What are your investment and financial advice charges?
Understanding Investments: What you pay in Investment and advice charges?
Tuesday 1 October, 2019
If you own an investment ISA, Pension or Insurance Bond you will be paying a fee to the investment managers. If the investment managers then spread your money across a range of other funds, you may be paying two sets of investment management fees (a fund of funds is a good example of this). If you also use the services of a financial adviser, you will probably be paying them a fee for ongoing advice and service.
Of course, no one will manage your money for free, and the alternative is to keep your capital in cash in the bank or under the mattress, neither of which will earn you a return to keep pace with inflation. Whilst you are “saving” money on fees, the real value of your capital is reducing so it’s not much of a saving at all!
The key to the most successful financial outcome is to ensure the fees you pay are reasonable for investment management and that the advice you pay for and receive adds value and helps you achieve your objectives.
What is reasonable and what difference do fees really make?
Howard Goodship, chartered financial planner, Ringwood, Hampshire said:
‘I would like to illustrate a couple of examples assuming two sets of typical fees, one of which I suggest is excessive and one reasonable. All financial advisers should be setting out the fees you pay for both financial advice and investment management in clear % terms and now also in pounds and pence, the legislation for which has recently been updated in April 2019.’
Scenario 1 - £250,000 assuming a 5% gross return (pre-fees)
|
Years
|
3% Initial fee & 2.5% ongoing Investment Management & Advice |
1% Initial fee & 1.5% ongoing Investment Management & Advice |
Difference |
|
10 years |
£318,000 |
£361,000 |
£43,000 |
|
20 years |
£407,000 |
£509,000 |
£102,000 |
|
40 years |
£667,000 |
£1,014,000 |
£347,000 |
Scenario 2 - £500,000 assuming a 5% gross return (pre-fees)
|
No. of Years |
3% Initial fee & 2.5% ongoing Investment Management & Advice |
1% Initial fee & 1.5% ongoing Investment Management & Advice |
Difference |
|
10 years |
£636,000 |
£722,000 |
£86,000 |
|
20 years |
£815,000 |
£1,019,000 |
£204,000 |
|
40 years |
£1,350,000 |
£2,028,000 |
£678,000 |
You can see that what you pay is important, and it matters more the longer you are invested. An average 65-year-old still has to plan for around 20 years and a 50- year- old for 30+ years (based on average life expectancy).
If you do find you are paying fees in line with my “excessive” example, they may be justified by the statement “you get what you pay for” and explanations that the quality of the investment management justifies the higher fees. During the past 7 years (post Retail Distribution Review), the choice of high-quality investment solutions has increased and with a broader choice, pricing has become more competitive. The pensions market is a very good example where 1% per annum was seen as competitive but since the introduction of auto-enrollment (and more competition), between 0.5% and 0.75% is commonly available.’
In Summary…
To conclude, price isn’t everything and it can certainly be worth paying a little more for some investment management services than others, but it does matter. With a wide choice of investment providers, a high-quality service is now available at a reasonable price. As Warren Buffett once said; “Price is what you pay, Value is what you get”. Make sure you are striking the right balance and are getting great value.
Howard Goodship, chartered financial planner has written his tenth article in a series on Understanding Investments. To read other articles in the Understanding Investments series please see the articles below or visit our New to Investing web page.
Understanding Investment Articles
1 What are Investments and why should you own them?
2 Managing risk and tax to earn a higher return.
4 Tax efficient investment income.
5 What are my pre-retirement options
6 What are your choices at retirement
7 How much money do you need in retirement?
8 Tax efficient saving for grandchildren
9 The value of independent financial advice
Please note: The value of an investment and the income from it could go down as well as up. The return at the end of the investment period is not guaranteed and you may get back less than you originally invested.
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