[Estimated time to read: 6 minutes]
You might want to shut your eyes before reading this.
I know, that makes no sense - but what I am about to explain also makes very little sense…
It’s the impenetrably opaque world of investment fees and charges.
You’ve got better things to do than read boring articles, so why should you care about this issue enough to read on?
- Because…forget threats to the global economy, market volatility or not saving hard enough for your retirement, high costs derail more people’s finances than anything.
- And, despite massive reforms in the UK in a direct bid to put an end to charging confusion - saving, investment and advice fees remain a minefield of perplexity, because it suits the industry.
- Plus, everything’s even worse for expats in the international financial marketplace.
When will there be good news?
There is some good news – I absolutely assure you – and you can take positive action if you’re affected by what I’m about to disclose.
But before we get to all that, I believe you’ll want to see the problem, how it can affect you, and why you’re probably right about what you see as the reason behind it.
Why you don’t always get what you pay for
In December 2012 the Financial Services Authority, now the Financial Conduct Authority, implemented new rules via its Retail Distribution Review (RDR) to govern how financial advisers get paid in Britain.
At the time, according to the Financial Times, someone who entrusted £100,000 to a UK financial adviser for a decade would be paying an average of 2.86% of their pot each year for financial advice, and for the costs of holding financial products.
So, the RDR came in and stopped commission payments to financial advisers, and aimed to introduce greater clarity for investors and make everything much cheaper.
It was said by the regulator at the time that these reforms would:
“increase transparency of prices and enable competition” and that from now on, charges would be disclosed in a “clear and upfront manner”.
So why then, almost four years on, have average costs on the above example portfolio only come down to 2.56%, according to accountants Grant Thornton?
We live in times of record low interest rates and income-starved markets, so surely the cost of advice is even more concerning for savers and investors today?
But, according to private wealth index provider ARC, the average private client with money in a steady growth-focused discretionary portfolio achieved a return of 2.3% last year.
You don’t have to be an economist to see that, despite the massive shake up in the UK thanks to the RDR, the average investor is still losing out because of fees and charges.
And I know YOU know things are worse in the international marketplace where commission payments still abound, and fee structures on products are far higher and even more opaque.
I believe that fee structures in financial services are kept as complicated as possible on purpose.
As long as people can’t understand what they’re going to be charged they’ll remain in the dark.
As long as they remain in the dark, the industry will continue to get away with short changing them.
The impact – as illustrated by the fact an average investor made 2.3% last year but was charged 2.56% - is an enriching of an industry at the expense of people’s financial futures.
Adding it all up – the cost of investing
To help you make some comparisons, the following table shows what we charge compared to what other companies charge, assuming a portfolio size of £500,000.
The percentage amounts may all seem small, but remember, the compounded effect can be large.
I’ve used UK firms as a comparison for two reasons.
Firstly the fee structures of our competitors in the international financial marketplace are even more opaque than the following, and they take commission on top of fees.
Secondly, as we endeavour to export UK best practice internationally, I felt it more appropriate for us to compare our fees with British firms:
|Firm||Initial Charge||Ongoing Charge||Additional Charges|
|AES International - Financial Planning||1 - 3%||1.25%||None|
|AES International - Basic Investment Portfolio||0%||1.25%||None|
|Towry||1.8%||1.115%||1.8% taken each time new money is added|
|St James Place||Up to 5%||1.85%||6% exit fee on pension products in Y1 – falling to 0% by year 6|
|Brewin Dolphin||Up to 2%||1.91%||£20 per share trade|
|Hargreaves Lansdown*||1%||Up to 2.4%||Up to £11.95 per share trade|
*Portfolio Management Service
Education is the movement from darkness to light
Money doesn’t come with instructions, and a lot of people remain in the dark because no one tells them they’re in the dark, so how are they supposed to know?
I’m grateful that you and I don’t fall into that category, and together we can change the way the world invests by chipping away and challenging the status quo.
It’s not acceptable that people are charged more than they make.
It’s not fair that there are initial charges, on-going charges, commission payments, exit fees, cost per trade, fees every time money is added or taken away, advice fees, VAT and so on, and on…
The fact is it doesn’t have to be this way…
And now we get to the good news.
You don’t have to accept the status quo
Armed with the knowledge you have, you have choices.
If you don’t yet know what you’re paying out versus what you’re making, don’t worry, that’s common - you can request for a portfolio X-Ray Review and find out.
Then, you can make your choices…knowing that you don’t have to accept the terms of an outdated industry, you don’t have to be kept in the dark, you don’t have to pay the going rate, because that going rate is often way over what’s fair, and almost always opaque.
Your low cost options:
- Do it yourself – the advent and growing popularity of so-called robo advisers means you can choose to do it yourself even if you have little time, and no desire to become a stock-picking asset manager.
We have our own robo platform if you’re interested in this approach…
But you don’t have to choose it – that’s the wonderful thing about being enlightened – you know your market choice is broad!
Have a look at Nutmeg and Wealthify in the UK, or explore the likes of Scalable Capital or MoneyFarm.
Shop around, choose the right company for you.
- Guided self-investment – if you’re not entirely comfortable relying on algorithms and check boxes to build a portfolio, you can do it yourself with some guidance.
You can choose a professional adviser, ideally one who’s Chartered because by the nature of their status they are required to put your interests before their own.
(Click image to view our Investment Code)
Make sure you agree fees in advance, and work together to build a financial plan.
Armed with this, you can then choose and manage your own investments.
And if you need a review or some advice further down the line, you only pay for what you need.
- Choose fee-based – your final option is to choose a fee-based adviser who will create your financial plan, and manage your portfolio for you, for a fixed fee.
You don’t get something for nothing, and professional advice should be paid for.
But it shouldn’t be charged by stealth and by lying to the client about what they’re actually paying.
- You believe fees should be fair and transparent? So do we.
- You don’t have to accept the existing conditions – we don’t.
- You can get a better deal – and we’ll help if you feel you need us.