Cheap as chips – or false economy?
We’re all on the hunt for a bargain.
Whether that be an own brand label Chicken Kiev at the supermarket or where to invest our hard earned pension fund, no-one wants to part with more cash than they have to.
When it comes to investment management there are basically three key options open to you – each with differing fees attached.
Firstly, there’s passive investment. This is where the investor effectively says to the fund management firm: ‘I’m just putting my money in the Stock Market so get on with it.’ Cheap as chips.
Investments left to the tidal ebb and flow of the FTSE 100.
Then we have active management, introducing the human element to hopefully produce better returns then passive fund portfolios.
‘Right, we’ll go ten per cent in the US and 90% in the UK and look again in a month’s time when we might have to increase our US investment.
‘Too much money over there, then in a month’s time we can move it over here.’
The third option is discretionary fund management which means that it’s like active fund management, but you have your own individual fund manager at the coal face who takes care of your money.
‘I was reading an article about investment in the Far East and do you think you can put more money in there? Of course I can put more money in there, however what we are worried about in the Far East is this, this and this.’
Obviously you need a little more money to secure this level of service.
The point is, do you want somebody keeping an eye on things for you and taking care of it, because if you do then you need active or discretionary management.
The annual management charge for a passive fund is 0.15%. A managed fund is 0.75% and a discretionary fund manager might be 1.5%.
There is certainly a place for passive funds if the client is 100% price driven but people are falling into the trap of thinking that it’s cheap and so it’s the best option for their pension fund.
People will often just look at the bottom line.
But what happens when the proverbial hits the fan and you’ve put all your money in passive fund management, what is going to happen?
With a passive investment, you don’t get any stewardship.
History shows us that while over the past five years no-one has done badly, we would do well to remember 2008 and the impact of the financial crash.
Be aware if you are buying cheap – and ask what are you not getting?
In our opinion at Carrick Financial Management, it would be prudent to talk to a financial adviser, to take their professional opinion about the different options and what would best match your investment portfolio.
I likened this to a client recently as ‘how do you know your car has an air bag? The dealer and handbook says so. But the only way you’ll truly know is when you have an accident.’
Some people are comfortable with that.
Their fund driving along without an air bag.
It’s not wrong, but are they really aware of what they’ve got?