Retail Investment Managers – Are They Worth It?

Regular readers will know that after extensive research and much experience, we favour passive investments. That is to say that our clients will accept the level of return that fits their appetite for risk over the long term. In addition, we can access institutional funds instead of retail funds and reduce costs which result in ‘performance drag’.

This way of investing is backed by investment guru Warren Buffett who said:

“Most investors, both institutional and individual, will find that the best way to own common stocks is through an index fund that charges minimal fees”.

Those following this path are sure to beat the net results (after fees and expenses) delivered by the great majority of investment professionals.’

In many cases we also find that the new client does NOT NEED to take as much risk as they are doing, and we can reduce the risk whilst still allowing them to achieve their goals in life.

However, there are still many investors who are not aware of this, or who feel that they can genuinely beat the market in the long term despite all the evidence to the contrary.

Many of these investors will use well known investment managers with household names. Well, an article in the press came to our attention recently which, putting aside the passive/active debate, we feel is quite shocking.

We will not name this company, but it decided to float on the London Stock Exchange. It was valued at £676 million, despite losing money last year, and having debts of around £300 million.

As a result of the flotation, the two key fund managers received £15 million & £9.5 million! The rest of the employees then got £14 million in Christmas cash, and also have something like £70 million in shares.

So, what about all the investors who have given their money to this firm in the hope that they will perform. What did they get?

Well, many of this company’s funds have languished at the very bottom of the performance tables.

It looks like the familiar story of growing their own wealth whilst totally ignoring what should be their real remit which is growing YOUR wealth!

Of course, this story of greed is not unique, but adds to our determination to operate as we do now by largely being able to ignore this type of company, and always putting you the client first.

In a similar vein, we met new clients recently who had getting on for a million pounds in various investments such as ISAs and Pensions. Their main remit was to get organised and develop a strategy to be able to work part time from their early 50s.

They had used a standard commission based adviser up until now, but found that he did not contact them very often unless they wanted to buy another investment. This is very common, but what shocked them was that they were not aware of the considerable amounts of commission the adviser was taking each year putting aside new investments. More about Portafina

This is called trail commission, and is typically 0.5% of the total investments held. The insurance companies and investment companies (like the one above) pay this automatically to the adviser. So what it boiled down to is that this adviser was being paid something like £5,000 pa from their investment pot for…nothing!

If he was giving a fantastic service with regular reviews etc then you could argue that is one thing, but as is only too common, this is not the case. We find that what particularly galls new clients is that they have no idea that they are paying this money out!

By the way, if you have bought products in the past directly from the investment company, you may find that this 0.5% that the adviser would normally receive is simply absorbed by the company.

The Financial Tips Bottom Line

When you work with an adviser, make sure that they are fee based and will carry out the work you want done not only now, but on an ongoing basis.

You then agree with your adviser what fees you will pay to get this service – this should be a written agreement. But if ALL THEY TALK ABOUT is investments, and it’s a fee not a commission, then get another opinion.


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