For many investors the costs of investing money have been hidden within the plan. Investment bonds are a real example where the set up costs can easily exceed 10%. On the second page of an illustration you will see the cost of the product if you encashed the day after investing so be sure to read that.
Other investments can have large up front costs such as ISAs and unit trusts but many investors are missing a trick here as they don’t have to pay these costs of typically 5.25%.
Using a discount broker is not an option for many as there is no protection for the advice as you will often be offered the plan with no advice.
Knowing which funds to be invested into is key to making sure your money is managed carefully.
For example the best fund in the active managed sector returned 40% over the last five years and the worst returned -22%. The difference in risk between the two is also amazing with the worst fund being 81% more risky then the best.
And so receiving bespoke fund advice is essential but it doesn’t have to cost the earth. A fee based Independent Financial Adviser will separate the cost of the plan and buy at the cheapest possible rate. Today I can buy most funds at no up front cost.
This is also true of customers who would be switching funds. In many instances when a customer has an annual review they would be switching from one fund to another and would incur the same up front fee of c5.25%. Whilst some fund supermarkets etc have this discounted down to c2% once again there is no need to pay the fee at all.
This is particularly worrying for lower risk funds as their return is likely to be lower and so that fixed cost is crippling.
Another hidden charge is within ‘guaranteed’ or ‘protected/structured’ investments.
They are marketed as having ‘no explicit charge’ which of course to most people means there is no charge at all. This is highly misleading. These arrangements are created using very complex financial instruments and sold as simple plans but are far from that.
When the provider is creating the plan they decide what margin they take at the beginning by offering you a lower participation in the upside of the growth of the plan. Furthermore in order to create an extra margin for themselves they provide the ‘protection’ or ‘guarantee’ by moving down the quality of the company providing that guarantee.
So for example if the protection was being offered by the government that would come at a greater cost than that offered by one of our many ‘in trouble’ financial institutions that are used to provide the ‘guarantee’. Its no surprise that banks regularly come up with these arrangements on quarter by quarter basis as their profit is immense.
The same is true of pensions although their costs have plummeted over the years. Within a pension you will be offered access to a range of funds and the above costs can easily apply.
Beware cheap imitations of the well known investment funds. Mirror funds are a copy of the real fund with an extra charge layered in. A recent article that I did showed that a customer was 36% worse off over three years by investing into what they thought was a Fidelity Special situations fund but was actually a ‘mirror’ version.
You will find these typically inside investment bonds and pensions so be careful. One of the easiest ways to identify them is the fact they normally have the providers name in front of it. So Fidelity special situations will be AIG Fidelity special situations for example. These costs are dramatic but disguised so be careful.
About Peter McGahan and Worldwide Financial Planning: Peter McGahan is the Managing Director of Worldwide Financial Planning – FT Award winning Independent Financial Advisers. Peter writes for many national and local press publications and is widely respected as an expert in personal finance.
Worldwide Financial Planning specialize in the provision of expert one-to-one advice in the areas of Mortgage, Business Finance, Investment, Pension and Retirement Planning and Inheritance Tax.