Elements of a Healthy Retirement Plan
- 3 | Low fat -
Keep it Lean
and you'll keep it mean.
This particular update was initiated in January - a time when we are surrounded by New Year's resolutions. Most specifically, adverts and challenges that encourage us to eat healthily. To exercise. In pursuit of a long life and fit-for-anything body.
Sensible advice. But too much sitting around and watching the fat accumulate is not just a problem for our health. It's a problem in lots of places. Not least, our finances. In fact, when faced with decisions about which investment to choose, we often completely overlook on of the biggest handicap to our future potential.
The apparently small Percentage
One of the issues is, most asset managers, providers AND financial advisers all express their fees in percentages. And in what appear to be very small ones at that. 1% pa, 1.5% pa, 0.5% pa. With numbers so low, why would you worry about having to shop around for a lower one?
Perhaps because, although those numbers appear small, they very (very) quickly add up...
Percentages matter. A 2017 study by the Financial Conduct Authority (FCA) found that cutting the annual fee on a standard UK equity fund by just 1.2%* pa would have increased the return to investors by half.
£1 more for every £2 invested - just for cutting the fee by a fraction.
Because, every day, every year, regardless of markets, fees are deducted from your money. And that adds up. 1% a year for 25 years equals one quarter of your original investment. PLUS one quarter of your profits as well.
And in a falling market, the situation only gets worse. At least on the way up, there is growth that might help give back some of the fees you are paying. On the way down, fees only magnify the loss.
The worst thing about that study, though? Most of the people surveyed didn't even realise a fee was being paid in the first place. In other words, they were suffering significant loss from over-charging, on something they had actually believed was 'free'.
A reasonable price
An investment in any market is rarely completely 'free'. But that doesn't mean you shouldn't invest. And, at Simplified Money, we are big fans of a good stock market investment. We are also fans of collective investment funds. These are far more diverse and cost-effective, particularly for smaller investors, than trying to deal in shares yourself.
Similarly, we believe in the value that support and advice can add to your plans for a secure future. Because, like any coach, that support can help you focus on what you want, develop a plan to achieve it, and act as a mentor, perhaps motivator, to make sure you get it done.
However, unlike cars (where, mostly you get what you pay for), with investment, an executive saloon price tag is not an accurate measure of executive saloon quality. In fact, it can often be a sign you've found a dud. And the higher the fee, the more likely that becomes.
Because a higher-fee product has two challenges. First it has to outperform the cheaper option by at least the difference in fee. But all that does is bring it back on par. And none of us is happy paying three times what the person next to us paid, when we are actually all ending up with exactly the same thing.
The second challenge is therefore to outperform a second time, to justify the fact it is more expensive. And that's hard. Day in day out. Year in year out. Always being right. Never making a significant mistake.
The good news
Keeping an eye on fees is slowly becoming easier. Some new disclosure rules have been introduced which insist you get to see - in £s and pence as well as in percentage terms - exactly what you are likely to be paying. And to who. BEFORE you actually invest.
The impact of which is already being felt. There is an increasingly popular focus on low cost platforms and pension plans. And on the performance of low cost, global passive funds. The vast majority of which have been shown to do better than the rather costly, multi layered and actively managed alternatives.
The biggest issue, though, sits within some of the older and more traditional plans you might be landed with. The ones you've had for a few years but haven't looked at in a while.
Now might be time to get the details out. Take some action. Because you could find yourself being paid back in spades.
*Source:The Financial Conduct Authority Asset Management Market Study, Interim Report, section 1.5/1.6 on page 8 (click here to open a copy in a new window)