There were a couple of interesting articles in the FT over the weekend (27/8/2016) on the costs to investors of having someone else manage your portfolio. Data from Grant Thornton suggests that investors who buy investment advice and financial products from mass market investment groups are still paying 2.56% per annum on average. This is only down from 2.86% in 2012 when the Retail Distribution Review (RDR) which unbundled product commissions was expected to reduce them substantially.
Indeed product costs may have come down but it seems that investment firms are making up for the lack of direct kick-backs on product sales by raising other charges.
Now you might not think that 2.5% is high but it can enormously erode your wealth over the longer term. In the same article in the FT it was reported that the average private client with money in a growth-focussed discretionary portfolio achieved a return of 2.3% in 2015. That’s after some costs were deducted but not all. In other words, the return could well have been halved because of charges.
And for that you don’t even get a personalised service unless your portfolio is very large. Due to high regulatory and staff costs, you are now likely to be stuffed into a “model portfolio” where your holdings will the same as other clients of the wealth manager.
Do wealth managers achieve better investment performance than you could do yourself? Not in my experience. There is very little evidence that professional fund managers exhibit any consistent out-performance probably because markets are quite efficient nowadays with the instant distribution of news and analysis so fund managers cluster around the same “average” performance.
There are two simple solutions to this problem: 1) Manage your own stock market investments as ShareSoc has consistently advocated (thus cutting out the middleman, or disintermediation as it is technically called); or 2) Buy very low cost index tracking or other pooled investment vehicles. A judicious mix of 1) and 2) can also be worthwhile if you wish to maximise performance without too much excitement or effort.
High charges are a menace which is why the debate on the recent increases in charges affecting some clients of Youinvest continues to rumble on. Experienced investors know that minimising costs is essential so unexpected changes to charges are always unwelcome as it undermines your nicely considered financial planning and decisions on who you wish to use as a supplier of investment services.