A telescope is a marvellous thing. But you need to look into the right end of it to see properly. Objects far away can be seen with clarity. When it comes to fees and charges, the huge investment industry wants you to look through the wrong end, to make things that are large appear very small. A neat trick. Many investors never stop to consider the total cost of investing. This blog looks into investment advice fees.
The 1% investment advice fee myth
You will agree that 1% is a relatively small figure.
If the two of us share a cake and I take 1%, you will be left with the remaining 99%. That sounds simple, easy and insignificant. However, regrettably for you - the investor - it isn’t any of those things.
To make matters worse, if the 1% represents the investment advice fees, and the fee is taken from your savings, ISA or pension, you may not even notice. Out of sight and out of mind.
The years pass by and the fee remains at 1%. The kind people who manage your money don’t even ask for an inflation-related increase. How sweet of them, you think. Wrong again.
The eighth wonder of the world: compounding
For the sake of this very simplified example, imagine you had £500,000 invested in your self-invested personal pension (SIPP) and the investment management fee is 1%.
At outset, the year 1 cost is £5,000.
Markets perform well and you double your money over the next 10 years (a growth of 7.2% a year will do just that). Your SIPP is now worth £1 million and the 1% is now £10,000 a year. Are the investment team working twice as hard? Who knows, but it’s unlikely.
Carry on until year 30 and the results are challenging to say the least. Your SIPP pot has grown to an impressive £2,981,748. Nice. But that ‘small’ 1% fee is now worth £29,817. Ouch!
If the money is invested at 7.2% a year without a charge, your final pot will be worth £4,025,442. The gap between £4,025,442 and £2,981,748 is £1,043,694. An impressive gap, don’t you think?
Is the gap equivalent to 1% of the two totals? No, absolutely not. It has widened to about 26%. How did that happen?
You may have a mortgage. You may also have your car on a monthly PCP contract. There may be an annual commuting cost to get to work every day. Money is set aside for the annual holiday. All very normal.
You budget and save for these explicit costs. But lurking inside your SIPP, your ISA or your investment portfolio is a significant annual cost you probably didn’t budget for. And it is eating and eroding your wealth. Investment advice fees may well be your largest annual cost that you didn’t even know about.
The example above is based on just 1%, but there is more bad news. You will be paying more than that. Much more.
|Platform or Wrap||0.5%|
|Total cost of investing||3.5%|
This is purely a simple example. You need to find out for yourself. There is some good news in the form of MiFID II: EU legislation forcing the full disclosure of investing charges, fees and costs. Your personal numbers could be higher or lower than 3.5%.
You will have to lie down with a wet cloth over your face to begin to imagine what charges of anywhere close to 3.5% a year could do to your future lifestyle. It might make you feel dizzy.
It’s your money and it’s time to take action
The regulator, the FCA (Financial Conduct Authority) have assessed the annual profit margins of 44 UK business sectors.
Here are the top-5 sectors.
|Metals and Mining|
|Institutional Financial Services|
Money management holds three of the top-5 most profitable business models (and who likes estate agents?) Spotted the link yet?
It’s called OPM, or Other People’s Money. A bit here, a bit there, and it all adds up.
“Transparency will bring into much sharper focus the substantial price discrepancy between active and passive funds. Generally, active funds trade far more often than they should, and the impact on net returns is considerable.” Robin Powell, Evidence-Based Investor.
So now it’s up to you. The information is out there. It is broken down into pounds and percentages, layer by layer. You really don’t need to pay through the nose.
If you want a calm and rational second opinion of your own costs and charges, contact us here.