Have you ever driven several miles out of your way to save a penny on a litre of petrol? Do you collect vouchers or enrol in loyalty schemes to save a few pounds on grocery items? Did you complain when the Government added another penny in tax on a pint of beer? Well, how about the cost of your investments?
When it comes to our pensions, one of the biggest financial investments we’ll ever make, most of us either don’t know what we’re paying or don’t even seem to care. The continued decline of company final salary schemes means that more people will be regularly contributing to defined contribution pension schemes. The pension business is growing. And with low returns on short-term cash savings, the need for investors to secure better returns on long-term investments at an appropriate level of risk, is in great demand.
Much has been said lately about the dismal returns typically produced by active fund managers, but more significant than their under performance, what is truly shocking, is how much investors are paying.
In most cases, the full costs incurred by consumers when making long-term investments are not consistently and comprehensively defined, nor are they understood, which is why we thought it would be beneficial to outline the charges you should expect to pay when investing your money.
What charges can you expect to pay?
Let’s say you invest £100,000 over 40 years as a one-off capital investment. You’d be expected to pay a typical annual management fee of 0.75%, a platform charge of around 0.35% and an average adviser charge of 0.82%. Initial adviser charges, annualised, come to 0.24%. Then there are fund custodian and administration costs, which average 0.17%. On top of all this are transaction costs. These vary depending on how much trading your fund manager chooses to do, but we’ll say 0.41%, which is the average figure for transaction costs. In total, that means that the cost of investing, on average, is 2.74%.*
If you think that this sounds like a bargain, you haven’t factored in the effect of compounding.
What is Compounding?
As an investor, you don’t pay this percentage of fees once. The same percentages are annualised over and over again. As the value of your investment grows, so do the charges you incur. This significantly impacts the value of your return over the lifespan of your investment.
An annualised return of 8% before charges of 2.74% nets down to 5.26%. 40 years on, when you’re ready to retire, the £100,000 you invested would be worth £2,172,452 if there were no charges. With the charges, it would be worth a mere £777,203. Your actual gain would be just £677,203. Therefore the impact of the charges is to reduce the final value of your investment by almost 65%. Now you can see why keeping our costs low is an absolute priority.
How does Hartey Wealth Management keep investing costs low?
We believe investors should clearly understand the value of our management services which is why we offer our clients transparent and low-fee investing – there are no hidden charges or surprises.
When we first launched, the average all-in cost to a client investing £500,000 in our 24/7 portfolio was 1.68%. This covered everything including platform costs, adviser charges, administration and transaction fees. We were well below the average figure of 2.74% per annum.
But we wanted to do more. We wanted to offer our clients more savings. So we spent a significant amount of time with our platform providers and fund managers reviewing costs and have been able to reduce our fees across all our services. For example, our 24/7 Portfolio which was 1.68% is now 1.54% per annum. That’s a saving of 0.14%. On a £500k portfolio, that’s a saving of £700 per year. Compound that saving over the life of your investment and it could be the greatest discount you will ever redeem.
If you want to know more about how Hartey Wealth Management can help you keep the costs of your investments low get in touch to find out about our Second Opinion Service.
*Research figures based on calculations from the True and Fair Campaign. The report can be downloaded here. HWM champions The True and Fair Campaign, which lobbies for fairer and more transparent charges.
Featured in the Hartey Wealth Management Summer 2016 Newsletter