Let's talk about fees
Never underestimate the impact small percentages can have on your investments.
Our proposition is all about keeping both fund management and advice fees low. We might even appear to be rather obsessed at times.
But that’s because (according to a recent study by The Financial Conduct Authority1) less than half of investors realise they pay a fee in the first place – and even fewer fully understand the impact those fees are having on final returns.
The problem seems to originate from the fact that most fees are quoted as percentages. For fund management, charges tend to sit in a range from less than 0.5% to over 2%; for financial advice, you can expect to pay the same again.
Which may not seem like much. Those apparently small numbers probably seem quite innocuous. You might not even do the calculation to find out how much that is in £pounds and pence.
In that same recent FCA study*, the Regulator decided to calculate the effect of different charges on a fund of £20,000. For a realistic situation, they used the actual performance of the UK stock market over the past 20 years and looked at how much difference fees alone might have made to your potential final return on that money.
So, first, they calculated the return on that £20,000 using an annual fee of 0.3%. Then, they did the same calculation again, using an annual fee of 1.5%. The difference in the two returns? Around £15,000!
Which, in percentage terms, is 75% of the value of the original investment. And that is definitely a large number.
Back to that FCA study again, they found that £109 billion of investor's money - perhaps some of it yours - is sitting in funds that behave like tracker funds yet charge like active funds. And if the same underlying performance is being achieved by both but one charges a higher fee is being paid, that means only one thing.
A lower return. And not only a lower return, but one where the worst performing manager earns the most. Directly at your expense.
Now, before we get carried away too much, fees are not everything. Different funds target different stocks and different risk profiles. And there are some managers out there who justify their higher fees through a combination of outperformance and risk management.
Financial advisers justify their fees by getting you invested in the right place, with the right level of risk, without paying too much for the privilege; by saving you tax in the process - and then keeping you motivated to actually achieve what you set out to achieve.
In the US, for example, a study by LIMRA in 2015 found that those working with financial advisers were:
more confident they would be able to live the life they wanted in retirement,
three times more likely to have over £150,000 ($250,000) in retirement savings and
more likely to be confident their investments were on track...
You need to always be sure you know how much you are paying and what services you are paying for.
With over 2,500 funds in the UK to choose from, it is key to remember that you do have plenty of choice. With over 20,000 advisers in the UK, you have lots of opportunity to discuss what you want. That above example had just a 1% difference between the two funds, but has made a huge difference to the end result.
Which is why we get a bit obsessed about fees. It's why the process we use to select product and fund solutions places a great emphasis on fees. It's why we use technology and efficiencies to keep our own fees low. Because the benefits of advice and wealth management are enormous and we want to bring them to a lot more people than just the already very wealthy.
While we believe that helping you achieve your dream for the future is, in many senses, priceless, if we help can do that for a lower fee, you might be able to achieve that dream just a little bit quicker.
1, Source: The Financial Conduct Authority Asset Management Market Study, Interim Report, section 1.38 on page 18 (click here to open a copy in a new window)
The value of investments can fall as well as rise, and you may not get back all of your original investment.