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Sadly the financial services industry is littered with examples of heinous behaviour from the misleading to the criminal. Over the years I have found that some of the most pernicious examples seem to relate to the costs and charges that are levied on private investors. On the surface such amounts can appear almost trivial, but when added together they can provide a painful cost and negate any of the benefit that your investments may have otherwise gained.
I divide these items into the covert, and overt costs. The overt ones are usually given to us, although it can often take some work to co-ordinate all of these so that we can establish their full impact. These can be from trading commissions on shares, through to management charges on funds and portfolios. However, from these relatively straightforward costs you can find other “additional” costs for nominee and custody accounts, or maybe a platform fee. There are even some examples of an “inactivity fee” which I find astonishing – so you get charged when you do something and then when you do nothing!
Some of these charges from private banks and stockbrokers amongst others need to be calculated to give you a full picture of your true cost, but I’m sad to say I have come across too many examples where the client thinks he may be paying a mere 0.5%, but in fact we find it is in excess of 4% each year!
Although the recent introduction of the Retail Distribution Review (RDR) has outlawed commissions for financial advisers, it means that a fee for advice may be levied. Some have said that advice was previously given free – but that was untrue – it was just being subsidised by the product provider whom you were paying! This should make the issue of cost slightly clearer here but there are still other issues to address.
For a fund you will have the annual management charge (AMC) but there have always been other costs which were not so prominently displayed. These were referred to as a Total Expense Ratio (TER) to include other operational and trading costs (actually they didn’t necessarily include the total expenses and weren’t even a ratio!). These are now also referred to as ongoing charges and should be identified, as they can add a significant cost to a fund which, in a period of lower and slower growth can make all the difference between a profit and a loss.
Then there are the covert costs. Sadly unless you are experienced within the industry, there are many cracks and crevices within the system which can allow extra costs to be incurred through ineptitude, inefficiency or sometimes just ignorance! For example with certain investments the trading price can be vital. In the stock market, brokers are obliged to obtain the “best” price for the client at that moment. However, the “best” price may not necessarily be the best in terms of a dealer being able to trade most effectively in the market – this is down to experience. Thus the spread, the difference between the buying and selling price, may vary according how and who they deal with. Equally, they may need to trade on another market – say in Paris – to get a better price, and often the lack of knowledge and capability may mean that you as a client may not necessarily be getting the best possible value.
In my view all the costs and charges should be as clear and as straightforward as possible, and I have always thought that the cost of investment should always correspond to performance – you can earn more if it goes up – and less if it goes down!
Costs and charges can cheat your portfolio, so please check and challenge to make sure you are really getting the best value.