Your money-making expert. Financial journalist, TV and radio personality.
Guest article from David Ryder, author of How To Invest Without Being Ripped
If you have investments in funds with a bank, an asset manager, investment company or online investment provider, and if you are paying more than 0.15% a year in management fees, you’re probably being ripped off.
That’s the conclusion I’ve reached after working in the finance industry for 25 years. For more than 10 years of that time I was writing the performance reports, outlook documents, and various other articles on behalf of four different well-known financial institutions. Those documents were sent to their customers i.e., investors like you.
Most of the time I was having to justify the poor performance of the investments, or to distract customers with other topics such as “Will there be a recession?” or “Is now a good time to invest?”
The people I worked with weren’t fooled by these ploys. None of my colleagues in any of the four financial companies put their own money into the investments of the respective companies.
The only exceptions were, literally, one or two extremely senior managers who each had to put a small amount of money into the funds they managed so that, when asked on TV or in a newspaper, they could say, “Oh yes, I put my money where my mouth is.” They would never disclose what proportion of their wealth was in their own funds.
There are two simple reasons why no other employees put their own money into those investments:
And it’s not just my opinion.
The industry watchdog, the Financial Conduct Authority (FCA), produced a damning report in 2021 entitled Authorised fund managers assessments of their funds’ value.
What the report said about active fund managers boils down to the following:
On 10 August 2023, the FCA published an update on this report in which they observe companies having “significantly improved their Assessment of Value processes.”
I don’t care about their processes; I want lower fees and better returns.
The update went on to say, “While we found firms had a better understanding for the need to justify fees, most remedial action did not involve cutting funds’ fees.” Well, fancy that.
On 31 July 2023, the FCA’s new Consumer Duty requirements came into effect. These were intended to improve the service level and value for money across a broad range of insurance, banking and other financial services.
It’s good as far as it goes. However, it fails to adequately address excessive fees or terrible returns in the investment industry.
This rip-off continues because the banks and investment companies prioritise the money they can make for themselves, not what they can make for you.
I have no problem with companies making a profit. If they don’t make a profit, they go out of business. Companies going out of business can make it more difficult for you and me to access the services and products we need. Similarly, everyone deserves a fair salary for a fair day’s work.
However, the profits and remuneration packages within the investment industry are very high.
Taking profits first, a research report by IBISWorld found that the average profit margin for “fund management activities in the UK” was set to reach 21.8% in 2023. In other words, if a company has £10 million pounds of turnover going through its books each year, it gets to keep £2.18 million in profits. And that’s after everyone has been paid…
…According to an article on Glassdoor.co.uk, the average annual salary for an “Investment Professional” in the UK in August 2023 was over £160,000. That’s just the salary. Glassdoor goes on to say that the “average additional cash compensation” i.e., bonus, pension contributions and whatnot, is £56,519. That brings it to an average total remuneration package of £216,591.
That overall pay package (not to mention ones much higher) applies to investment managers, analysts and senior managers. By contrast, support staff (the majority of people working in the industry) get paid much less. So, if you know someone who works in finance, be nice to them because they’re probably not earning big bucks.
Nevertheless, an average annual remuneration of £216,519 is a mighty persuasive reason for the decision makers to keep the fees they charge you as high as possible.
I conducted research over several months to compare what I get from banks and investment companies and a similar, but much cheaper, alternative.
First, I analysed the investment selections, “portfolios”, of more than 80 huge banks and investment companies and worked out the average investment choices they make for lower-risk, medium-risk and higher-risk investment portfolios.
Then I sifted through around 15,000 funds and found 110 funds that deliver very similar investment choices but for much lower fees.
Next, I put together portfolios that copy the investment choices, “allocations”, of the big banks and investment companies. But my portfolios only use the 110 low-cost funds that I had found.
Finally, I reviewed over 20 well-known bank and investment company websites to identify those that enable me to set up my low-cost portfolios. There are lots more websites than that, but many of them weren’t worth looking at because they were too expensive or didn’t offer low-cost funds.
As a result, I only pay between 0.05% and 0.08% a year in fund management fees.
Contrast that with the average active fund management fee of 0.89% according to the FCA. On average, they charge 11-times the fees I pay for very similar investments.
So, if you’re paying more than 0.15% a year in fund management fees then, in my opinion, you’re being ripped off. By the way, 0.15% is what the FCA determined was the average annual fund fee charged for passive funds.
That high fee that active funds charge would be fine if they beat the returns you could get by investing in the cheaper funds that I prefer. But managers of active funds can’t even hit their own targets.
According to a report by S&P Dow Jones, between 2001 and 2020, the majority of active funds in the US (the biggest investment industry in the world) missed their own targets most of the time.
The best year for active fund managers was 2009 when 41% of firms failed to achieve their own benchmarks. In 14 out of the 20 years, more than half the fund managers covered by the data failed to hit the performance targets they set themselves.
And remember, that’s the “gross” returns i.e., the returns before they’ve subtracted their fees. If you look at “net” returns i.e., the returns you’re left with after they’ve taken their fees from your investments, the returns you’re left with are even worse.
What can you do about this? Quite a lot.
Here are the steps I would consider.
Look at the returns you’re left with on your investments each year, for every year you’ve had the investment, after all fees have been taken by the investment company.
According to Curvo.eu, the FTSE All-Share Index returned an average of 6.58% each year from March 2005 and December 2022. That’s a reasonable comparison for what many of the expensive portfolios (especially medium-risk and higher-risk portfolios) should be beating, not just matching but beating after fees.
Take the 0.08% off the 6.58% to cover the fund management fees I pay (the Ongoing Charges Figure or “OCF”) and you’re left with 6.5% a year.
Is your average return each year as good as 6.5% a year after fees? If it is then you’re getting returns that I consider to be fair.
Find out what the Ongoing Charges Figure (OCF) or the Total Expense Ratio (TER) is on the funds your money is invested in. My portfolios work out at between 0.05% and 0.08%. If you’re paying 0.15% or less (the average annual OCF on passive funds according to the FCA), you’re being treated fairly.
All of the following set my alarm bells ringing:
And on and on.
I’ve examined over 20 such providers (a lot more weren’t worth considering). I analysed them for:
These are significant financial companies, many of which spend vast amounts on marketing.
Only four of them were good enough to pass my tests.
You can get a FREE copy of the 64-page ebook, “14 Principles to Simple, Low-Cost Investments” by clicking here.
Until 30 November 2023, Exclusive deal for MoneyMagpie readers worth an extra £25
MoneyMagpie readers can also can exclusive, free additional insights and tips when the buy the full book at £14.93, including:
· A 14-page guide, How to Find a Good Advisor
· A Q&A session between Jasmine Birtles and David Ryder
· Four-hour audiobook to accompany the paperback
Disclaimer: None of David Ryder, Prospero Media Ltd., MoneyMagpie or any associated parties is a licensed financial advisor. Information found here, including opinions, commentary, suggestions or strategies, are for informational, entertainment or educational purposes only. This should not be considered as financial advice. Anyone thinking of investing should conduct their own due diligence.