I’m paying HOW MUCH for my investments?
Much like peeling an onion, financial services can make one’s eyes water. Particularly when it comes to costs, which have traditionally been buried under layer upon layer.
Thankfully, the onion that is financial services in the UK has already had a number of layers peeled off over the years. Initially, through commission disclosure (‘this is how much we make from you’); then the transition from commission to fees (‘this is what we will charge you for our advice’).
The latest layer that has been peeled off has come courtesy of new EU regulations, referred to as ‘MiFID II’, which came into force in 2018.
In fact, financial services in the UK has been spared most of the more dramatic elements of MiFID II by virtue of having gone through a previous layer peel, the ‘Retail Distribution Review,’ a few years ago.
However, one new requirement under MiFID II is that investors must now receive a full and annual declaration of all the fees that they have been paying for their investments. And when I say ‘all,’ this includes some costs that hadn’t previously been disclosed (transaction and research costs incurred by a mutual fund, for example).
A lot of investors are therefore about to start receiving a letter from their adviser or investment manager setting out the aggregated charges that they have been paying. If done properly and fairly, it should include advice costs, platform/custody charges, fund management costs, VAT, transaction fees and anything else that the client has been paying for.
This, unfortunately, may come as a major surprise to a lot of investors.
We regularly meet investors with portfolios where they simply do not understand what charges they are paying. More often than not, they can quote a ‘headline’ rate, which is usually only part of the picture.
Worst by far, in our experience, are discretionary fund managers (‘DFMs’). They charge an investment management fee, usually around 1% per annum, plus VAT on top. They can invest in a range of securities, including shares and funds. Funds come with their own fees and costs, yet the investors we talk to often only understand the DFM’s fee. All-in, the aggregated charges can be more than double what the DFM is charging.
This often comes as a shock. And it has not been helped by the fact that their investment performance has been mediocre at best (another article to follow on this).
Another gripe is that DFMs rarely give financial advice to their clients (or, if they do, they charge separately, and steeply, for it). It’s all well and good saying “we have this great investment team and you should let them manage your money,” but if you are not advising the client as to what is actually in their best interests, then how do they know which tax wrapper to use, which pension allowances to be wary of, how it fits into their estate planning, or even whether they should even be investing (and how much) in the first place. These questions can only be answered by an independent financial adviser, preferably one that builds a proper financial plan to look at the whole picture. If the only tool you have is a hammer, every problem looks like a nail. A financial planner will provide the full toolkit – often absent at DFMs.
So any investors out there who have received a breakdown of their aggregated charges and have managed to lift their jaw off the kitchen table, and want to know if there’s a better way, please do not hesitate to get in touch.
Our comprehensive financial planning service, coupled with independent financial advice that we commit will always be in your best interests, alongside a simple, low-cost, diversified and robust investment process, will undoubtedly be cheaper than your current arrangements.
For clients with existing portfolios of £250,000 and above, in 2019 we are offering a complimentary, comprehensive investment review explaining where you are invested, what you are paying, how the investments have performed and a comparison against our investment performance over the same period – all at no cost to you.
Feel free to challenge us – we like a challenge. And save your eyes from watering and help us peel the onion on your behalf.