18 Sep Have you been self investing and realised now that your provider has to charge you an explicit fee?
Many people in the UK choose to research and select their own investments, often through an administration platform such as Hargreaves Lansdown, or TD Waterhouse. Up until earlier this year these platform providers received a commission from the investment fund managers (typically 0.5% of the fund value invested each year; for a £100,000 fund, that is £500 just for holding and administering your investments).
On top of this, active fund managers typically charge between 0.75% and 1.5% per annum. So, if you are in a relatively low risk fund with underlying investments returning a gross rate of 5%, charges are typically reducing returns down to between 3% and 3.75% per annum (that’s a 40% to 25% loss of return)!
Because administration providers such as Hargreaves Lansdown and TD Waterhouse (amongst many others) received commission, they charged few explicit fees. However, that has now changed!
The Retail Distribution Review (RDR) effectively banned commission on regulated investment products (such as most retail collective investment funds, investment ISAs, Personal Pensions and SIPPs), so now the administrators have to made their charges explicit. The true cost is now clear and if you have a large fund, you could be better off switching to a new provider to reduce charges.
In fact, it is possible to receive professional financial advice, with all the regulatory protection that gives you, as well as holding a diversified investment portfolio at a total cost of less than you currently pay through the use of actively managed funds on these retail administration platforms. The likes of Hargreaves Lansdown have used newsletters and marketing material to encourage investment in ‘actively’ managed funds because they paid the high commissions, but there are alternatives at a significantly reduced cost (known as ‘Index Trackers’ and ‘Exchange Traded Funds (ETFs)’.
Some actively managed funds do justify their higher charges because they often provide returns that are consistently better than what the market average provides (Trackers and ETFS follow indexes, which are typically market averages). They may also provide a good rate of return for the level of risk taken (‘risk adjusted’ returns is what every sensible investor should be looking at when choosing which fund/s to select), so keeping some actively managed funds can still be the best way forward. Unfortunately, in many instances, the fund management charges erode the returns so that you are worse off than if you had selected a portfolio of low cost trackers.
Do you have the research and knowledge capabilities to compare performance, risk and cost of the thousands of UK retail funds? Probably not.
So, now that you know what you are paying for your self investment, you might want to consider delegating the time and hassle to a trusted, professional financial adviser, who probably also has access to a wider range of research and greater experience and knowledge of financial markets and economics than you do. Amazingly, you can access this without having to pay much more than you already do (if anything).
We aim to not only give excellent financial advice at a value price, but to help you fully understand your investment options.