge a much fairer and sensible fixed fee for the advice they give.
As a rule of thumb the total fees for all of the above should never really be more than 1.50% of your investment portfolio. In fact, ideally the figure should be less than 1%. Anything more and the fees you pay will be eating up any value you get.
Recently I have come across total fees of around 2.5% on two separate occasions with different Financial Advisers.
Worse still is that’s not in fact the Adviser fee that has made the overall cost for these clients so expensive, it’s the fact they are using very expensive platforms and fund managers.
For example, one client is paying 0.85% for fund management plus an extra 0.60% for ‘Discretionary Fund Management’. This is where the DFM thinks it can beat the stock market and pick and choose companies that will do better than others.
When I looked to see if they have achieved better performance the answer was no, and actually the performance was quite poor in comparison to the average market return. In fact 18% worse off in one particular year and 6% worse off in another.
This is because it’s virtually impossible to beat the market over the long term, so you shouldn’t pay any extra to try and do this.
Our investment fund manager charges come in at around 0.15% as we deliver the market return for the risk level you are comfortable with. Simple, straightforward and transparent.
With another client I found they were paying 1% for the platform where their investments were held. This is more than double the average! They don’t receive any special treatment. They get the same reports you would anywhere else and access to the same investments. In comparison, our main recommended platform fees are around 0.20%.
Reducing a client’s charges is one of the 6 key skills a Financial Adviser can bring to the table. You can find out more about the other 5 skills in this short video about how an Adviser adds value.
So it annoys me when I find they haven’t been doing their job.
What you can do to stop your investments ripping you off
#1 – Question whether you need advice.
Although most people would benefit from Financial Advice, not everyone needs it. If your affairs are simple and you have some knowledge you can save yourself the advice fee and invest yourself.
Is your Adviser truly delivering value? Do you know how much you are paying?
#2 – Don’t use a Discretionary Fund Manager
It’s another layer of charges and it’s very hard to beat the market.
#3 – Don’t use active funds
As above. Active fund managers do not beat the market over the long term. Even if they do, it’s very hard to pick them in advance.
#4 – Compare platforms
Like everything else, shop around and find a good deal but be careful not to choose your investment platform based on price alone.
A lot of investment platforms struggle to make money and their finances may not be sound. Look into the background of the platform you like the look of and make sure they own their own technology and are profitable!
Remember, when it comes to investing your money, expensive doesn’t mean quality or better. In fact it’s quite the opposite. You get what you DON’T pay for!
If you would like a review of the charges you are paying vs the performance you have received then please contact us we’d be happy to take a look and hopefully save you thousands.
Stock market linked investments and any income from them, can fall as well as rise and is not guaranteed. Any figures quoted are for illustrative purposes and should not be taken as a forecast or guarantee. Past performance should not be seen as an indication of future returns and clients may get back less than they have invested.