I spoke to a retired partner from one of Britain's big investment firms a few weeks ago. He told me what the average fund charges there were for investors back when he started work. I was stunned.
I've been asking people to guess the number he gave me ever since. No one has got it right. Most have been out by a factor of at least ten.
Have your own guess before you read on. Ready? Here's the answer: 0.08%. Not 0.80%. But 0.08%. Or as they would say in the industry, eight basis points.
Subscribe to MoneyWeek
Subscribe to MoneyWeek today and get your first six magazine issues absolutely FREE
Sign up to Money Morning
Don't miss the latest investment and personal finances news, market analysis, plus money-saving tips with our free twice-daily newsletter
Don't miss the latest investment and personal finances news, market analysis, plus money-saving tips with our free twice-daily newsletter
Today, management fees of 1% (12.5 times more) are entirely standard. Total expense ratios of over 1.5% barely raise an eyebrow in the City.
If you ask any of the City's eyebrow owners about these numbers, they will tell you that times have changed. There are platform fees. There is a huge amount of infrastructure involved (travelling to look at stuff, research stuff, modelling stuff) and, of course, there is regulation.
This is all completely true. And it is probably worth another few basis points. Let's add in 15 for distribution and ten for regulation (write any comments below about how this is wildly optimistic, grossly unfair etc). That gets us to 0.33%.
Let's round it up to 0.50% on the basis that I suspect that even 50-odd years ago, 0.08% was considered extremely cheap. But there's still a big gap there.
How come fund management today costs double what it did 50-odd years ago? I think we all know the answer to that. Fund managers haven't always been well paid.
Back then, said my retired friend, they were considered to be of slightly lower worth than a mid-ranking accountant and were paid accordingly.
The idea that it is reasonable for someone whose job is to fiddle around buying and selling stocks to take home millions a year hadn't yet wormed its way into industry tradition.
Even post the Retail Distribution Review (which banned commission, which was one of the things keeping final prices high), and after the supposedly disruptive arrival of cheap tracker funds, there are still hordes of managers out there charging well over 1%.
They say "that is what it costs". However, they won't tell you that the it' in question is mostly what they cost.
This matters: fund costs are huge wealth destroyers: £10,000 invested in a fund that grows at 7% a year would be worth £19,670 in ten years if you were to pay no charges on it. But pay 2% and it will be worth only £16,070. That's over £3,000 gone.
This isn't news to most MoneyWeek readers, I know, but I don't think we can remind ourselves often enough of the long-term cost to our investments of overpaying other people to invest for us.
So, either make sure you buy well-priced funds (the Vanguard LifeStrategy funds charge from 0.29%-0.33%), or pick your own stocks.
-
The dangers of derivatives as the “Goldilocks era” endsEditor's letter This is no longer a benign environment for investors, says Andrew Van Sickle. But – as the recent pension-fund derivatives blow-up shows – not everybody seems to have grasped that.
-
What to do as the age of cheap money and overpriced equities endsEditor's letter The age of cheap money, overpriced equities and negative interest rates is over. The great bond bull market is over. All this means you will be losing money, says Merryn Somerset Webb. What can you do to protect yourself?
-
Investors are bullish – but be very carefulEditor's letter Many investors are buying the dip, convinced the latest upswing is the start of a new bull market. The odds are that it’s not, says Andrew Van Sickle. The bear has unfinished business.
-
The MoneyWeek approach to investingEditor's letter At MoneyWeek, our aim is simple: to give you intelligent and enjoyable commentary on the most important financial stories, and tell you how to profit from them. So how do we do that?
-
Celebrity bitcoin ads echo the subprime mortgage crisisEditor's letter A wave of ads featuring celebrities punting crypto to the masses are reminiscent of how low income Americans were encouraged to take on loans they couldn’t afford, says Merryn Somerset Webb.
-
Will the UK's property slowdown turn into a house-price crash?Editor's letter As the cost-of-living crisis intensifies and interest rate rise, it is hard to see reasons for UK house prices to keep rising, says Merryn Somerset Webb.
-
What sardines can teach investors about today's marketsEditor's letter A California tale of “eating sardines” and “trading sardines” can help us divide investments into speculative and real, says Merryn Somerset Webb. Something that's very useful when looking at today’s markets.
-
The market finally seems to be getting itEditor's letter Reality checks are coming fast to the markets, says Merryn Somerset Webb – with even 2022’s safe havens beginning to reflect recession worries.
