Choosing Products Costs Unwrapped
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
Use this to dig out what your charges really are

The industry is there to help you - at a price
Buying shares directly incurs costs. Buying shares indirectly (through a unit trust or a structured financial product, for example) incurs other costs. The whole process is (deliberately?) opaque.

Excess costs can trash your savings through the mathematics of compounding. Be sure you understand the extra costs of any investment before you make it.

What are the costs?
If you are buying investments (e.g. shares) they may be in a pooled investment (e.g. a unit trust) and/or they may be parcelled up in a 'wrapper' (e.g. an ISA). We use the generic term 'Pool' to describe the pooling vehicle (not all costs will apply to all types of pooled investment). The added costs may comprise any of the following:

  • Initial Pool charges
  • Exit Pool charges
  • IFA commissions
  • Buy/sell spread on the price of the Pool
  • Brokerage fees on selling the Pool
  • Stamp duty & brokerage fees on buying the Pool
  • Dealing costs on purchases/sales of shares within the Pool. Portfolio Turnover
  • Even higher dealing costs within a wrapper (you will find that some brokers charge more for trading within an ISA than they do for trading within a dealing account)
  • Stamp duty (0.5%) on buying shares within the Pool
  • Buy/sell spread on the price of shares within the Pool
  • Annual Pool investment management charges
  • Other administrative charges incurred by the Pool (typically 0.2% - 0.5%)
  • Annual wrapper management charges
  • Dividend reinvestment fees (when the Pool treats reinvested dividends as a new purchase and charges accordingly)
  • Performance fees, (particularly insidious)
  • 'Soft' commissions (when services such as technical analysis are supplied 'free' to a Trust by a brokerage in exchange for higher dealing commissions or guarantees on volume).

Phew! Anything else?
Yes, there's the little matter of renewal commissions (also called 'trail commissions').

If you are paying, say, a 1.5% a year fund management fee you might be comfortable with this high charge because you believe you are buying exceptional expertise.

But what if you discovered that your fund manager was rebating 0.5% to your financial adviser? So that only 1% per year is being devoted to the management of your money and 0.5% is paying for your seller's marketing costs. This 0.5% is the "renewal commission".

The industry argues that so long as it is honest about the amounts you are paying, why should you care who it is being paid to?

Our view is straightforward. Unless this arrangement is declared to you, this is a scam. The fact that it is legal doesn't make it any less so. And the convoluted arrangements and nomenclature to express something quite simple show that the industry knows it. If you meet it, you know what to do.

Initial commission
Many funds will charge an initial commission when you purchase direct, say 5%. The good news is that many intermediary product providers will give you a discount on the initial commission. But the bad news is that they may only do so because they are receiving renewal commissions.

We repeat, we have no objection to these arrangements. We object to their concealment, which continues to distort the cost comparison between truly independent advisers and commissioned salesmen.

 

 

 

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