19.1 C
London
Wednesday, May 27, 2020

Finding a vessel that is seaworthy

Richard Webb of Saltydog Investor sorts the wheat from the chaff and explains more about the world of DIY investing

 

When I first decided to take control of my finances the world was a very different place. There were no ISAs or SIPPs and a supermarket was where you went to get your groceries. I traded through an independent financial adviser and switching funds involved signing forms in triplicate and seemed to take forever. Performance data was hard to come by, and was not readily available outside of the financial institutions. Nowadays it’s much easier as there are discount brokers and fund supermarkets where switching can be done at the press of a button.

 

Investors need to seek out funds as seaworthy as The Maltese Falcon
Investors need to seek out funds as seaworthy as The Maltese Falcon

At Saltydog Investor we are unapologetic advocators of active momentum investing. We believe that money is made by investing in funds that are in the sectors of the investment market that are on the rise, and exiting those on the fall. To actively manage your investments you need a platform that gives you access to a wide selection of funds and you need to keep your trading costs to a minimum. A quick check at the discount brokerages and platforms might have you believe that there is not much to choose between them in terms of cost; but you should never underestimate the financial industry’s capacity to charge like a wounded rhino.

 

Where do the charges go?

When you buy a fund there are three people looking for a slice of the action: The company you use to buy the fund (normally an IFA, fund supermarket or discount broker), the platform provider who supplies the mechanism for trading, and finally the investment house that actually runs the fund.

 

Watch out for initial charges

Every time you buy a fund you are potentially exposing yourself to some upfront costs – these are the ones that can really hurt. If you don’t shop around for the best deal then when you switch funds you’ll find yourself taking one step forward and two steps back. Buy a fund directly from an investment house and there is normally an initial charge of around 5%.  Losing 5% at the outset makes every switch an uphill battle, and it feels as though you are spending all your time sailing against the tide just to get back to where you started.

 

Historically this charge was split between the adviser and the fund manager, but if you’re happy making your own investment decisions it’s straightforward to find a fund supermarket that discounts the entry costs for the vast majority of funds. In many cases it’s reduced to zero, but it’s worth checking – one well known discount broker charges 1% on entry with no advice given.

 

Another form of upfront cost is the bid offer spread which you have to pay on some funds, normally unit trusts. In this case the initial fee is calculated by working out the difference between the offer price (the higher, buying price of the units) and the bid price (the lower, selling price). The important thing to remember is that there are hundreds of funds that do not have spreads and can be bought without paying an initial charge if you go through the right fund supermarket.

 

Some providers charge a fixed transaction cost (e.g. £10 per trade) instead of an initial charge. This can be cost effective on larger portfolios, and there are usually other rebates available – more on that later.

 

Annual charges

Regular ongoing charges are perhaps the most mysterious and difficult to unravel. These are built into the price of the fund and are used to pay the fund management costs, the platform provider, and trail commission to whoever originally sold you the fund.

 

When choosing funds we focus on how well they perform once the costs have been deducted. We’re not overly concerned whether a fund’s got an annual management charge (AMC) of 1.5% or 1.25%; it’s the end result that matters to us. The question you should be asking is: “Will this fund make me money?” What’s the point in choosing a fund with a low management charge, if it continually underperforms?

 

Rebates

As the fog has been lifted over investing charges, the size and scale of the kickbacks that brokers and platforms receive has been jaw-dropping. An AMC of 1.5% would typically consist of 3 separate charges – 0.75% for the investment house, 0.25% for the platform provider and 0.5% trail commission. The trail commission and some of the platform fee are paid to the fund supermarket that may then rebate some or all of it. Rebates currently range between 0% and 0.64% per year.

 

Saltydog Investor's Tugboat's performance as of 24th July 2013
Saltydog Investor’s Tugboat’s performance as of 24th July 2013

So what does it mean for the DIY investor?

Don’t panic. It all looks very technical and confusing, but it really isn’t and there are plenty of people willing to help. The fund supermarkets want your business and it’s in their interest to make transferring your current investments as easy as possible. They all have helplines and in my experience the staff are well informed and happy to assist.

 

Find a fund supermarket that reduces the initial charges to zero on most funds. There are plenty to choose from: Hargreaves Lansdown, Interactive Investor, Alliance Trust, Best Invest and Cavendish Online to name just a few.

 

Give them a call and they will send you a form to fill in. List your current investments and they will then arrange the transfers. If you feel uncomfortable jumping in feet first, you can always transfer some of your funds now and do the rest later.

 

Once you have all your investments in one place, administration will become easier, and you can concentrate on the most important thing – making your money work harder.

 

The Retail Distribution Review hit IFAs from the beginning of 2013; new qualifications, new menus of costs, and the jury is still out on the new and improved services offered for the money they charge. For the platforms and fund supermarkets, there is another 6 months before RDR hits hard. This could change the way that they charge for their services and so it’s particularly important that you keep a close eye on the options available over this time.

 

For more information on about active investing and managing your own money from Saltydog click here. Follow Saltydog on Twitter here.

 

 

Subscribe to our free once daily email newsletter here:[wysija_form id=”1″]

1 COMMENT

LEAVE A REPLY

Please enter your comment!
Please enter your name here

Most Popular

Mixed Up McGee

Dippy Debbie McGee yet again confirms her status as the ultimate airhead in boasting about her connections to ‘Randy Andy’ and is met with a denial from a royal source.

Could Mark Alexander be Innocent?

With humanitarian Terry Waite questioning the safety of the conviction of Mark Alexander for murdering his conman father Samuel, is it time that this curious case was reviewed?

Distraction Dom

Matthew Steeples suggests devious Dominic Cummings might actually be the best asset bungling Boris Johnson has got left; the king of distraction has made Jennifer Arcuri go away.

A Box Office Balls-up

Royal Borough of Kensington & Chelsea council’s decision to approve replacement for Kensington Odeon with a 63% smaller cinema is deservedly condemned as a “box office balls-up.”

A Magnum Muckup

Unilever ludicrously forced to “urgently” recall Magnum ice cream because it contains MILK. Health and safety busybodies at their finest.

Hero of the Hour – Adrian Chiles

BBC presenter Adrian Chiles’s delight in the simple pleasures of a pint in a park during lockdown reflects how so many feel.

Moron of the Moment – Larysa Switlyk

“Bitch of the first order” Larysa Switlyk takes to Instagram during the coronavirus lockdown to brag about her latest massacres; this moronic monster previously paid to shoot sheep in England.

Roy Clark’s Roller

‘I Never Picked Cotton’ singer Roy Clark’s Rolls-Royce heads to auction complete with suicide doors and emblazoned with his initials in gold leaf.

Lockdown Lunacy

Aleks Walker examines what famous folk have been doing at home during the coronavirus lockdown and identifies some quite bizarre examples.

Smiling Churchill and Scowling Edward

Rare photograph of Winston Churchill dining with Edward VIII to be sold as part of a sale on the eve of the 80th anniversary of him becoming Prime Minister. In a reversal of roles, it is the royal (nicknamed ‘Our Smiling Prince’) who is scowling whilst the future Prime Minister (nicknamed ‘Our Scowling PM’) smiles.

More Matters Marmalade – Part V

More Matters Marmalade – Part V – Guardian readers on marmalade – Letter penning ‘Guardian’ readers return to their favourite subject – marmalade. This time marmalade and tights.

Heroine of the Hour – Anne Diamond

Heroine of the Hour – Anne Diamond on Duchess of Sussex book – Anne Diamond is right to call out the Duchess of Sussex’s mint-making collaboration with Omid Scobie and Carolyn Durand’s ‘Finding Freedom’ as annoying, daft and delusional.

Beauty’s in the Eye of the Bargain Basement Bugatti

Replica “homage to Jean Bugatti’s Type 57S Atlantic coupé” to be auctioned for a sum 99.9% lower than the most famous of the four originals is said to be worth. £124,000 to £165,000 for the 2016 ‘Assembled Vehicle’ 1939 Delahaye USA Pacific by Terry Cook.

A Faithfull Flat

Triplex apartment in Knightsbridge building once home to Marianne Faithfull for sale for the astounding sum of £25 million.

Dopey Derbyshire Dunces

Derbyshire Police yet again show themselves inept at the art of public relations in tweeting about trying to locate a man who...

Hero of the Hour – Liam Gallagher

Rocker Liam Gallagher speaks the most sense on how to survive the coronavirus lockdown in thanking alcohol Rock stars aren’t meant...

Weather Now

London
overcast clouds
19.1 ° C
21.1 °
17 °
59 %
1kmh
100 %
Wed
25 °
Thu
20 °
Fri
20 °
Sat
22 °
Sun
22 °