The (cost) advantages of DIY investing
Under the title ‘Regulatory ‘typhoon’ on course for Europe’, in today’s (27.10.14) fund management supplement in the FT, there is a good analysis of costs levied by investment advisory/discretionary portfolio managers. The typhoon of the title is MIFID ii, the second version of the EU’s Markets in Financial Instruments Directive, which, under Article 24 (there are some 97 Articles in all) requires investment advisers to disclose to potential clients the total of all the charges to which they may be subject.
One might have thought this was already happening but the suggestion of the FT piece is that the aggregation of all the costs they are being charged may come as something of a shock to investors; (and hence a problem for wealth managers). The analysis, which comes from Numis, the stockbroker, via SCM Private, suggest that the average charge on a £120,000 portfolio (excluding transaction costs) is about 2.25% but can be nearer 3%, depending on the holding period. For short holding periods, because of initial charges, it can be much higher. In other words, many clients with this size portfolio are being charged between £2,700 and £3,600 a year.
This may not sound much to some but in the context of real returns from equities expected to be in the region of 5% at best, (7.5% gross less 2.5% inflation) such fees are consuming a large part (probably at least 50%) of the expected real return to investors. The after tax return, for those investors not in a tax shelter such as an ISA or SIPP, as the FT piece emphasises, is even worse; practically all of the expected after tax real return goes in paying fees, rather than accumulating to the investor.
Why should advisory fees be so high?
Well, obviously part of the problem relates to the low level of expected returns on investments; if equities were flying away delivering 10% real per annum, such fees would not be so noticeable. But the financial services industry must also be culpable for having too high a cost base; basically people are being paid too much for providing what is effectively a ‘commodity’ like service. This is especially true when clients may be facing three levies of fees; from the advisor, from the platform provider and then, when invested in funds, from the underlying fund manager. It is also the case that initial fees taken out of the portfolio at the start are especially destructive in reducing the ‘magic’ of compound investment return.
To be fair, however, even if advisors were not overpaid, the industry would struggle to provide personal investment advice for smaller portfolios at a reasonable cost, because the costs of marketing, administration and regulation are extensive.ree levies of fees; from the advisor, from the platform provider and then, when invested in funds, from the underlying fund manager. It is also the case that initial fees taken out of the portfolio at the start are especially destructive in reducing the ‘magic’ of compound investment return.
What are the alternatives?
Well there are some new lower cost wealth managers which may be suitable; SCM Private were using this piece to promote their own offering and Nutmeg is a relatively recent entrant, which is promoting itself as a low cost provider.
DIY investing will not be suitable for all; but with the many online trading platforms which have cut the cost of trading and holding investments considerably, now is a good time to go DIY for those who feel confident enough (and have the time) to take control of their own investments.
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