Understanding Investment Fees

longman27

I have £300K to invest and have been quoted fees/charges of 2.17% for the first year and then 1.86% a year after that. This would be in a Standard Life WRAP Platform.

If I tag inflation on top of that it looks like I'm risking my money and I'll need to gain about 6% to make anything. I think my question is whats the point when I could put it in a 2% fixed savings account and risk nothing except losing a bit to inflation.

Am I missing something?

eskbanker

You're missing several things, yes.

One is what your objectives are for the money, in terms of when you're likely to need it - long term money is likely to lose significant real terms value to inflation, so, for example, your 2% fixed term account is paying 2.2% below yesterday's new CPI figure, which you airily dismiss as 'a bit' despite it being a higher figure than the charges you're complaining about.

Another factor to consider is that those investment charges seem high, and, for those happy to DIY, it's viable to invest in broadly diversified low-cost funds in 0.1% territory, many of which should deliver at least 6% annually over the long term and outpace inflation by some distance.

However, your own personal risk tolerance is undoubtedly another issue to be factored in....

Albermarle

The  Standard Life Wrap platform is only for use directly by financial advisors, so presumably you are working with a financial advisor ?( independent one?)
In which case the fees will include their fee and this may be around 0.75% on its own.
Even with an advisor the total fees look on the higher side though.

If you were to manage your own investments ( a so called DIY investor) then the fees could be as low as 0.2% , although more typically around 0.3% to 1 % . However it depends on how much knowledge you have in this area, or are prepared to learn.
It's not rocket science when looking at basic personal investing, but you need a certain level of knowledge not to  make any howlers.

longman27

My wife and I filled out a survey regarding risk and we came out at a 6. We are thinking long term with the money as we own our house and are lucky to have good, old fashioned pensions.

tebbins

longman27 said:

My wife and I filled out a survey regarding risk and we came out at a 6. We are thinking long term with the money as we own our house and are lucky to have good, old fashioned pensions.

6 out of what?

longman27

6 out of 10, attitude to risk. We have been recommended the LifeStrategy 80% Equity Fund.

dunstonh

I think my question is whats the point when I could put it in a 2% fixed savings account and risk nothing except losing a bit to inflation.

The net return after charges tends to average around the 5-7% mark over the last decade or so (going forward, lower risk is expected to be lower for a period).  A savings account declares 2% (in this example) after charges.    The charges on a savings account are around 1.9% (but you never know what they are).

 This would be in a Standard Life WRAP Platform.

Standard Life have two platforms.    Wrap which is aimed at FAs and Wealth managers and Elevate which is aimed at general practitioner IFAs.  Both are good in terms of what they offer software wise and efficiency.   I use Elevate but cannot use Wrap as I am a general practitioner IFA. (to use Wrap, the adviser firm has to commit to using it as their primary platform or place significant volumes with them which basically makes it difficult for most IFAs to use and still refer to themselves as an IFA).  

I have £300K to invest and have been quoted fees/charges of 2.17% for the first year and then 1.86% a year after that

That would suggest you are looking at a document that quotes year one and then year 2 charges.  Rather than a document that separates out the initial charge and the ongoing charge.  There may be some compounding in there so those may not be the exact figures.   The year 2 figure is the important one here as it shows the ballpark of the annual charges.

Platform charge for £300k is circa 0.25%.   
Investment charges would be around 0.35% for a hybrid portfolio.  0.1% for a fully passive portfolio or 0.7% for a fully active portfolio.   I prefer hybrid but others have their own opinions.   
Adviser charge on £300k would be expected to be around 0.50-0.75%.

So, if we assume a hybrid portfolio and 0.75% adviser charge that puts you in the ballpark of 1.35%.   So, 1.86% seems high in that respect.  Although could be explained if the adviser firm is expensive (say 1% charge on that figure) or they are farming out the investment advice to a discretionary fund manager (add around 0.3% p.a.).

My wife and I filled out a survey regarding risk and we came out at a 6. 

Risk questionnaires are only a starting point for deciding the risk level.    They provide the wrong outcome in around a third of cases.   The adviser should discuss this more with you to allow them to fine tune what is right.  Although with an experienced adviser, it would be in conversation style and you wouldn't notice it happening (i.e. not question and answer but in a discussion style)

6 means nothing without context.  Obviously, it is not a 1-5 scale but its high on a 1-7 scale and above medium risk on a 1-10 scale.  Although the context of a 1-10 scale could be that 1 is cash or 0 is cash and 10 maybe only mainstream risk rather than maximum risk.  

jimjames

longman27 said:

6 out of 10, attitude to risk. We have been recommended the LifeStrategy 80% Equity Fund.

If you go for that fund you'd be paying 0.22% fund management fees and if you buy it through Vanguard you'd pay 0.15% annual fees to them on top so a massive saving compared to 1.86% in Standard Life. But that would be the DIY option so you'd need to do whatever checks going forward yourself. Although to be honest VLS80 is a managed multi asset fund so wouldn't really need any rebalancing.

Up to you if you want to DIY or pay fees but if you want to go for VLS via an adviser I'd be tempted to pay for the setup and not the annual fees after that.

tebbins

If you've been recommended VLS80 then there is no need for the IFA, you can DIY that. How easy you find DIY and whether or not you avoid some of the mistakes IFAs can help you manage will depend on you though. IFAs aren't just about managing your money though and some people can find the service, having someone to talk to about money, someone to help manage your expectations and help with long term financial and tax planning very helpful.

longman27

From the figures quoted here we could save £5000 a year in fees but would have to take responsibility for watching the investment. £5k is a lot of money but if we take our eye off the ball we could lose more or if we do lose through the advisor we would not have the false satisfaction of being able to 'blame' the professional.

Something to think about. Thanks for all the input.

jimjames

longman27 said:

From the figures quoted here we could save £5000 a year in fees but would have to take responsibility for watching the investment. £5k is a lot of money but if we take our eye off the ball we could lose more or if we do lose through the advisor we would not have the false satisfaction of being able to 'blame' the professional.

Something to think about. Thanks for all the input.

If the only fund is VLS80 it would be interesting to know what the adviser is adding each year after year 1. It's a self contained fund so doesn't need rebalancing or any other activity that would normally be part of a review. The annual review could still cover suitability but there doesn't seem to be much that you could "take your eye off the ball" with a fund like VLS80 as there isn't really anything to watch.