15 Nov Investment Fees & Why Clients Should Pay Them
As a result of the Financial Conduct Authority’s Retail Distribution Review (RDR), investment charges, adviser fees and associated costs have become more transparent. Clients are now made aware of all of the services that are being offered as part of an investment proposition and service providers are responsible for disclosing and levying their individual charges.
Potential investors may seek advice from several sources before deciding on a particular strategy and this may involve having to compare different types of advice and services. Whilst cost is obviously an important factor, it may not be wise to choose a strategy simply because it appears to be the cheapest.
Cost is one of several factors that should be considered when selecting an investment strategy, however, potential investors should keep in mind what the investment objectives are and which proposed strategy is most likely to meet those objectives. There are different elements that make up an investment strategy and it is the portfolio that delivers the best returns net of tax and charges that provides the greater overall value.
In order to ascertain value it is important to understand the different services that make up an investment strategy and what benefits they offer. It is then important to consider the costs associated with each service and whether such costs can be justified.
In this article, I will explain the advice and services offered by A&M Wealth Management Ltd, detailing how each part of the process works, what the benefits are and the associated costs.
A&M INVESTMENT ADVISORY MANAGEMENT SERVICE
A&M Wealth Management Ltd is a firm of Independent Financial Advisers (IFA). We are truly independent because we have no links or ties to any financial institutions and investment recommendations are sourced from the whole of the market. We do not subscribe to the “model portfolio” or “one size fits all” approach, nor do we believe that any one investment company or fund manager can be the best in all investment sectors. Our bespoke investment strategies are tailored to the needs of each individual. Some IFA`s have their own in house investment management and others link with Discretionary Fund Managers (DFM), however, we are keen to maximise investment opportunities whilst avoiding any potential conflicts of interest.
Our Investment Advisory Management Service (IAMS) will typically be made up of the following components;
Investment Fund Management
Investment Advice and Services
INVESTMENT FUND MANAGEMENT
An investment portfolio for £1 million, to provide capital growth over the long term, might look something like this;
Managed Equities – 55%
Commercial Property – 10%
Government/Corporate Bonds – 35%
The equity content may be further diversified, as follows;
UK Equity – 40%
US Equity – 25%
Europe (Ex UK) – 17.5%
Asia/Emerging Markets – 17.5%
Once the asset allocation has been established funds are sourced from the whole of the market with the aim of incorporating top performing funds in each sector. The portfolio might currently look like this;
Baillie Gifford Strategic Bond
Fidelity Extra Income
GAM Star Credit Opportunities
Artemis Strategic Bond
Invesco Perpetual Monthly Income Plus
Threadneedle UK Property
M&G Property Portfolio
Janus Henderson UK Property
Lindsell Train UK Equity
LF Miton Multi Cap Income
Old Mutual UK Mid Cap
Liontrust UK Smaller Companies
T Rowe Price US Equity Large Cap
JPM US Select
Old Mutual North America
Blackrock European Dynamic
Baillie Gifford Emerging Markets
Schroder Asian Income
The above portfolio would be relevant today, however, performance can change and future recommendations may differ. An independent portfolio is comprised of funds that are sourced from the whole of the market, based on certain criteria and are retained purely on merit.
The main criteria, is the ability of the fund managers to produce above average returns on a consistent basis. The following examples are taken from Money Management Magazine November 2018 (A Financial Times Publication);
|Fund Name||Average Annual Return
|Average Annual Return
|Baillie Gifford Strategic Bond||5.6%||8.2%|
|Lindsell Train UK Equity||13.2%||16.9%|
As the table demonstrates, the difference between the investment returns achieved by top performing funds and the average is quite considerable. The difference between the top performers and the worst performers is even greater. The above returns are the average annual returns and it is easy to appreciate the difference that this will make over the medium to long term.
The recommended portfolio includes funds that have outperformed on a consistent basis. The question is, why do they perform well? The best and most consistent investment managers will point out that, although they obviously have considerable talent, they rely on the support of researchers, analysts and economists.
Fidelity International employs 7,000 people across 24 countries. The bond team alone is supported by 69 investment professionals.
Schroders employs 4,700 people across 30 countries whilst Invesco has offices in 25 countries employing more than 7,000 people.
Investing in assets such as equities and government/corporate bonds requires considerable knowledge and the more information available, the better able the fund manager`s are to make informed decisions. It is also important for fund managers to keep their investments under regular review. A successful investment process will require expert knowledge on global economics, national politics and regional and sector specific factors before the investment managers and researchers carry out due diligence to decide whether or not to invest in a particular company.
In order for investment managers to make informed decisions they rely on a comprehensive research and analysis support system. This requires investment by the investment management groups which is usually rewarded by above average performance. Poorly resourced investment strategies may offer a cheaper alternative but this is likely to be reflected in the results.
The portfolio in our example consists of 20 funds from 18 different investment companies. In order to research the whole of the market and select appropriate funds, it is necessary to utilise the latest technology.
It is important to be able to compare funds in each sector based on investment performance over different time scales. It is also important to consider the risk/volatility applicable to each fund. A fund that produces steady consistent returns may be more attractive than a fund that fluctuates between outperformance and underperformance.
Once a shortlist has been established, each fund has to be carefully reviewed to understand the objectives, philosophy and approach of the fund manager(s). This is crucial in determining the suitability of a fund in different economic conditions. A portfolio can be created combining different investment “styles” that may compliment one another.
Managing and monitoring investment portfolio’s is as important as the original recommendations. Asset allocation and risk profiles change as investments perform differently and investment performance needs to be regularly reviewed.
Most of the investment funds in our example portfolio generate returns through a combination of “interest”, “dividend income” and “capital gains”. The investor has a responsibility to report to HMRC and declare the taxable income each year. An investment fund may receive investment income monthly, quarterly, or half yearly, therefore, a portfolio may have to record dozens of transactions each year.
Finally, and perhaps most importantly, investors need to receive regular updates on the performance of their investments. It is important to be able to assess the performance of the portfolio against agreed benchmarks and to be able to rebalance a portfolio if the asset allocation changes. Many clients also want to be able to have access to relevant information such as the portfolio’s value whenever they choose.
All of the above would not be possible without an administration platform. As independent investment advisers we reviewed the platform market to select a suitable platform based on technological support and cost efficiency. We currently use the AJ Bell Investcentre Platform but we keep the platform market under regular review.
An administration platform adds an extra layer of cost to an investment strategy when compared with, say, a Discretionary Fund Management Service, however, the efficient management of a whole of market portfolio should more than compensate in overall returns.
INVESTMENT ADVICE AND SERVICES
As truly independent investment advisers our advice is tailored to the specific needs of the individual. Initial meetings are free and without obligation and enable us to fully understand the needs of the client and the investment objectives. Rather than relying on simple model portfolio`s or outsourcing solutions, we create bespoke investment strategies.
We do not levy any initial adviser charges for providing recommendations and implementing the strategy.
Our ongoing adviser charge is both transparent and cost effective and is designed to cover the cost of our comprehensive ongoing review and monitoring services.
In order to create a bespoke portfolio we need to have a level of expertise that includes knowledge of markets, asset classes and economic market conditions. Gathering information through the media, investment and industry relevant seminars and external research are all ongoing requirements.
Creating a bespoke portfolio of market leading funds requires in depth research utilising the latest developments in technology. Keeping up to date with sector and fund performance, understanding management styles and philosophies and being able to combine assets in a complimentary way are all part of the planning process. It is also important to consider phasing capital into recommended investments during periods of volatility and we do this on a case by case basis to access greater long term value.
It is essential that portfolio’s are kept under regular review to ensure that future objectives can be met. Individual funds have to be periodically tested against their peers and portfolio’s need to be assessed against a realistic benchmark. We review all investment recommendations on a regular basis to ensure ongoing suitability. This will often require discussions and meetings with relevant investment groups.
Investment assets within a portfolio are not usually correlated and different investment returns will alter an asset allocation and, therefore, the risk profile. Again, we regularly review each portfolio and advise accordingly. It is important to invest when assets offer reasonable value but it is also important to protect profits that have been accumulated. By taking a proactive approach we can help to protect portfolio’s by consolidating gains to maximise returns.
Tax planning is also a crucial part of successful investment planning and this is also carried out in house. Annual profit taking, providing tax efficient income or making occasional capital withdrawals have to be managed carefully to avoid unnecessary tax liabilities.
The ongoing service is as bespoke as the investment management which helps to maximise returns and mitigate risk. Peace of mind is often as important as investment performance and our service is as individual as the investment advice. We meet with and report to clients as often as they require rather than offering a rigid approach.
THE COST OF OUR INVESTMENT ADVISORY MANAGEMENT SERVICE
Investment Fund Management
The fund managers levy an annual management charge and additional costs such as dealing and custody fees are included in the Ongoing Fund Charges (formerly Total Expense Ratio (TER). The charge is expressed as a percentage of the amount invested. Based on an investment of £1 million, the OFC for our example portfolio is 0.58%
The AJ Bell Investcentre Platform also applies an annual charge on a percentage basis. The fee reduces for larger portfolio`s and can be summarised as follows;
Up to £1 million – 0.2%
£1 million to £1.5 million – 0.15%
£1.5 million to £2 million – 0.1%
£2 million + – Nil
Investment Adviser Charge
We levy an annual adviser charge of 0.75% based on the amount invested. The fee is all inclusive and covers all ongoing advice and monitoring services. By applying our fees on a percentage basis all clients, regardless of geographic location or investment amount are treated equally.
All of the above fees are performance related and will fluctuate in line with investment performance. If markets fall, investment charges fall accordingly.
During periods of market volatility we phase capital in to recommended investments, which means that we may be overweight in cash for reasonable periods of time. We don’t take advisor charges on the capital earmarked for investment.
We don’t apply adviser fees to fund switching and the fee is capped for larger investments.
PERFORMANCE OF THE EXAMPLE PORTFOLIO – 5 YEARS
The following table compares the performance of the different asset classes within our example portfolio with the sector average;
|UK Smaller Companies||18.20%||13.30%|
|UK Equity Income||10.90%||7.50%|
|Europe (ex UK)||15.00%||10.00%|
*The commercial property sector includes funds that directly own commercial property, as is the case in our portfolio and funds that invest in the shares of property companies (equities). This makes performance analysis within the sector rather difficult.
|Start||Year One||Year Two||Year Three||Year Four||Year Five|
|Our Example Portfolio||£1,000,000||£1,111,741||£1,238,900||£1,383,909||£1,549,625||£1,739,382|
|Sector Average Portfolio||£1,000,000||£1,083,080||£1,174,797||£1,276,210||£1,388,558||£1,513,748|
Performance figures based on FE Crown Fund Ratings – Money Management Magazine November 2018. Past performance cannot be used as a guarantee for future performance.
Investors, Deputies and professional trustees need to carefully consider a range of factors before embarking on an investment proposition. The cost of a recommended strategy is an important factor, however, it is only part of the overall structure. In the above example, our portfolio would have returned an additional £225,000 over a 5 year period. Whilst past performance is not a guarantee for the future, our example demonstrates that fund performance varies considerably and by adopting a whole of market approach returns may be enhanced.
Being proactive can also enhance investment returns, something that cant be highlighted in a performance table. Phased investment, profit taking, utilising annual tax relief’s and allowances are some of the ways that, as advisers, we can add additional value.
When considering different investment propositions it is important to understand the advice and services being offered as well as the overall cost.