Lee Goggin, the co founder of findaWEALTHMANAGER.com examines the why DIY Investing might be expensive for you.
There is an investment and savings revolution going on in the UK. Improved transparency and consumer choice are top of the regulator’s agenda and big strides have been made towards clearer charging and more objective advice. Anything which empowers investors has got to be a good thing, but it seems that many are not always profiting from this. Indeed, many investors have been encouraged to go it alone as DIY investing and the decision has proved costly in unexpected ways.
Going direct may cost more!
It didn’t take the financial press long to reveal a very counterintuitive trend: investors paying over the odds for their fund investments because they have gone direct to the fund manager rather than using an intermediary. Direct investors were typically paying twice the fee, it was found. In 2014 UK investors were estimated to be collectively paying a £100m premium each year for going down the DIY investing route. This is simply because they lack the purchasing power of financial institutions.
One lesson to be drawn from all this is that although direct investment might seem like the de facto cheaper option, in reality it can be anything but.
Direct fund investors are typically hit by a 5% upfront fee (plus 1.5% annually for management), while those using low-cost brokers can pay as little as 1% a year for their investment – even factoring in the broker’s fee. The middleman may be taking a “cut”, but most would agree this is more than offset by their ability to access the most cost-effective share classes for their investors. (And that’s just the transactional, “nuts and bolts” part of investing. Skilful asset allocation and diversification – how you split your money between different types of asset class – is a huge part of what wealth managers offer.)
The hunt for value
Perhaps it shouldn’t be the case that investors need to go through an intermediary to get the best value from fund managers. However, it is a prime example of the value that wealth managers provide over and above what clients may perceive at first. Investing is all about making your money work harder and accessing behind-the-scenes bargaining power could make all the difference to reaching your financial goals. A good wealth manager will always keep an eye on the end cost to the client and they will help you get the best deal for your investments, fund share classes included.
The value that a wealth manager provides can come from many quarters – and it is not always easily quantifiable.
Many clients get great peace of mind from having a professional adviser in their corner; others like working with a prestigious brand. But while soft factors are certainly important, wealth management boils down to growing and preserving a client’s wealth to a degree which justifies the fees incurred. Happily, new standards of transparency on fees make it a lot easier to see the value you are getting.
Wealth managers are taking great pains to highlight the value they deliver. As such, institutions are increasingly using new technology to show clients precisely how the investment advice given has impacted portfolio performance. If you are seeing strong risk-adjusted returns where outperformance is clearly attributable to the skill or robust investment process of your wealth manager then you will of course be a happy client. Add to this the peace of mind to be had from outsourcing something very important (and actually quite challenging) to a professional. Then factor in the economies of scale you can benefit from, as with fund share classes. All things considered, your wealth management fees might turn out to be very good value indeed.
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