Costs Matter

By Proposito Team

As you may be aware, the investment management industry is regulated by the Financial Conduct Authority or the FCA.

The FCA have recently published their Asset Management Market Survey, if you want to read it you can follow the link here.

Now you may not think that this is particularly relevant to you; however if any of your clients have any investments, (be that in Isa’s, Pensions or other investment portfolio’s) it is an extremely important publication.

To summarise, The FCA have found the following

  • There is little price competition for actively managed funds, meaning investors often pay high charges. On average, these costs are not justified by higher returns.

in other words, some of the charges that your clients are paying are, quite frankly, not being justified. Many advisers and fund managers will sit in front of you and your clients and claim they are different but the evidence shows that this is simply not the case.

The below chart from The FCA study shows you the ‘mouths that need feeding’ in an active fund before any returns from the market are passed on to the investor.

Costs Matter

Source: The FCA

This is not news to us, our investment philosophy has followed an evidence based discipline for many years, this combines low cost passive instruments with diversification and ‘behavioural investment counselling’ to provide our clients with a more predictable investment journey, one that is aligned to them living their lives on their terms and without the fear of running out of money.

What is behavioural investment counselling

Investor behaviour is the most important factor in determining long-term investment returns. At times investors will find that the right thing to do seems counter intuitive. Our role is to ensure that our clients make investment decisions based on logic and their long term objectives – not emotions. This is particularly important when markets are moving rapidly.

We will make sure our clients don’t try to predict the market or follow the crowd. Instead we will manage the way they react to those periods of euphoria and despair – both very human reactions – to maintain discipline.

Our approach is goal-focussed and planning driven, rather than trying to outguess the economy or markets. This means we help our clients to make good investment decisions about what to (and what not to do) with their investment portfolio.

We don’t claim that the investments we recommend will ‘outperform’ their friends portfolio, an active portfolio or a particular benchmark. However, we also do not rule it out; we just cannot promise it – neither can any adviser – and it has almost no link with what we do for our clients, nor is it what they value.

We help them to achieve their financial objectives by helping them to act towards the realisation of these goals. This is the key to successful investing. We also help them to avoid some of the very common human mistakes that most people are making most of the time.

Our clients value our behavioural advice, for example, coaching them to continue to do the right things, and to avoid doing the wrong things, especially when their friends, the active management world and the press are giving in to the fads or fears of the moment.

The study from The FCA would seem to support this approach.

The FCA also found that;

  • Assuming, for illustrative purposes, that both funds earn the same return before charges (the average FTSE all share growth), an investor in a typical low cost passive fund would earn £9,455 (24.8%) more on a £20,000 investment than an investor in a typical active fund, and this number could rise to £14,439 (44.4%) once transaction costs have been taken into account.
  • Overall, our evidence suggests that actively managed investments do not outperform their benchmark after costs.

The impact of charges over time are a huge factor in the successful outcome of someone’s financial plan.

By keeping costs low and effectively managing behaviour, our clients are able to benefit from the returns of the market, without having to give some or all of their returns to a fund manager.

The below chart shows you the impact of charges on a relatively small portfolio, imagine the figures if this were a £200,000 or £2,000,000 investment!!

Costs Matter

Source: The FCA

There are firms out there that will claim to be able to outperform the market, and there are other firms who are simply charging your clients too much for something that they cannot deliver.

Some of these firms are taking an initial ‘fee’ of 3% from the investment and then incurring costs of up to 2.5% each and every year (we haven’t even mentioned inflation yet!) and that is all before your clients receive any return for the risk they are taking!

That is money that could be coming to  your clients and could be the difference between retiring when you want, with an income that allows you to live the retirement you want to and not.

We are pleased with the outcome of this study but we are not surprised. You may be. We would be more than happy to come and talk to you about this in more detail if you would like to know more.

We feel it is really important for people to understand what is marketing ‘spin’ and what is fact.