Sound Financial Group Blog

In previous blogs I have droned on about the costs to invest and how in the UK they are, in the main, too high. Despite constant press coverage, charges appear to show little signs of reducing and so I make no apologies for starting my 2012 blogs with yet another about investment charges, but this time in relation to ‘advice’.

When it comes to investing money, there are three main costs.

Investment funds have an annual management charge (AMC) which pays for the cost of managing the investment fund. Most investors see this as the ultimate charge and will base their assumptions on this figure, however as explored in previous blogs and communications, the AMC does not include certain other costs and expenses, which will be included in the Total Expense Ratio (TER).

The level of AMC will depend on the nature of the fund, whether it adopts a passive or active management style, or something in between.

Investors also have to pay for the cost of holding and administering investments. This increasingly takes the form of a ‘platform’ or ‘fund supermarket’ charge and can include the cost of the product wrapper, such as Pension or ISA for example.
Finally, IF an investor receives the benefit of financial advice and proper management of their investment funds, there is a cost of associated with this, which is usually attributed to the investment funds. We still meet many new clients for whom they are paying their adviser the sum of, say, 0.5% of their investments, but get very little for it. A prospective client came to see me recently with a fund of around £500,000 and was paying their adviser approximately £2,500 per annum and hadn’t seen him for over 3 years!

The level of these costs will vary and historically it has been the case that investors have seen all three costs bundled into one annual management charge. It has been typical for an investor to pay perhaps 1.5% per annum for an actively managed fund, and from this annual charge each of the three parties is paid. Again I must point out that the TER will see these costs rise to over 2% for many actively managed funds, which again begs the question are they worth it? (We think not, but that’s for another day).

Typically the fund manager will receive 0.75%, the investment platform 0.25% and the financial adviser 0.5%.

As we move ever closer to a more transparent world of retail financial services, with new regulations being introduced on 31st December 2012, the trend is towards an ‘unbundling’ of these three charges. Unbundling might not reduce the total cost of investing, but it does make it easier for an investor to see where their money is going and they can then decide if the advice they are receiving is worthy of it.

If you wish to discuss your own investment strategy or would just like a second opinion on your current investment arrangements, please contact us and take advantage of a no cost or obligation meeting.