Happy New Year: I was delighted that Tricia and I celebrated our 42nd wedding anniversary on 1st January and in typically romantic style the first thing that I said to her was: “do you realise that 12 months today is the day that the RDR comes into effect?” – Needless to say she wasn’t too impressed!
A report published in New Model Adviser on 6th December quoted FSA research which showed that 8% of registered individuals had stopped advising between 2010 and 2011. FT Adviser on 7th December focused on the 11% fall in directly authorised IFAs over the same period so that there are now only a little over 15,000 directly authorised IFAs like myself. My Newsletters have been keeping clients up to date with the changes expected from the Retail Distribution Review and I have quoted sources stating that 20% to 30% of advisers would no longer be helping clients as a result of the RDR so the decline is not a surprise. However what is a surprise is that the decline has started so soon. I think that the year 2012 will see a more rapid decrease, a decrease which won’t stop on 1st January 2013 but which will continue. Not only will the panorama for regulated advice change beyond recognition but the availability of advice will become in shorter supply with the potential that costs will increase.
It is on the issue of costs that I am starting my series on investment. The latest book that I’ve been reading is “The 7 Secrets of Money” by Simon Brown and others and I highly recommend it. It is my intention to reveal the seven secrets over coming months but if you want to know sooner you will have to get your own copy from Amazon and for more information you could look at the authors’ website at www.7secretsofmoney.co.uk and download the introduction and list of contents.
Secret No.1: There is a financial conspiracy going on
The book refers to two studies which show that investors get disappointing returns:
One found that between 1989 and 2009 average returns for investors in stocks were 3.17% per annum when average stock market returns were 8.2%
The other found that between 1992 and 2000 investors were receiving 4.91% per annum when markets were delivering 8.99%.
The authors refer to “conspirators” who conspire to transfer as much of your wealth to themselves as possible which reduces the amount that you receive. This is not referring to criminal deception but to “entirely legal and reputable conspirators” and these include:
1 Product manufacturers who manufacture retail investment products
2 Product distributors who sell retail investment products
3 Those who neither manufacture nor sell but who are indirectly dependent on your continued purchase of financial products and services – these include much of the financial press and the credit rating agencies
Your money is taken in several ways:
1 Dealing commissions: Every time a fund manager deals in a security there is a charge or commission and this is borne by the end client. The more activity that takes place within a fund, the higher the income for the fund manager or other party and the lower the net return for the investor.
2 Other Fees: including depositary fees, custody fees, valuation fees, accountancy including audit fees, and so on.
3 Sales Charges: There are also a range of sales charges that can be added when the entity selling the investment persuades the retail investor to buy. Bid-offer spreads is a typical example where it is common to pay 5% as an initial cost of investing (in cold terms your £10,000 investment reduces to £9500 before the ink is dry!).
I have never recommended Structured Products and there is an excellent explanation in the book of why no one should take them – the costs are just too high – enough to say ‘if it looks too good to be true it probably is’. If you want any more look at the book or get in touch.
So why is there the huge difference between the market return and the return received by investors as shown in the studies?
1 Most retail funds are in actively managed funds where fees are higher than in passive funds. Higher fees results in a lower net return for the investor.
2 Retail investors time their decisions to invest and to switch based on irrational emotional behaviour.
Stock markets do not exist to make you or anybody else rich. They exist a) to bring businesses that need capital together with those that have capital; and b) to facilitate the buying and selling of stocks. You, as a provider of capital, are entitled to a return on that capital that reflects the risks of that provision of capital.
What can you do?
- Ensure that you have an investment strategy where much of your potential return is not eaten by costs.
- Ensure that you have an adviser who is on your side and ensures that you apply a scientific investment strategy and not one based on fear or greed (more of this in secret number 6).
That’s only the first of 7 secrets and more is to come.