Just how confident are we about making the right investment decisions?
Not very, if a recent survey of independent financial advisers and their clients is to be believed. The survey showed that while advisers believed it was their knowledge and experience clients valued most, clients felt it was reassurance from face-to-face meetings that mattered.
The results suggest that while we probably have the potential, with the help of the net and other research tools, to make decisions equal to those of many advisers, we lack the confidence. If so, that is a shame – especially given that investing directly can have a highly positive impact on the long-term value of a portfolio.
Why? Because the key determinant in most cases of how much funds will be worth at the end of an investment period is not the skill (or otherwise) of the manager but of the initial and annual charges levied on the fund.
The annual performance of most funds in any given sector tends to be within 1-2% of each other, with a few showing enormously better or worse growth every year. It is unusual for a fund to show annual out-performance of at least 2% above its peers for five years or more. So, any potential out-performance will be reduced if a fund has high initial and annual management fees.
The challenge, then, is whether typical investors have the knowledge and skills required to do without a financial adviser.
Is it sensible to go it alone? Roddy Kohn, independent financial adviser at Kohn Cougar, says: ‘A minority are able to make their own decisions, but the majority prefer to talk through options with an adviser. The chances are the adviser can tell them about the small-print an advert or a website might not have spotted.’
But Patrick Connolly, independent financial adviser at Chartwell Investment Management, says: ‘The role of a good IFA is to know when this is the case and to offer an appropriate service for each individual. And if you can obtain a discount from a fund manager for selling high volumes, why not pass that on to the consumer?’
Jersey-based Advisa operates a 66% commission rebate. So if you plough #10,000 into a Jupiter unit trust you’ll get back 2% or #200.
Garrison, another IFA, will return 2.5% and save you #250 on the same fund. Or pick Internet IFA and it will hand back 3% or #300. Torquil Direct, a Wolverhampton-based firm, charges a flat fee of #25 for any investment.
But virtually all discount brokers will keep 0.5% of the annual renewal commission paid by many providers for selling funds. Chartwell is an exception.
It has its own direct-selling operation, Chartwell Direct, which rebates initial commission – typically 3-5% – charged by an ISA provider, saving up to #350 on a #7,000 investment. It will also return 50% of annual charges for a flat fee of #20. On that #7,000 investment, that means an indefinite annual saving of at least #17.50, even assuming no fund growth.
This has earned Chartwell the ire of some fund managers. Fidelity has written a strongly-worded letter to the firm asking it to stop rebating this money. If it does not, Fidelity says it will refuse to pay the 0.5% trail commission and keep all the money itself.
Connolly says: ‘Fidelity says this cannot be commercially viable for us, but the money we make exceeds what we were making, as this move has proved so popular.’
More than 100 brokers are now prepared to rebate commission and obtain additional discounts from providers on the funds they sell. A full list of providers can be viewed at www.find.co.uk, the Yellow Pages of the financial world (look up Investment Centre and click on Discount Brokers).
A multitude of websites provide a wide range of information about funds, including charges, how risky they are, performance and even whether to buy them.
You can also opt for the online fund supermarket. Available from online brokers and through Virgin, Egg and Fidelity, it allows investors to buy their funds online. You can make significant discounts on funds and end-to-end transactions are available (give your debit card details online and purchase straight away). Most importantly, fund supermarkets allow you to pick and mix funds. While ISA rules mean a broker can generally only sell an ISA from one fund manager, online supermarkets offer the option of choosing a permutation of managers and funds, all kept under a large overall ISA wrapper.
So the lesson for investors is that it’s possible to make incredible savings if they are prepared to do some homework – and with less unnecessary hand-holding from independent financial advisers.
Nic Cicutti is head of content at www.FTyourmoney. com, the personal finance website.
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