Don't Pay The Bankers: Low Cost Mutual Funds
How to Avoid Being Ripped Off by The Financial Services Industry
If you go to a financial advisor and ask for help investing your money, in general their advice will be biased towards products that pay them the most commission rather than ones that will benefit you the most. At best this is immoral at worst it is fraud, but for decades they have been getting away with it. In the UK the Financial Services Authority (FSA) will soon make some of their worst practices illegal, but even so the industry's main objective is to relieve you of most of your money and certainly not to maximise your profits.
Advisors will not guide you towards investments that will save you money and there are many available that will cost a tiny fraction of the ones recommended, so here are a few suggestions to help avoid being ripped off by an industry in serious need of reform/regulation.
Disclaimer: Information in this and other linked articles is unregulated and for general information only and is not intended to be relied upon in making specific investment decisions. Appropriate independent advice should be obtained before making any such decision.
Financial Advisors and their Ridiculous Fees
Financial "Advisers" and How They Steal Your Money
Unit Trusts, OEICs and Mutual Funds generally have high charges to pay the outrageous commission to the advisors (hence their being recommended whereas ETFs, Index Trackers and Investment Trusts are not) A typical initial fee of 5% is charged, most of which goes to the advisor, then a management fee of perhaps 1.5% each year (although the real cost is higher and you should always try to find the Total Expense Ratio which includes the share trading costs and could be 2%, 2.5% or even higher) This may not sound too bad but lets put this in perspective:
You win Â£1,000,000 on the Premium Bonds or Lottery and visit your bank manager and he calls in an advisor who spends a couple of hours with you discussing how you want to live off this money. He recommends a selection of unit trusts and doesn't charge you a fee (what a nice chap); A safe Balanced Portfolio mixing stocks/shares UTs, bond UTs and Gold mining UTs which will hopefully beat inflation and pay you an income better than a bank account for ever. Wonderful. An income for life, growing with inflation or better.
This would result in the advisor getting Â£50,000 commission straight away (for a couple of hours work) then he gets perhaps Â£5,000 a year for life and the investment manager gets Â£15,000 per year for life. Over 30 years, if the investment manages to track inflation and pay you an income the advisor and the investment company will take Â£200,000 in fees (in today's money) The advisor may phone you up each year and advise you to change half of the UTs to a "better" fund and he will then get another "Â£25,000" a year in commission meaning a total fee of Â£925,000 (i.e. almost the same amount as you have left). What a brilliant scam.
If however you ask your "advisor" (i.e. salesman) to give back some of the commission you may actually get it, or alternatively go to a discount broker such as Hargreaves Lansdown, Selftrade, Interactive Investor" who will give back most of the commission and some of the other fees. Hargreaves Lansdown also gives their ISA customers a Loyalty Bonus that returns some of the annual fee (the part that would have gone to the salesman) e.g. 0.1% to 0.375% of the total invested. This may not sound like much but it really adds up and demonstrates quite how much of a rip-off the usual fees are.
Rich Dad Poor Dad
Low Cost Managed Funds and Index Trackers
Low Cost Managed Funds and Index Trackers
As I pointed out above a lot of money is wasted on Unit Trusts because of excessive fees both to the advisor and to the fund-manager, but some of these fees can be avoided by buying with a fund supermarket or discount broker such as Hargreaves Lansdown, Selftrade, Interactive Investor". If you are only going to buy Unit Trusts, then Hargreaves Lansdown is one of the best around and really does give back all or most of the initial fee and some of the annual fee (the annual management fee of most unit trusts includes a commission to the salesman and Hargreaves Lansdown gives some of this back to the customer as a Loyalty Bonus) but how is Hargreaves Lansdown so profitable? They have a huge number of customers because they are one of the cheapest brokers around and the money that they are paid is still significant. Most of the unit trusts recommended by Hargreaves Lansdown in their "Mark Dampier's Wealth 150" list have fairly high fees even after some of the commission has been repaid to the customer, because they are recommending good managers who often don't come cheap. Many fund manager don't even beat the stock market index once the fees have been taken off, so why not just track the market?
How do you avoid high Unit Trust fees?
As explained before investment trusts (with lower management fees) and ETFs (most of which are index-trackers) with much lower charges could be the answer, if you have a large amount of money to invest, but these usually have a dealing cost per trade (e.g. typically about Â£10) and there might even be a quarterly or annual fee from you broker if you start dealing in these or other shares, so they may not make financial sense either, but some unit trusts actually have very low fees and are not widely recommended. Not generally as low as ETFs but not bad. e.g.
Legal and General has tracker unit trusts that track a variety of indices with Total Expense Ratios (TERs i.e. management fees plus all other costs) as low as 0.25% tracking bond markets, stock markets, FTSE. Fidelity also have a "Money Builder" tracker that tracks the FTSE All Share index. These will never beat the market, but you don't have to pay a manager because they are run by computers. In general, if you stray away from local markets these are still quite expensive. e.g. to track a UK index it may cost just 0.25% but L&G and Fidelity will charge 0.83% or more for some markets such as Pacific, Japan or European, whereas HSBC is one of the best tracker providers with fees as low as 0.37% even for European and Pacific and just 0.27% TER for Japan. Vanguard is a new arrival in the U.K. with some more very low-priced funds (although not yet available from some fund-supermarkets)
The cheapest UK tracker fund available (in December 2011) is provided by Hargreaves Lansdown and charges just 0.07% (TER of 0.11%) This was launched just two weeks after Hargreaves Lansdown annoyed many of its investors by imposing a Â£2 per month fee per tracker fund held in their Vantage account, so this new product does go some way towards pacifying those customers.
Restructure Your Portfolio
Restructure Your Portfolio
I have been rather nasty about the financial services industry here, but they probably deserve it. They have been proven to be either incompetent or fraudsters by their actions before, during and after the "Credit Crunch" and should either have lost their jobs or be in gaol (i.e. jail) but instead live in comparative luxury, with ever increasing pay and bonuses while all other tax payers in the world have been impoverished by their actions. Allowing the industry to collapse would be devastating, but why not restructure your investment portfolio so as to avoid making these undeserving people wealthier and make yourself wealthier in retirement in the process.
There are a few investment managers who actually deserve the fees they charge (e.g. Anthony Bolton at Fidelity, Neil Woodford at Invesco and of course Warren Buffett), but they are the exception. Most have not beaten the index against which they are measured and yet many, if they do achieve what they promised will then hit you with an extra performance fee. Check the charges on your investments and see if the manager has managed to consistently beat the index and if he hasn't why not switch to a fund that matches the index for a 0.2% annual fee rather than pay someone 2.0% or more to underachieve.