£109 billion in overcharging investments
SO you've worked hard all week and put some of your money into your pensions and ISAs for rainy, and hopefully sunny days, hoping it rises. Yes, the market might be up, but how much did you pay to be ‘up', and how ‘up' are you?
In our recent column we explained the difference between the best and worst pension funds, (a staggering £469,000) over 20 years with Aviva's With Profit fund cuddling up to L & G's Aggressive fund and Abbey Target at the bottom.
The truth is, there are thousands of investors in these funds who know no different.
Most of you put your hard earned money away thinking your financial adviser/bank has a close eye on your money, and that the fund manager is actively moving between currencies and fluctuating stocks and shares to give you the best returns. Not so.
The Financial Conduct Authority (FCA) has pointed out that some investment managers have been charging you way over the odds for their management, for what is just a closet tracker fund – or, a photocopy of the fine wine you thought you had purchased.
We can easily become fixed with “I pay more therefore it should be better”. That marketing works for many brands, but does it work for investments?
Like most footballers, a closet tracker simply mimics a stock market by loosely tracking it and charging for so called active performance.
The FCA recently looked into 84 fund companies as potentially offering closet trackers and ordered 64 of them to change their marketing material and fund managers to pay £34 million in compensation to investors who have been overcharged.
The FT included Schroders, Fidelity, JP Morgan and Henderson in their list on a report created by Better Finance where they believed one in six companies are closet tracking.
The FCA has concluded there is more than £100 billion of British investors funds were in what are simply closet trackers.
But what is closet tracking and are we right to point the finger so quickly?
In my 30 years I've always seen closet tracking at a level much greater than this. As one man puts his trainers on because he heard a tiger in the jungle, his friend announced he would never outrun the tiger. Bewildered, he explained he was only trying to outrun him.
And so, very large funds of money simply allocate their money, your money, virtually mirroring the index they are trying to beat, and sit like super tankers, groaning their way through the mist covered ocean bumping off icebergs they are unable to avoid with two just weeks' notice.
They are simply there to outperform the one next to them and not hit a berg at high speed – not what you thought you were paying for. They shouldn't be in that ocean.
However, we do need active management and whilst the aforementioned research provides good pointers, they could easily have you jumping into ice cold water for no reason.
Undoubtedly the cheaper versions of investment will make your hot air balloon lighter but they carry other risks.
High exposure to large tech companies where you are automatically invested into them despite their over valued status is not a good thing.
This is over inflating an already increasing problem and if you believe the Facebooks, Googles and Apples of this world will carry on regardless, what happens when Brussels moves in like it has done in the past to take them to task?.
They currently pay 9.5 per cent tax as opposed to the average across traditional companies which pay 23.3 per cent. What happens when you need to move quickly if there is a second UK referendum? This is where an active manager comes into their own.
Furthermore consider the flaw in the Better Finance study above, which used a tiny five year period from 2009 to 2014 in its comparison. That is just irresponsible to compare a period just after a war is announced and at the bottom of the market. That's the point when you let go of a balloon and no management is needed. The only way was up.
So, pick a good pilot and be sure to analyse if you are getting value for your hard earned money.
:: Peter McGahan is the owner of independent financial adviser Worldwide Financial Planning, which is authorised and regulated by the Financial Conduct Authority. For a review on your investments please call Darren McKeever on 028 6863 2692, email firstname.lastname@example.org or visit www.wwfp.net.?????