Beating the market
Thousands of people could retire earlier if they reviewed the fees being charged on their retirement and investment plans.
The Financial Services Industry charges fees on all investments – that’s how they get paid for the advice they offer and the work they do setting up and managing funds and portfolios. There is nothing wrong with that – but most people have no idea what these fees are, and they have virtually no understanding of the impact these fees have on the value of their retirement fund.
I am not aware of any other situation where individuals buy a service without understanding the full impact of the costs they will pay. Most people, if short-changed in a shop, will raise the point immediately. We regularly shop around on the internet to make savings on a purchase or compare car or contents insurance and energy suppliers to get a better deal.
So, why don’t we shop around on fees for what is really important in our lives; our retirement lifestyle? After all, if you could get the same return on your money with the same consumer protection, but by shopping around you could retire sooner – why wouldn’t you?
Regardless of age or how much money you have, high industry fees can delay you reaching your ‘stop working’ day; the day you start your retirement. With the changes implemented in the ‘Retail Distribution Review’ (RDR) five years ago and the new update to the Markets in Financial Instruments Directive (MiFID 11) which came into force on the 3rd January 2018, investors have never had so much information available to them. Investors now have the power to take back control of their money from the Financial Services Industry and do what’s right for them. After all, this is your money and you are saving for your retirement not your fund managers. Yet very few investors understand the fees and the impact of those fees.
And therein lies the problem; if we do not know how much is it costing us in total Financial Services Industry charges and the impact that has on our long-term future wealth, why would we do anything about it, and how would we know what to do?
Perhaps it is because we do not have sufficient information presented to us when we invest, to allow us to make that decision, or we do not want to look ignorant in front of our trusted advisor or perhaps we do not think it is happening to us.
Let’s have a look at an example:
Inventor A is aged 45 and has pension and ISA savings valued at £300,000 and wishes to retire with a fund in the region of £750,000 and preferably at the age of 65. The total financial services industry cost on their money is 2.5% per annum. Assuming an average growth rate of 6% per annum the fund value would not achieve the target value until the investor is aged 73.
Remember, £300,000 of this fund value was Investor A’s money to start with, a profit of £467,000 has been generated and it has taken 28 years to achieve target value. You may be surprised to find out that the total Financial Services Industry charges have totalled £345,512 over this time.
It has therefore cost Investor A £345,512 to make £467,000 and they have lost eight years of their desired retirement lifestyle.
Investor B, also aged 45 and with pension and ISA savings valued at £300,000, wishes to retire with a fund in the region of £750,000 and preferably at the age of 65, decided to review the industry costs. Investor B realised that they could get the same returns and same consumer protection for 1.1% per annum. They also achieved an average 6% return per annum on their money. They achieved a target fund value of £773,000 by age 65 – eight years before Investor A.
In other words, they have achieved their target retirement fund value at their projected retirement date with one simple decision; shopping around to get the best fees.
As £300,000 was Investor B’s money anyway they have made a profit of £473,000 in 20 years not 28 and it has cost investor B only £102,000 (not £345,512) to make £473,000 and achieve their lifestyle objective. If at the time they decided to delay retirement to age 73 like Investor A, the fund value would continue to compound and be in the region of £1,128,500, an additional increase of £360,000.
Let’s look at another example:
Investor C is aged 30, has a smaller pension fund valued at £40,000, and looking to retire at age 65. The average annual return is 7% per annum over the investment period. The total Financial Services fees are 2.13% per annum and no further contributions will be made.
The fund value is projected to be £203,968 and as £40,000 was investor C’s money already, she has made a profit of £163,968. The Industry would report how well she has done and Investor C may be content with her advisor’s recommendations. However, it has cost Investor C £74,588 in Financial Service Industry fees to make £163,968.
Investor D, like Investor C has exactly the same scenario but shops around and reduces her fees to 1.1%. Lower fees do not mean lower returns and investor D also averages a 7% return per annum. Because the fees do not cause such a drag on the returns, the fund value compounds and at retirement age of 65 has grown in value to £291,105. As investor D already had £40,000, a profit of £251,105 has been generated but with a reduced industry cost of only £48,623.
Investor C gave away control of her money to the Financial Services Industry and achieved a fund value of £203,968 to live the rest of her life on, paying £74,588 in fees over the term.
Investor D took back control of her money and achieved a fund value of £291,105 for exactly the same financial return, same financial risk and same consumer protection.
Which investor are you?
Just by being prudent and understanding the impact these Financial Services fees have on your money you can keep more of your investment for yourself and your future retirement lifestyle – rather than funding your advisor’s lifestyle! It’s your money – so take control of it and give yourself the option to retire sooner, should you wish.
This is a case study I have taken from my book ‘Retire Faster’ for Company Directors available on Amazon.
As a business owner I would imagine that controlling costs are very important to you. Especially costs spent by those you employ. You probably have budgets that restrict their spend, but when it comes to managing your pension or investment portfolio’s, how much budgetary control do you have. Very little I would imagine. More to the point, how much is this lack of financial control costing you and what affect is it having on your long term financial wealth.
This case study is not unusual … in fact I would go as far as saying its standard practice. Read the case study and decide as a business owner what would you do?
CASE STUDY 1 – MR K.
Mr. K is a Business Owner with a Small Self-Administered Pension Scheme (SSAS) valued at £660,000. Mr. K asked us to carry out a wealth efficiency review on his pension arrangements as they had not been reviewed for a number of years. We found Mr. K was paying 4 levels of charges per year:
- The Administrator of the SSAS who charged £650 + VAT
- The Discretionary Fund Manager (DFM) who charged 0.65% + VAT + additional dealing fees
- Annual Management Charges (AMC) of the funds purchased, in the region of 0.57%
- The Financial Adviser who charged 0.5%
Although these charges initially appeared competitive, the actual charges appeared to be excessive. After further investigation we found that the DFM routinely sold parts of the funds held in the SSAS and bought similar stocks just to justify increasing the dealing charges.
We found that instead of selling just one fund (perhaps due to poor performance) and re buying another, partial sales of all the stocks took place (even though some had performed to expectations). We felt this practice was unusual because there was a £100,000 cash balance in the fund. These additional dealing fees added an extra £1,822 to the annual charges and we could find no justification (even re-balancing… adjusting the risk of the portfolio) as to why these transactions were made.
Therefore in monetary terms Mr. K was paying in the region of:
- £780 to the SSAS Administrator
- £5,148 to the DFM (adviser annual management charges)
- £1,822 to the DFM (additional dealing fees)
- £3,296 in fund annual management charges (AMC)
- £3,300 to the IFA (who had not made contact for over two years)
Total charges for the fund management were in the region of £14,346 per year, equivalent to a reduction of 2.17% off Mr. K’s portfolio growth rate. This is about average for the industry.
We highlighted to Mr. K that using new technology he could reduce his fees to:
- £780 to the same SSAS Administrator
- £1,122 in fund annual management charges (AMC)
- £3,300 to the IFA (if he chose to keep his current advisor)
Total charges £5,202 per year, equivalent to a reduction of 0.78% off his portfolio growth rate. That is a saving of £9,144 per year.
The best way of seeing the effects of high charges on Mr. K’s portfolio is to project the future value of his fund at a growth rate of 5% per year, over a period of 25 years. We can then apply the different charging structures of 2.17% on his original portfolio and the 0.78% on the proposed portfolio and note the difference in projected fund values. It is important to note, that we are not stating that the new portfolio will perform any better or any worse than the existing portfolio, but we are purely looking at the effects of charges.
The cash flow analysis showed a positive difference of £586,000 by using the proposed proposition, which also gave Mr. K access to a low risk globally balanced portfolio holding over 5,375 stocks.
What would you do with an extra £586,000 in your pension fund or investment portfolio?
More to the point, Mr K employed these discretionary fund managers to do a job for him. Not content with their quoted fees, additional fees were taken (which as discretionary advisers they are entitled to do under their terms of contract) but their actions were equivalent to them dipping their hands into Mr K’s till at a rate of £64 per day over and above what we would term necessary.
As a business owner what would you do if this was happening to you… are you sure its not happening to you? … is it worth a conversation?
Ironically Mr K runs a security company… sometimes you just have to smile….
When I talk about performance of pension funds or investment portfolios, investors will get very defensive about their wealth managers. It is almost as though they want to defend their personal decisions to work with their particular financial organisation, even though at the time they did not fully understand or were fully aware of the costs that would be sucked out of their investment.
I am often told that “I am very happy with the returns that I am making on my money,” which raises the question; “I am sure you are, but if you could have had an extra profit of tens or hundreds of thousands of pounds or millions of pounds, would you not have been even happier?” This question of complacency is extremely interesting. It appears that if an investor is getting an acceptable return on their money, they are not particularly concerned with how much of their wealth they are giving away unnecessarily. Why is this?
Is it anxiety, fear, doubt or just not wanting to show a lack of understanding of the financial world. What ever it is that is stopping investors from caring about their money, there must become a point when you say ‘STOP’.
Conventional wealth management institutions have internal systems set up to deliver a particular service and they will much prefer that the status quo prevails, as it is more profitable to them and their shareholders. Why would you expect them to keep you informed of new financial opportunities which exist outside of their organisation? Why would they provide you with an opportunity to move your money to a competitor at their expense, even if it was in your best financial interest? These corporate entities are in business to maximise shareholder value and get rewarded for doing so. They are not in the game to make sure that each investors financial outcomes are catered for, that’s the investor’s problem and if the investor has not considered all the facts, that’s not the corporate’s responsibility.
Let’s not kid ourselves here in the real world, Banks, Discretionary Fund Managers and Wealth Management Companies are in one business and one business only. They are targeted to grow their client bases and to increase funds under management regardless of charges or performance. It is therefore really important for the investor to take back control of their money and ensure that their portfolio costs are kept to the bare minimum. The fee you pay your financial adviser is for the personal service and help that you receive in constructing and managing your portfolio, so this aspect of the fee is not in dispute.
But how much do you give away unnecessarily each year?
Let us look as this example of investors with various degrees of wealth, which they invest in Company A charging the industry average of 2.2% and Company B charging 1.1%. Both companies average 5% growth per year over 25 years and lets look at how performance and compound interest impacts on your long term wealth.
|Amount of investment
||Company A 2.2% fees
||Company B 1.1% fees
||Profit being wasted
Take a moment to consider how much money you have invested in your pension and investment portfolio and ask yourself why are you wasting so much profit unnecessarily.
What would happen if investors suddenly realised they could still get the same financial return on their money, still have the same consumer protection and still have the backing of global Institutional investment companies, but pay less in investment and management charges for this comparable service. Would these investors still want to leave their capital in these supposedly safe hands of the traditional investment world?
What if by moving their capital and reducing these fees investors could do the following?
- Afford the holiday home they had always dreamed of.
- Could comfortably afford exotic holidays every year.
- Receive additional income, to live their life without fear of ever running out of money.
- Could set aside a nest egg in case additional care was needed in later life.
- Could pass on this additional wealth to their beneficiaries.
This would be additional spending money. This is using money that is currently and unnecessarily funding the financial services industry. So if you really care about your money and would like to consider creating more wealth… stop worrying about your financial future and start planning what you will spend it on.
Now is a very important time in history, where individuals need to take notice of what is happening around them in the financial world, should they wish to acquire additional wealth and have the option to retire faster. Government lending is at an all-time high, the Banks have been given a crutch by the Government, the Bank of England (BOE) has reduced interest rates to an all-time low, Quantitative Easing and austerity cuts look as though they may be here for many years to come, pension schemes remain underfunded and we are now all living longer. On top of all this we now have Brexit and I have to ask the question ‘what have you and your financial adviser done to hedge your pension and investment portfolio against the UK’s exit from Europe’?
It’s frightening to think about what the future holds, with economies, cultures and technology changing at the rate it has over the last decade, it seems almost impossible to imagine what the world will look like as we arrive at the later stages of our life. But we can give ourselves a helping hand if we act quickly enough and reclaim our personal power from the financial services institutions.
Creating sufficient wealth over our working lifetime will enable us to have choices in later life. Being dependent on others in the future, I do not believe, will be a happy place. The question is “how do we create additional wealth without putting additional pressure on our current expenditure?” With low interest rates and mediocre investment returns, creating additional wealth is becoming more difficult. However, suppose I could show you how to create additional wealth from the money you have already accumulated to date. No additional expenditure required, but a very favourable outcome.
Many investors concentrate their portfolio in their home stock market and in some cases they only hold a small group of stocks. This is often a common occurrence when people have bought shares because of Utility or Bank offers or inherited a share portfolio from their parents or a relative and feel obliged not to cash them in and take the proceeds. Many company directors working for larger organisations also have large shareholdings, often in share incentive schemes and due to a sense of loyalty, find it difficult to sell the stock when it’s a good financial decision to do so. There is often an emotion attachment which is difficult to shift.
Limiting one’s investment universe to a handful of stocks, or even one stock market, is a concentrated strategy with possible risk and return implications. Consider the analogy of the roulette wheel. If you want to gamble for the highest odds you place your chips on a single number and if you are successful you win big. Likewise you could spread your chips around single numbers on the table (not to dissimilar to the retail unit trust fund managers or buying individual stocks and shares) and hope that the odds on the numbers that win are more substantial than the losses that did not.
Alternatively you could gamble by spreading the risk in your supposed favour by betting on red or black and get offered even returns by the house (or by using in-house managed funds). But it’s not the 50:50 odds you would expect. The wheel is always in favour of the house therefore by betting on red or black you will have an 18/38 chance of winning 47.37%, with the house winning 52.63%. This is again similar to active fund managers, even if they do outperform the benchmark, the additional charges incurred will most likely, over the longer term, reduce the return to below the benchmark. The question is, does investing with active management make a substantial difference to your return or is it just gambling with your money? It is worth remembering that while a betting system may sound like a good idea, over time, they have been proven beyond any shadow of a doubt to be losing plays.
The media is full of experts predicting which markets are going to perform best over the forthcoming months and years, so investors by listening to this noise, quite often form a biased opinion of what’s going to happen next. If they decide to follow up this prediction with action and buy or sell stock to put themselves in a financial position to take advantage of this prediction, they are gambling not investing. The financial professional may make a prediction because they want to appear on some form of media commentary, or to advertise their company or make some noise with their prediction because they would like some personal acknowledgement. However, if it all goes wrong, which it does, the consequences have to be faced. I believe making predictions is foolhardy, because any amendment to political, global currency fluctuation or investor sentiment will see all bets fall out of the window and who can control such changes.
If I am ever asked ‘which financial sectors should I buy next, to get the best return on my investments?’, I often in the nicest possible way, have to refer to my lack of crystal ball reading skills and point out that no one knows with any degree of certainty. Even if a commentator calls the markets correctly, you still have to ask was it skill or just random luck. Even the most powerful professionals in the world of finance make these predictions and call it wrong big time, with huge global consequences.
So, why try and predict outcomes not under your control. Ask yourself “why would you pay somebody, who said that they can predict what is going to happen next?” and perhaps worse, why would you believe them if they said they could. According to Google, there are 1.2 million fortune tellers (or people suggesting that they can predict your future) appearing on their site, and without checking them all, I would expect a financial fee to be passed across their palms before they tell you about your long healthy lifespan and future search for love. Perhaps some may say we should add fund managers to this list.
A good question to ask yourself is: “would you pay a fortune teller to predict your financial future?” If not why are you paying your fund manager?
The financial services world is not always as it seems. Wealth that belongs to you, is systematically being taken from your pension and investment accounts unnecessarily, transferring your wealth from you, to the financial services industry in the name of active management (I call this guessing or gambling). I believe now is the time to stand up to the industry and take back power and have control of your money.
My book ‘Retire Faster’ available on Amazon will guide you through the investment jungle, where currently, the investor is the prey. I will show you how to become the hunter and demonstrate to you, that there is another way to create wealth. A way that allows investors the opportunity to achieve greater financial efficiency, greater independence and a more profitable return, whilst enjoying a much more transparent and consistent investment experience.
The question is, do you want to continue to gamble with your retirement fund, or invest it efficiently?
As in life, an illness can sometimes go unseen for many years without making itself obvious, and others have very serious warning signs.
When you visit someone in the health profession they will immediately pick up on these symptoms and provide you with advice on how to tackle the situation. They also highly recommend that those individuals without obvious warning signs get regular health checks especially as they progress to their middle and later stages of life. The health profession recognise the importance of regular health checks and the occasional tonic boost.
In my profession I too can immediately pick up on symptoms if your financial portfolio is sick. The only difference being is that when I talk to people their investment portfolio’s symptoms have gone undetected for many years and would have continued to go undetected with serious consequences until it was too late to take any reasonable actions to remedy the situation.
High fees and unbalanced asset allocations from portfolios created by the traditional financial services Industry have a very serious impact on your future wealth. If these symptoms are not addressed now, they will not be able to recover and by the time they are diagnosed it will be too late.
Like us, in order to function at our best, it is important to have a regular portfolio check, because like an illness, if it goes undetected for many years it could have serious consequences leading to drastic circumstances.
Get your portfolio checked now, you may need to rely on it in your later years of life and you are going to expect it to be fit and healthy in order to support you as best it can. Don’t leave it to chance, as it may disappoint and then there is no going back.
Ask about our confidential second opinion service. We will give your portfolio an examination and we may be able to offer you some ideas on how to give your portfolio a tonic boost. If we find any symptoms we feel need addressing we can write you out a prescription on how to remedy it.
Remember you live the rest of your life in the future…. Why not make sure the future is going to be what you expect, take action soon.
During my career the question I asked myself most often was, am I best servicing the interests of my clients, by attempting to predict the future, or what if there was another way, a way that investors could understand and manage their expectations, a way that told the truth.
After all, what we do know is that capital markets work. Investing is not a game where one investor must lose so another can win. Any investor has the chance to capture the same capital market rates of return. Over the long run, markets reward investors with positive returns for taking risk and providing capital. If they did not, the capitalist system would have collapsed long ago.
I needed to explore if there was an approach that did not take predictions into account, but used principles grounded in academic finance? If there was, I and my clients could therefore avoid the risk of speculation, and benefit from the intelligence and stability of an approach based on solid theory and empirical evidence, and reward ourselves with an investment solution that earns and delivers the capital market rate of return.
[box] Adjective: empirical :based on, concerned with, or verifiable by observation or experience rather than theory or pure logic. “They provided considerable empirical evidence to support their argument” Synonyms: observed, seen, factual, actual, real, verifiable, first-hand[/box]
When I began my research, I found that the City’s prevailing definition of investment advice (everyone promising that they can all outperform the market) is not the only one. A different definition had been developed within the academic world, based on decades of empirical research. The new approach is the culmination of the work of the academics; Eugene F. Fama, widely regarded as the ‘father of modern finance’ and Kenneth R. French, who is an expert on the behaviour of security prices and investment strategies.
Together, Fama and French have provided two anchor points for a new definition of investment advice; market efficiency and the risk dimensions of shares and bonds. In 2013 Professor Fama received the Nobel Prize in Economics for this work. Their views were that the financial markets actually work. Prices reflect the knowledge and expectations of all investors.
Although prices are not always correct, markets are so competitive that it is unlikely any single investor can routinely profit at the expense of all other investors. The conclusion therefore was like a lightbulb moment to me. If the markets are efficient instead of trying to beat the markets at any price…why not just buy the markets being offered at a much lower cost…..simples.
As an Independent Financial Adviser I am often asked “where do you think the Global stock markets are going”, or “a friend has been promised a 15% per annum return on their investment, what do you think?”
I believe these types of questions are asked, because for decades the mass marketing campaigns in the financial press have been supported by the large Investment and Life Assurance Companies. The financial press has received large advertising revenue from these campaigns and therefore a financial industry has grown from it. These campaigns all focus on giving the next ‘must have product’ or the next ‘must have fund’. Retail investors have subsequently clamoured for these products, chasing the promises being offered. Many are then disappointed and become disillusioned with the investment markets over time, leading to them purchasing more publications to see if they can correct the situation. Thus increasing revenue for the financial press.
The real problem is that finance publications earn revenue from predicting the next best or worst shares or financial sectors for the coming year, and the retail public lap it up. The plain truth is, giving investment advice boils down to making a forecast. The publications are making a forecast, but they have no more knowledge than anyone else. Who would buy a publication that says, “We have no idea what’s going to happen” but “buy our next issue and we will repeat the same message”. Investors have therefore grown up with the expectation that an adviser, or the press can look into a crystal ball and predict the future…..well we can’t.
By Hannah Goldsmith – Goldsmith Invest
Tweet at @hannahGfs
Website : https://www.goldsmithfs.co.uk/
Linkedin – https://uk.linkedin.com/in/hannahgoldsmith