Are fees eating into your returns?
February 23, 2022
Recently we have been looking at underperforming funds. Today, we’re going to find out just how much you’re paying for them.
If you want financial advice, then you pay for it. If you just want to invest, then you pay investment manager fees.
But how much do you know, or understand about what you’re paying for and why?
‘Wealth Management’ is nice and vague. A Wealth Management service has most things under one roof which means they can charge you for pretty much everything you touch.
IFA’s nowadays have their hands in every cookie jar. As I said, they will take a piece of everything they broker, so they offer life insurance, business protection, income protection insurance, they even offer mortgages now.
Surely this whole structure is out of date. The same insurance can be obtained from ‘comparethemarket.com’, but without the hefty price tag. You are also likely to get a better deal online, but that’s a given these days.
The CEO of St James’s Place famously referred to his IFAs as ‘salesmen’. That tells you everything you need to know. Be careful and make sure you know what you’re paying for, and that you are happy to do so.
They will charge you for the advice, and in some cases, given how they are paid, the advice will be to take out as many products as possible.
Having said that, most saving and investing products have some fees and charges associated with them no matter how you choose to do it. Managing investments involves time and money and you must expect to pay reasonable charges.
But fees erode your investment earnings. Of course, your hope is that a fund that charges higher fees is doing so because it’s confident that it will perform above average, but this is not always the case. Popular funds, may not be popular because they make the most money, but because they are good at selling the fund to investors.
Try and make sure you know how much you are paying and satisfy yourself that it is good value for the service and investment performance you’re getting or expect.
As an example of how a small amount can impact your investment, if you were to put £50,000 with an investment manager, and then add £1,000 per month, over 5 years you would pay £7,672 in costs (if the all-in fee was 1.5% per annum). This amount will always be more than you expect.
Many funds must now provide a key investor information document to investors which displays an ongoing charge figure, but as we’ve pointed out before, they often don’t include all the actual costs that you end up paying.
Costs are made up of some or all of the following:
Investment Management Charges
Investment management charges are deducted from the value of your investment in order to cover the costs of researching and selecting investments for the fund.
They form part of the ongoing charge. As an example, Rathbones charge 1.2% for this.
These are charges for administration and other services such as maintaining a record of your investment and calculating the value of the fund each day.
They form part of the ongoing charge.
If you have any investment anywhere, you will most likely have some on an investment platform. Most platforms charge an ongoing admin fee, which might be a percentage based on your total investment, although some will charge a flat fee on a monthly or annual basis.
What other costs might you be paying that won’t be included in the headline figure?
Entry and Exit Fees
St James’ Place have famously large fees if you ever actually want to take your money out, and they aren’t alone. Some have entry fees as well just to accept your business; they charge you to get in, and charge you to get out.
Fund trading cost and stamp duty
These are the costs of buying and selling the shares and other investments that make up the fund.
They are equivalent to the costs you would incur if you decided to buy shares for yourself. Therefore, they are not included in the ongoing charges figure, which is the additional cost that results from using a fund to invest.
They will be lower for tracker funds since they will usually change their investments less frequently. You are unlikely to ever know what these costs are.
Some types of fund (for example, targeted absolute return funds) charge these on top of the regular annual charge.
They are typically 20% of any performance in excess of a target level, the idea being to align the interests of the fund manager and the investor.
Check to see if there’s a performance fee, what would trigger it and how much it would cost you.
Fee for Advice
Since the start of 2013, if you invest with the help of a financial adviser, you pay a separate charge for this advice.
The amount of the charge is decided between you and the adviser, but there are different ways to pay.
For example, you could pay a lump sum direct to the adviser at the time you receive advice.
Alternatively, you might arrange to spread the payment for the initial advice or to pay a regular sum to the adviser for continuing help, in which case the payment might be collected as a deduction from the value of your investment.
The cost of advice varies but the average is around £150 an hour, or 0.5% a year of the value of your fund, although some will charge much more.
As we said at the beginning, not everyone requires this service.
If you are with St James’ Place you could have paid as much as 4.5% of the amount you’re investing! That means if you want to place £100,000 with them, they would charge £4,500 for the advice, which will be to put the money in their funds.
You could also then see a further 1.5% initial product fee. For arguments sake, let’s just call it £5,500 on the initial £100,000 just to give them your money.
That then means that your initial investment is actually £94,000. If they then make a mediocre 6% in year one, you are still down £360. There is sadly only one winner in this transaction.
Putting capital on The Portfolio Platform, costs nothing. Nothing to get in, and nothing to get out.
There is a subscription to then actively trade it, but this can be from as little as £55/month, regardless of how much you invest. To link the same £100,000 to our FTSE tracker, would cost you £660 per year. That’s 0.66%, with no other costs.
Last year, including fees, that investment would have made 40.9%. That’s £40,900. Obviously it was a great year for the FTSE, but it was an even better year for users of the TPP platform.
The UK’s largest investment adviser.
St James Place is currently managing between 12-15% of total UK investor assets, with an approximate value of £130 Billion. The company has over the last 20 years grown at an exceptional rate, recruited more advisers than any other firm, and converted many to their restrictive but profitable practices.
SJP now has the largest distribution of restricted advisers in the UK, restricted on the basis they can only sell/advise on SJP investment funds(which accounts for less than 1% of all funds and variants available to consumer investors).
There are over 3,400 unit trust funds available to UK investors and on average the average fund charge is 0.94%. For SJP’s unit trust range of funds their annual charge (excluding their cash fund) is between 1.00% and 2.50%.
Senior management have admitted their charging structures are confusing. Last year, St James’s Place then recently appointed non-executive director, Helen Morrissey (since resigned) said "I would like to satisfy myself that fund charges are transparent and fair, but I do not believe they are because otherwise, I would be able to explain them to you…’.
Last year, in the wake of new legislation introduced by the industry regulator, the Financial Conduct Authority St James’s Place were forced to admit that some two-thirds of their funds were failing to deliver value.
This was reported extensively in the Times and Independent. A large proportion of SJP clients are unaware of the firm's structure and model.
St James Place Wealth Management is the advice firm with self-employed financial advisors, generally referred to as partners.
However the investment funds are held with St James’s Place Unit Trust Managers. Both companies are the property of St James’s Place PLC. Under the proposition clients can opt to pay for advice or not pay for advice.
Yodelar has completed a number of reviews of St James’s Place and their investment funds over the last 5 years, and have continued to highlight to their readers that a large proportion of their funds perform poorly when compared to all other same sector funds.
The restricted nature of their business model (only able to offer investors their own branded funds), hinders SJP from offering clients access to the top performing funds available from better fund managers.
As you can see, there are so many charges that need to be accounted for and a lot of the time, investors don’t know which ones they’re paying for. At The Portfolio Platform, the fees are very simple.
The one thing you do pay, is a subscription to the strategies you autotrade and this is a fixed amount each month. That is it, you get to keep all the profits.
You could link everything you have to a FTSE tracker, and the cost would be £55 per month; that’s it. That would be the entire cost of running your portfolio.
Too good to be true? Our users don’t think so. Just have a look at a few of our testimonials.
You can miss out all the people in the middle and gain direct access to professional traders who will do the trading for you, but you still get to keep all the returns. See the performances here.
“TPP might just be about to revolutionise investment for the retail market.”
- London Stock Exchange 2020