Some big names are in the news – Neil Woodford, the former ‘star’ fund manager, St James Place (SJP) and Hargreaves Lansdown (HL). All three are linked to the story in some way.
Charges, fees and costs are in the spotlight. This is big breaking news in the financial services and wealth management world.
You need to see behind the headlines to really understand why this story is important; how it came to light, how it affects you; and some insider tips for what to do next.
The Light on the Charge Brigade
All major events start slowly and often insignificantly. It is only through a historical lens that a clear pattern emerges.
The initial skirmishes of this new battle are being fought by two sides. On one side we have the Enlightenment who seek major changes when it comes to the cost of investing. They seek clarity, openness and fairness for all. They represent you, the investor and saver.
The enlightenment are a small but growing movement and they are faced by the Establishment. The Establishment are a big and powerful lobby who want to retain the status quo. They represent the investment industry, the wealth managers and the discretionary investment managers.
Put simply the Enlightenment want to shine a torch into some dark corners. This should be welcomed by all investors.
The Past is a Different Country
There was a time when it was almost impossible to uncover the cost of investing. Those who tried came back and used terms such as a Gordian knot, a Russian doll, an iceberg or the many layers of an onion. Nobody could get to the truth.
The retail investor simply didn’t know how much of their pension, ISA or investment portfolio was being eroded by charges and fees.
Then the regulator, the FCA stepped in to help. The Retail Distribution Review (RDR) helped to ban commission on investment advice. Later came MiFID II which introduced charges disclosure in writing, both in percentages and pounds. And yet some of the Establishment have dragged their feet.
Greed isn’t good.
Professional investing is worth paying for. Please bear in mind that there really isn’t a free lunch to be had. Not even a free breakfast. You will always spend something to someone to have your money invested. This is not usually a DIY option. The question is – how much is fair and appropriate?
If you eat out frequently, you can soon gauge value for money at mealtimes. Burger bars and Michelin restaurants are poles apart. In the middle, there is a fairly clear benchmark when it comes to pricing, quality and value.
The same model doesn’t work when you invest. This is because for most people you typically only invest in one venue, not a wide range. So, comparisons are difficult. Here are just some of the obvious investment costs and charges.
You may use the services of a financial adviser/financial planner/wealth manager, and you need to pay them.
They probably use a Wrap or Platform to host your investments. That’s payment number two.
Your adviser/manager may outsource the investment role to a discretionary investment manager (DIM). That’s charge number three.
The DIM will create a portfolio comprising a host of investment funds run by other fund managers, or individual company shares and gilts. Cost number four.
Each time a fund or company share is bought or sold, costs and charges accrue. That’s fee number five.
And so, it goes on. The layering of cost upon cost all adds up and it is all coming out of your investment pot.
The Magic 1%
One of the best things the Establishment did years ago was to ‘own’ the magic 1% label. A masterstroke even if they didn’t realise it at the time. It dates to a US stockbroking firm in the 1930s, so it has been around for a while.
The average investor has assumed that if the cost of investing was a tiny 1% then they get to keep 99% of everything else. Makes sense at first glance.
And that’s where most investors left it – at first glance.
The problem with the overly-simplistic 1%, first of all, was that the total charges were never just 1%. This was merely the shop-window price (think the visible tip of an iceberg).
The larger problem for the investor was the complex mathematics about the growth of investment funds over time. A very simple example to use is the FTSE 100 performance over the 10 years to December 2018 (dividends reinvested).
The annualised return is 8.3%. Which means the 1% ‘cost’ is pegged to a typically rising asset (past performance is no guarantee of future performance and values can fall as well as rise). This is where the magic of compounding comes in, especially when people are investing over 30+ year periods.
At the end of a 30-year term the final result looks nothing like a 1% and 99% share.
A very simple example of a 1% return gap illustrates the point.
£8,116,000 vs £6,022,000, a gap of 25% (£1m invested for 30 years at an annual return of 7% and 6%). Where did the £2,094,000 go? Not into thin air, that’s for sure.
It’s time to pay attention. It’s your money and your future at stake.
Your family could have benefited from a lot of the missing £2m. An earlier retirement perhaps. Nursing home costs for your mother-in-law. A better level of education for your children. Or supporting a favourite charity and changing lives.
Time to read those pages covered in small font. Small print equals a big imprint.
What you should do now
If even a small element of this piece has been disturbing, you need to act. The problem isn’t going away any time soon.
If you are an investor in a portfolio, an ISA, a pension, a general investment account or something similar, start asking questions. Start collecting facts. Probe deeply. Ask for your personal Ongoing Charges Figure (OCF) from your adviser/wealth manager. Analyse it carefully.
Does the total cost represent value for money? If you have no benchmark to test your OCF against, ask for help (see below).
Don’t hold your breath
With regard to the OCF, this is the conclusion from the regulator (FCA) in Spring 2019:
Based on our sample, where consumers attempt to undertake research themselves, the information they are currently given does not give a fair and clear account of how much they will pay when they invest in financial products. Asset managers must ensure that they comply with all relevant requirements and should consider reviewing their cost disclosures to ensure that they are clear, fair and not misleading. (My bold)
Pretty disappointing really. The Establishments are digging their heels in.
If you are really concerned, search for an independent Chartered Financial Planning firm who can offer you an impartial fee-based service. Some may offer you a free consultation and an OCF comparison. They may even give you a torch.
Donald Fraser. Director. Capital Asset Management.