Inurance Bond -- Good or Bad?????

dunstonh

There are a lot of middlemen in the financial services industry, I'm afraid It's quite routine for them to pocket as much as half your profits in fees of one kind or another.

For shame that people cover their costs and make a profit in their line of work.

cheerfulcat

No, dh; for shame that people pocket profits made by other people risking their money. I have no objection to paying someone for advice but I don't see why s/he should also take a percentage of my investment for ever after. Similarly, I wouldn't mind a flat fee for fund management but a large annual percentage is taking the mickey somewhat, IMHO, especially considering that they take that % whether or not the fund is doing well.

EdInvestor

My objection has more to do with disclosure - at the moment some charges are hidden from investors and the regulator allows providers and advisors to express the effect of charges in a way which people don't understand.

An annual charge of 1.5% doesn't sound like much, but the effect of it will be to reduce the value of the fund by at least 25 - 30% over 20 or 30 years.How many people realise that?

Investors should always check the FSA charges site for an update and ask any advisor to explain exactly what they are paying - the total amount, similar to what is shown on the tables below for the particular product being recommended - not just the advisor's commission. Don't be put off by technical jargon and if you don't understand, don't buy.

https://www.fsa.gov.uk/tables

dunstonh

No, dh; for shame that people pocket profits made by other people risking their money. I have no objection to paying someone for advice but I don't see why s/he should also take a percentage of my investment for ever after.

Going back many many years, there was only upfront commission but there was a push from the consumer groups to get less paid upfront but more paid ongoing so there was a performance part to it and some money to provide ongoing servicing. Hence, trail commission was born. It didnt affect pricing and indeed charges have been coming down over the years. The focus on TERs has been a good driver with regards to that.

Similarly, I wouldn't mind a flat fee for fund management but a large annual percentage is taking the mickey somewhat, IMHO, especially considering that they take that % whether or not the fund is doing well.

That option is available to you should you wish to choose it. Indeed, there are some business models that do work on zero commission basis but fixed fee retention.

As for %, there is the counter arguement that many like the idea that the adviser is paid ongoing and that the amount is based on the performance. The more the fund goes up, the more the adviser gets paid. If it goes down, the adviser gets paid less. If the adviser earns a one off commission up front, then there is no buy in to the performance of the investment. You just end up with policy floggers as you see with tied agents and salesforces who get paid on that basis.

My objection has more to do with disclosure - at the moment some charges are hidden from investors and the regulator allows providers and advisors to express the effect of charges in a way which people don't understand.

Explicit charging is becoming more and more common now and TERs are finally starting to take the place of AMCs on research and portfolio building software. There isnt many places where charges are not disclosed fully.

An annual charge of 1.5% doesn't sound like much, but the effect of it will be to reduce the value of the fund by at least 25 - 30% over 20 or 30 years.How many people realise that?

So? Everybody with a CASH ISA is getting 25-50% less over 20-30 years because of charges. Every savings account does. The difference is that investment funds have explicit charges that you can see. With savings accounts/Cash ISAs you dont see the charges. You can bet your life that if they did operate on an explicit charged basis that the rate you could get after that charge would be higher than it currently.

If you dont like explicit charging, then why not go back to with profits funds. You have posted enough complaints about those and the way they charge. You either have implicit or explicit charging. Make your mind up which you want. Or even, stick to GEBs where there is no explicit charging as it is an implicit charged contract.

Who is going to be happier?
1 - Person getting 6% a year as a return but paying 0.5% p.a.
2 - Person getting 12% a year as a return but paying 1.5% p.a.
3 - Person with GEB paying no explicit charges but getting 0% (but wont find out until maturity that they are geting nothing)

This "effect of charges" thing is a red herring. If Tescos didnt add in such a profit margin I would be much better off over 20 years. When you buy goods and services you pay for them. If you didnt pay them, you would have more money.

EdInvestor

dunstonh wrote:

Who is going to be happier?
1 - Person getting 6% a year as a return but paying 0.5% p.a.
2 - Person getting 12% a year as a return but paying 1.5% p.a.
3 - Person with GEB paying no explicit charges but getting 0% (but wont find out until maturity that they are geting nothing)

Personally I'm happy with 15%-20% on average at 0.01% p.a.This is actually not very hard to arrange, but it does involve doing a bit of work upfront, not a lot mind, and otherwise pretty low maintenance. It really does help if you cut out the middleman I find, sorry about that.

I'd be less critical if more of the middlemen actually produced decent returns: but so many of them not only charge like wounded bulls, but also put people in the most appalling duff low-grade rubbish funds.

It's good to see that people are now walking away from this kind of contemptuous mug punter treatment, it's well overdue.

cheerfulcat

As for %, there is the counter arguement that many like the idea that the adviser is paid ongoing and that the amount is based on the performance. The more the fund goes up, the more the adviser gets paid. If it goes down, the adviser gets paid less. If the adviser earns a one off commission up front, then there is no buy in to the performance of the investment. You just end up with policy floggers as you see with tied agents and salesforces who get paid on that basis.

The nub or crux of the matter is that the advisor ( not forgetting the fund manager ) gets paid regardless of how well or otherwise the fund is doing. He or she may not get paid as much when it does badly, but s/he still gets paid. Oh, and that's not counting the extra bite taken by the insurance company which provides the bond ( since that was what started the thread ).

That option is available to you should you wish to choose it. Indeed, there are some business models that do work on zero commission basis but fixed fee retention.

You're talking about IFAs? I meant fund managers and investment houses as well.

So? Everybody with a CASH ISA is getting 25-50% less over 20-30 years because of charges. Every savings account does. The difference is that investment funds have explicit charges that you can see. With savings accounts/Cash ISAs you dont see the charges. You can bet your life that if they did operate on an explicit charged basis that the rate you could get after that charge would be higher than it currently

No, people in cash ISAs are not paying charges. The bank is taking the investment risk. It has to pay the deposit account holder interest whether or not the borrower is paying it interest ( or its investments do badly ). The account holder is getting the correct risk-free return. The bank, quite rightly, takes the extra return - the risk premium - which comes from it having taken the risk of lending the money out/investing it.

Who is going to be happier?
1 - Person getting 6% a year as a return but paying 0.5% p.a.
2 - Person getting 12% a year as a return but paying 1.5% p.a.
3 - Person with GEB paying no explicit charges but getting 0% (but wont find out until maturity that they are geting nothing)

You've left out the person getting 1.5% pa and paying 1.5% pa. Not to mention the one losing 2% pa and paying 1.5% pa on top...

This "effect of charges" thing is a red herring. If Tescos didnt add in such a profit margin I would be much better off over 20 years. When you buy goods and services you pay for them. If you didnt pay them, you would have more money.

It is not a red herring, as many even in the financial services industry recognise. Charges eat heavily into returns ( as whiteflag's post demonstrates ).

The Tesco analogy, on the other hand, is as ruddy a kipper as I've ever seen . I would be well peed orf if Tesco were to bill me annually for 1.5% of the price of that tin of beans I bought ten years ago. That's why I say - I don't mind a flat fee for services supplied but I don't see why the IFA and the provider should have a free uplift courtesy of my investment ( with me taking all of the risk, and them getting paid no matter what ).

Regards

Cheerfulcat

jem16

cheerfulcat wrote:

No, people in cash ISAs are not paying charges. The bank is taking the investment risk. It has to pay the deposit account holder interest whether or not the borrower is paying it interest ( or its investments do badly ). The account holder is getting the correct risk-free return. The bank, quite rightly, takes the extra return - the risk premium - which comes from it having taken the risk of lending the money out/investing it.
Cheerfulcat

Call me cynical but that makes it sound rather like the bank is doing me a huge favour and I get a risk-free return for nothing. :A

Although not technically a charge, surely it has the same effect as a charge? The bank has to cover its risk premium some way - surely by reducing the amount of interest it guarantees to pay me?

cheerfulcat

Call me cynical but that makes it sound rather like the bank is doing me a huge favour and I get a risk-free return for nothing.

Not at all; it's a simple business arrangement. You keep your money in the bank, which allows it to lend or invest. In return, the bank pays you interest. And of course it is not entirely risk-free.

The bank has to cover its risk premium some way - surely by reducing the amount of interest it guarantees to pay me?

The risk premium is the extra reward, over and above the risk free rate of return, for taking risks with capital. So take a 4.5% risk free rate, add a risk premium of 3% for a total of 7.5% return. The bank gives you 4.5% and keeps the extra 3% because it took the risk, not you. If you took the risk yourself you would keep the whole 7.5% ( well, minus tax ) but you would also stand to lose capital. And this is also why the difference between what the bank makes on the money and what you make by keeping it on deposit cannot be considered a charge.

jem16

cheerfulcat wrote:

Not at all; it's a simple business arrangement. You keep your money in the bank, which allows it to lend or invest. In return, the bank pays you interest. And of course it is not entirely risk-free.

True. My capital is being eroded by inflation and the bank may, although unlikely, go bust.

The risk premium is the extra reward, over and above the risk free rate of return, for taking risks with capital. So take a 4.5% risk free rate, add a risk premium of 3% for a total of 7.5% return. The bank gives you 4.5% and keeps the extra 3% because it took the risk, not you.

So tantamount to a charge?

If you took the risk yourself you would keep the whole 7.5% ( well, minus tax ) but you would also stand to lose capital. And this is also why the difference between what the bank makes on the money and what you make by keeping it on deposit cannot be considered a charge.

I can't see why it would not be considered a charge

If I take a risk I get 7.5%.
If I let the bank take the risk for me I get 4.5% - in effect I have been "charged" 3% for this security.

It may not be a charge in name but it's a charge by nature.

dunstonh

And this is also why the difference between what the bank makes on the money and what you make by keeping it on deposit cannot be considered a charge.

In economics it is considered an implicit charging structure.

If the same principle is used with investments you end up with Guaranteed equity bonds or with profits funds. Both of which are pretty awful investments. There will be no disagreement there.

The Tesco analogy, on the other hand, is as ruddy a kipper as I've ever seen . I would be well peed orf if Tesco were to bill me annually for 1.5% of the price of that tin of beans I bought ten years ago.

A tin of beans doesnt give Tesco a lifetime of liability or have ongoing servicing requirements. They are not required to keep all paperwork for life and deal with ongoing valuation request, statements and monitoring and visits. The FSAs TCF rules basically give you a potentially uncapped liability on workload for unspecified events in the future. These are all ongoing costs.

The charging structures exist that allow you to cut out the adviser if you want you. However, you have to remember that in many cases, if you do cut out the adviser and go direct you make no savings in doing so. They only way to make savings are to use adviser firms that offer the products on a discount basis.

If the ongoing trail commission was removed you can bet your life the upfront chunk would be a lot greater. Just as it used to be when ongoing trail came about.