The charges laid against us
Saturday 14 February 2009
John Kay is one of Britain’s leading economists. His interests focus on the relationships between economics and business. His career has spanned academic work and think tanks, business schools, company directorships, consultancies and investment companies. He has written a new book which was extracted in the FT. It is a rather good summary about investment charges.
He talks about trading. We use the analogy to trading as a bar of soap...the more you use it, the less you get. Of course some fund managers would argue otherwise, particularly when their jobs rely on trading but…
John Kay says “The effect of these costs on returns depends on the frequency with which you deal. Online trading is so inexpensive and easy that you may be tempted to trade often. But only one thing eats up investment returns faster than fees and commissions, and that is frequent trading. Do not succumb. Do not accept the invitation to subscribe to level two platforms or direct market access. The total costs of running your own portfolio should be less than 1 per cent per year.”
Whilst investors may say - "we only switch investments once or twice a year", yet if they are held within actively managed funds, the trading is much more often. Ask any fund manager how often they trade and what are the costs? You may be surprised of the answer!
He goes on to say “Investing in actively-managed funds will cost you more. The choice of funds, both open and closed-end, is unbelievably wide. There are more funds investing in shares than there are shares to invest in. This situation doesn’t make sense, and is both cause and effect of the high charges. Costs need to be high to recover the expenses of running so many different, mainly small, funds that all do much the same thing. At the same time, the high level of charges encourages financial services companies to set up even more funds.
The proliferation of funds means that choosing a fund may be no easier than choosing individual investments. The problem seems to multiply itself, as do the fees. The fees attract more advisers, and so on. This plethora of choice would be less confusing if all funds, managers and advisers were excellent, but most are not”
In our view he is correct. To illustrate his point regarding costs he goes on to say “If you own a mainstream British unit trust for five years, it is likely that the direct and indirect costs and charges you incur in buying, holding and selling that investment will total 3 per cent a year. Other investment funds may cost you more. The total charges on a fund of hedge funds are such that it might yield less than a government bond even if the underlying investments returned more than 10 per cent per year.”
Ouch. These are high fees, yet if investors see high earning funds making say 20% per annum, they may be prepared to pay 3% per year or more in fees. The net result is 17% to the investor. That sounds like a good deal. Yet the evidence shows that 20% returns each and every year are few and far between. If we knew as advisors which fund manager was going to produce such returns every year, we would be first in the queue of investors! Sadly, that's more of a pipe dream and not reality. Thankfully we live in the world of investment reality rather than a hopeful dream world, but if you, as an investor, do happen to choose the right fund manager at the right time, then you really need to put that call on luck not skill.
Rather than hoping for high returns, the solution is lower fund manager fees. Thankfully, lower fees are available, without sacrificing performance over time…if you know where to look.
Perhaps the queue should be at our door as it is possible to deliver a successful investment experience over time...we look forward to showing how.
posted by Murray Round Wealth Management @ 15:17,
The Authors
Nicholas Round
Nic is the Managing Director of Murray Round Wealth Management Limited, who seeks to ensure the advice provided is truly independent. Based in Shropshire with clients local, national and worldwide, Nic has strived to find the best possible service for his clients needs, by researching and studying the market, trends and philosophies. Nic strongly believes Asset Class Management will bring his clients Financial Freedom, Independence and Happiness.
Kirsty
Kirsty is our communication guru. Managing information requires considerable due diligence and her passion for organisation gives the clarity we all seek. From Shropshire, with a Psychology Degree and much travelling, she is now back in Shrewsbury...and London often, keeping us all at Murray Round focused.
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