Hidden Fees

Investing should be about the investor but somewhere, we lost our way.

Ed, if you invest your savings through a financial adviser, you may be one of many individual investors unwittingly spending thousands of pounds on fees.

As an example, new research shows that 41 per cent of investors are unaware of the impact of platform fees on their investments. These are charged by online services used by financial advisers to build and manage customers’ portfolios. Well over £300bn of investments is currently managed on adviser platforms in the UK.

In this article, we would like to break it all down and have a look at exactly what we’re all paying for.  

It starts with your Independent Financial Advisor; probably more tax accountants and insurance brokers than anything to do with actual investments, but I guess it all comes under the heading of personal finance.

They will ask you a list of standard questions to work out your risk rating, they will then take your money (in every sense), and put it onto a platform, dividing it up into the various asset classes determined by the computer model (they all use pretty much the same one). After that, it’s no longer their problem.  

For this privilege, you will pay your advisor a pre-arranged fee. However, this is by no means where the fees end and if you are unaware of this, you are not alone.  

Adviser platforms charge on average around 0.3 per cent of the latest value of investments annually – a cost that is usually passed on straight to savers and pension holders. On a pot of £50,000, invested over 25 years and growing 5 per cent a year, the investor will fork out a hefty £12,500 in platform fees alone, in addition to the payments for financial advice.  

The 41 per cent of oblivious investors is made up of 27 per cent who know about the fees but are not sure how they affect their investments, and 13 per cent who do not even realise they are paying platform fees.  

Perhaps investors themselves can be blamed for their lack of awareness, but some of this could just be down to being British. We hate to change the status quo, and we naturally assume that the basic investment model our parents followed, must be the right one. Subsequently, we just give it to ‘our guy’ and then trust the system is doing right by us. These recent findings certainly highlight the crucial need for greater levels of transparency, engagement and education of investors.

In another quirk of the current system, adviser platforms are chosen by advisers but are paid for by consumers, as the Financial Conduct Authority (FCA) pointed out in a report published in March. These costs will be somewhere on your investment reports. Because the IFA isn’t paying them, they aren’t costs attributed to the IFA and they can carry on claiming that their costs are stated as ‘x’.  

Of those surveyed about fees: 8 per cent were confused about what they pay for, an equal share didn’t understand the fees they pay, and another 8 per cent weren’t even aware they pay any additional fees.  

The share of perplexed investors was matched almost exactly by the 26 per cent of advisers who said they had always felt uncomfortable talking about fees and charges.  

Perhaps they feel they can’t justify their expense or there are simply too many charges to explain. Last year Helen Morrissey, a non-executive director of St James’s Place said, when asked about the complexity of their fees: ‘I would like to satisfy myself that fund charges are transparent and fair, but I do not believe they are transparent because if they were, I would be able to explain them to you’. She has since quit her role.  

St James’s Place are without doubt one of the worst IFA’s around for hidden charges and underperforming. The sad fact is, they don’t care. They just want your money; and the proof they don’t care is that they charge a 6% exit fee. If they actually thought they would make you money, they wouldn’t need this because why would you want to leave?  

They would argue that the amount goes down 1% every year your investment stays with them, however, if you make any changes (and one of these is adding more capital!!) then the exit fee returns to 6%. If you bear in mind that they have a 4.5% initial ‘advice’ charge, and their Deferred Income Portfolio has returned 4.2% over the last 3 years (in total), it would take them about 5 years for you just to cover the cost of leaving them!  

SJP's charges have been a regular source of contention, and a report by The Sunday Times found their fees are even a concern to their own advisers, with a leaked call from St James’s Place managing director Ian Gascoigne, identifying that some advisers want them to scrap their expensive fees, which have helped to pay for extravagant rewards from cufflinks to cruises which SJP had regularly awarded to their top selling advisers.  

The fact that the managing director refers to his team of Financial Advisors as salesmen, tells you everything you need to know. Investments should be about making money for the investor, but wherever there is money, there will be people around to take advantage of others.

If they performed well, all would be forgiven as is often the way in the world of finance. However, they have admitted themselves that 8 out of 10 of their funds have consistently underperformed. As an example, the SJP Alternative Assets fund has been the worst performing of all 145 funds in its sector over the last 1, 3 & 5 years.  

It’s all very well bashing St James’s Place for their disgraceful abuse of trust and charging, but how about the rest?  

Fortunately, nobody else we found was even nearly as bad. Hargreaves Lansdown’s average net charge for funds in the sector was 0.78 per cent. However, when platform and transaction costs, plus performance fees, were added on top, the charge rose almost double to 1.5 per cent.  

It was a similar story for Fidelity. On their website, their fees show as 1.07 per cent. However, once performance fees and platform costs were added, this shot up to 1.49 per cent. It sounds a lot like trying to hide fees, and quite simply, it is. Given that your investment will go onto a platform, surely that charge is compulsory and therefore a fee. A taxi driver doesn’t get you to your destination and then charge you petrol money on top, or worse, take it straight out of your account without you even being aware of it.  

With the JPM UK Equity Core fund, Hargreaves gave a net charge of 0.33 per cent. When all the charges add up, the fund costs 1.09 per cent.  

The MiFID II regulations from 2018 have forced the hands of many fund managers, exposing the fees they’ve hidden from investors for years and it was subsequently discovered that investors were paying an average of 30% more than advertised. However, in some cases, such as the JPM Global Macro Opportunities Fund, this number was as high as 85%.

Educating people with regards to investments is the best way of enabling them to make the right decisions for themselves. We aren’t suggesting the IFA’s are all bad, or that fund managers shouldn’t get paid for doing their jobs.  

However, fees need to be transparent, investments need to be transparent. Just look at the Woodford scandal and the many more before that. You should always know exactly where your money is and what it’s doing.

At The Portfolio Platform, users pay a subscription. This is genuinely a model with 0 hidden charges. There is no performance fee in there, no management fee, just a subscription. If you subscribe to a £75/month strategy, then it’s £75/month, whether you put in £10,000 or £1,000,000. Only you have access to the funds so you absolutely cannot be charged more. There is no exit fee, why should there be? It’s your money, it’s liquid. Simply withdraw money whenever you want.

This is the future of investing yet we sit in the past, and carry-on handing money to nameless computer platforms for our 7% return/year. Only it isn’t that, not if you actually want to get hold of it.

If you wish to discuss an investment with no hidden charges, and where the only purpose of it is to make the investor money, please email one of our team here.

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