“How much a dollar really cost? The question is detrimental, paralyzin’ my thoughts”

When it comes to advice this is subjective, but the reality is that we can do dumb things (I would be the first to admit this)

The Financial Conduct Authority (FCA) has embarked on an ambitious project to examine the fees fund managers charge. The media has been quick to jump on this; highlighting how savers are being over charged as well as suffering sub-par returns.

In essence, the media believes there is a direct correlation between high charges and investment returns. In this blog, I want to consider how we might be going about this the wrong way.

Buying a car

When we buy a car, we might have a list of requirements and almost certainly we will have a budget. This sounds obvious because we are investing a lot of money.

What seems strange is that it appears we don’t follow the same process when it comes to investing, and yet the sums involved are often much higher.

The argument with investing seems to be this; if you invest in an active fund (this is where a fund manager selects the assets) the charges don’t outweigh the potential return when compared to a passive fund, which simply tracks an index (such as the FTSE All Share Index).

Taking this theory a step further, I visited trustnet.com and researched the Old Mutual UK Dynamic Equity Fund which is the top performing UK Fund over 5 years; and compared this to Lyxor ETF FTSE All Share. The total fund charge with Old Mutual is 1.10% and Lyxor 0.40%; that’s a whopping 175% difference!!!

On the assumption that low costs will deliver better performance, we ran the figures over 3 and 5 years:

  Old Mutual UK Dynamic Equity Fund Lyxor ETF FTSE All Share
3-years 41.94% 15.69%
5-years 148.96% 54.40%


This shows that even with the higher charges over 5 years, the more expensive fund outperforms by 173%, and over 3 years 167%.

Normally the more expensive funds are actively managed funds, and of course not all active funds will outperform a passive fund. However, to assume that cost drives performance as this table shows, is not 100% accurate!

It is no different to investing in a car, a house or any big purchase; research is key.

Fund performance is part of the process; and the cost is important, but so is the return. It is not just about this. I have picked the Old Mutual Fund because it was the top performing fund; I would never invest in that fund until I had done fund research into the manager and his investment style, and potential risks etc. Only after this and if I thought that it could continue to deliver this performance, would I invest: irrespective of the charges.

The next argument is about other costs…

Extra costs

The fund mangement charge is not the only charge!

Hargreaves Lansdown is the best-known investment platform (a platform is normally the only way to access these investments), and for investments below £250,000 they charge is 0.45% p.a. Over 5 years in simple terms this is 2.25% and over 3 years, 1.35%.

This does have an impact on performance but it is minimal.

  Old Mutual UK Dynamic Equity Fund Lyxor ETF FTSE All Share
3-years 40.59% 14.34%
5-years 146.71% 52.25%


But what about the middle man (advice)?

The cost of advice

The cost of advice varies but can cost between 0.5% and 1.00%. Financial planners can often access these investments via platforms at a cheaper cost, but assuming they don’t, then over 5-years on a 1% fee the extra cost is 5%, and over 3-years 3%.

Considering all charges (fund, platform and advice) the potential returns would look like this:

  Old Mutual UK Dynamic Equity Fund Lyxor ETF FTSE All Share
3-years 37.59% 11.34%
5-years 141.71% 47.25%


Putting a value on advice

In this we have taken a very simplistic view, but this is important because when the media and FCA talk about fees we need to pay close attention.

If we are paying higher fees, then we should make sure we are getting value for money. I picked the M&G Recovery Fund which has a charge of 0.91%. Over 5-years the return is just 27.51%, over 3-years 2.32%. If I take away the platform charge and adviser fee on the 3-year figure, the return is -1.13%.

This highlights that it is not just about picking random funds but about doing the research first because only then can we see the potential value. There are times when a passive option is better and the two can complement each other.

But what about the value of advice; recent research by Vanguard estimated that the value of advice adds about 3% on returns. There are two areas I want to focus on which I think are really important; asset allocation and behavioural coaching.

Asset Allocation:

Without advice, it is very easy to pick a few funds without considering how they might behave.

At the time of the EU Referendum vote, if someone had all their money invested in UK Funds then potentially they would have suffered poor returns this year. However, if they had diversified (and spread their investments across different sectors and geographical locations) then they are likely have fared better.

The skills of a financial planner are to create a diversified portfolio; by researching funds, and talking to fund managers. But it goes one step further, it includes having the discipline to review and rebalance on a regular basis (this can be every 3, 6 or 12 months).

The research from Vanguard on placing a value on advice estimates that of the 3% quoted above, this equates to about 0.43% of that additional return.

Behavioural coaching:

One of the biggest challenges with investing is staying calm in turbulent markets. There is countless research explaining how trying to time the market doesn’t work, but worse than that is the habit of chasing performance. The adviser is the stop gap; the aim is take away the emotion of investing.

If we are managing money ourselves, it is very easy to tell people how we have made money, and there are points in the market cycle when this is easy to do. But when an investment falls then what do we do? It is tempting to sell at this point and then start chasing performance in the hope of making up the loss; this is without doubt the single destroyer of wealth.

An adviser will always go back to the plan and remind clients to remain focused on the long term and put emotions to one side when the markets get tough. The value of this to clients is estimated to be 1.5%.

The point is that just two of these factors make a difference of nearly 2% of on the overall 3% quoted above. Other factors include tax planning, costs and income.


There is no doubt that if I am paying 1.10% on a fund and there is a similar fund charging 0.40%, that is performing better then I might do well to choose the cheaper option.

Fundamentally this is down to doing the research because we shouldn’t assume there is a direct correlation between cost and potential returns. There are plenty of investments where paying the extra cost is the better option.

When it comes to advice this is subjective, but the reality is that we can do dumb things (I would be the first to admit this); how many of us panic when the markets are falling and without someone to step in we would make knee jerk decisions? When we are “doing it ourselves” it is very easy to make investment mistakes which cost us financially and then try chasing performance to get back what we have lost; very rarely do we win overall in these circumstances! We can select the best fund based on its performance over the last five years but will it be the best fund in five years’ time?

Surely if it is possible to diminish our own instinctive reactions this is worth paying for because the results speak for themselves.

When considering whether to pay the 1% (or whatever is agreed) it is important to talk to your financial planner; your plan is key, not only ask them how they will approach this but also ask how they approach investments and what they do. Once you get to understand this you can see the value of their input.

Personally, I understand the theory of investments, I research them daily managing money for clients and delivering good long term returns. And yet I freely admit that I do dumb things when it comes to investing my own money; I buy shares and enjoy it when they go up and sell them as they fall. I have concluded that I need to pay someone to stop me making silly mistakes, and that is why I pay a financial planner.

I think the FCA is right to focus on fees, but we need to turn this around. Investors don’t always understand the effect that an adviser can have on the returns from a portfolio. There is no direct correlation between costs and performance – because if it was as simple as choosing the cheapest fund we would all do it and be continuously successful.

Note: This is written in a personal capacity and reflects the view of the author. The post has been checked and approved to ensure that it is both accurate and not misleading. However, this is a blog and the reader should accept that by its very nature many of the points are subjective and opinions of the author. Individuals wishing to buy any product or service as a result of this blog must seek advice or carry out their own research before making any decision, the author will not be held liable for decisions made as a result of this blog (particularly where no advice has been sought). Investors should also note that past performance is not a guide to future performance and investments can fall as well as rise.

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