RP: As an investor, you need to know how much you’re paying.
Unfortunately, fund management companies around the world have traditionally made it very hard to work it out.
Statistician Chris Sier decided to look into the cost of investing when he moved from a job as a police officer to work in asset management in London. Despite having less responsibility in his new post, his salary almost doubled overnight.
CS: My question was: where does the money come from? Where does money evolve? And how does it fuel everything that we see outside the window here — which you can’t see here obviously… but all of the buildings and all the companies and all the people are funded somehow, and it got me thinking about where the money came from. And then, I reached the conclusion that it came from the consumer, and the consumer pays for everything. And that’s been my journey since then: it’s figuring out how much the consumer pays.
RP: Something that surprised Dr. Sier, as he started to investigate further, was quite how many layers of intermediation there are involved in asset management. Of course, every layer adds to the cost.
CS: So there are a whole bunch of things that the consumer won’t recognise. They recognise a fund manager, or maybe if they don’t recognise the fund manager, they’ll recognise the platform or the distributor. Or in the pension fund world, they’ll recognise their pension fund provider. But they probably don’t know about things like custodians, brokers, transfer agents and all of these many, many intermediaries that exist in the process — that actually, every time the money touches them and passes through their hands, they get paid for. Now, I’m not saying that that’s wrong — for people to get paid — but what I am saying is the industry could be so much more efficient. Every layer of intermediation that sits in that journey takes some money.
RP: Something that many investors don’t understand is how much of their returns are eaten up by the cost of trading. The more the fund manager trades, the more you pay.
CS: My father, as a fund manager, always used to say: you can bleed performance by over trading. So he was very cautious and never really traded. He’d buy and he’d hold and he’d keep… and he would be very, very cautious about the things he bought. That was his model. But others don’t have that point of view: they tend to trade, and they trade upon the volatility of the price. There’s an opportunity: “we should sell it and make some money,” or “we should buy because it’s cheap and then we should sell it later on.” Those are two very different approaches. And you need to be aware that when you buy manager A versus manager B, that one is not going to have lots of trading costs… and one might well have, because that’s their model.
RP: Chris Sier is now working in several countries, trying to get to the bottom of how much investors pay. But it’s a painfully slow process.
Until the total cost of investing becomes clear, investors are best advised to stick to low-cost funds with transparent fees and charges.
Don’t forget to subscribe to our YouTube channel where you'll find acres of digestible investor education - no matter what you're investing for.
By subscribing, you can dip in and out and tailor your own learning programme.
Or get back to our Video Library to find more digestible content.