In a moment I want to tell you of a very attractive offer that should appeal to all small cap investors...
But first let me just take a minute to check we are both on the same page. As a small cap investor, you are used to doing all the leg work, hunting down the next big exciting stock. To me that is the only way to deal with shares. But there are a huge number of you out there who still let fund managers do all the work.
If you have invested your money in a managed fund you are probably uneasily aware that you are not getting much reward from it, but that others are. The so called professionals' are creaming off your money...
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The professionals' profit more than you
You might know the numbers already, but in my opinion they bear repeating.
Say you invest £10,000 for the long term, which I will call twenty years. A reasonable expectation would be that your money would earn 6.5% per year. At that rate, after twenty years it becomes worth £35,236. But if it only earns 4% per year you end up with £21,911, a difference of £13,325. The difference between 6.5% and 4% can be accounted for by the fees and charges that are sliced off your savings day by day.
As you can see, after twenty years the professionals have made more than you have.
So here is some news that you will scarcely believe. Things are about to get worse. That, at least is the view of Gavin Oldham and Richard Stone, chief executive and finance director respectively of the Share Centre. I went over to Aylesbury last week to meet the pair and take a look at an operation that prides itself on service to the private investor.
We had a good long chat about matters of interest to this hardy breed, one of which was fund charges. Fees charged by the fund manager for making investment decisions, and others for accountancy, regulation and custody come to about 1.5%-2%. On top of that are dealing charges which are often incurred each time the fund manager makes a trade, taking the likely total to 2%-3%.
Fund charges continuing to rise
The leading authority on fund charges is Lipper and in a report last year it said that "in the UK, of those funds that have changed their management fees over the last ten years, 80% increased them. This figure rises to more than 90% when looking solely at actively managed equity funds."
Given that there are thousands of existing funds to choose from, you may have assumed that fees would have been driven down by the force of competition. But evidently that has not suited the industry.
Now a new government initiative is likely to see them go higher still.
This is the Retail Distribution Review. According to the Financial Services Authority (FSA) this will establish a resilient, effective and attractive retail investment market that consumers can have confidence in and trust at a time when they need more help and advice than ever with their retirement and investment planning.' In practice what it means is that independent financial advisers (IFAs) have got to undergo training to make sure that they toe the line, and that charges must be transparent.
Some IFAs are deciding that the game is not worth the candle and are quitting. It is not just the prospect of sitting exams that is putting them off, but the fact that they will have to tell their customers exactly how much money they are raking off.
Transparency could change everything, here's what to do
Until now a large part of their income has come from trail commissions.' If they recommend a customer to buy one of those funds charging 2.5% per annum, for introducing the business and remaining loyal, they might get a kickback' of 0.7% from the fund manager. In future they will not be able to do this, but must instead present their own bill to the customer.
Plenty of customers are likely to consider these bills unjustifiably high, so IFAs face a problem. But so do the fund managers, who have used the IFAs as a channel to market, but will now have to find alternatives. Oldham and Stone think that will mean even higher charges to cover extra marketing.
Fund fees look set to rise, which is one more reason why you should take charge of your money and run your own portfolio (see DIY Investing, Penny Sleuth, 1 May). This brings me back to the Share Centre. Both Oldham and Stone are passionate in their support for DIY investing, and the Share Centre makes it all possible.
The charges are low, the business regularly wins awards for customer service and it makes that one attractive offer that I mentioned at the start. If you own 500 shares in the business which may well turn out to be a good investment in their own right you can cut your commission by 30%, to as low as £5.25 per trade. See here for more details.
Unlike most of the savings industry, the Share Centre is not bent on gouging its customers. It is good to see.
This article is taken from Tom Bulford's free twice-weekly small-cap investment email The Penny Sleuth. Sign up to The Penny Sleuth here.
Information in Penny Sleuth is for general information only and is not intended to be relied upon by individual readers in making (or not making) specific investment decisions. Penny Sleuth is an unregulated product published by Fleet Street Publications Ltd.
Tom worked as a fund manager in the City of London and in Hong Kong for over 20 years. As a director with Schroder Investment Management International he was responsible for £2 billion of foreign clients' money, and launched what became Argentina's largest mutual fund.
Now working from his home in Oxfordshire, Tom Bulford helps private investors with his premium tipping newsletter, Red Hot Biotech Alert.
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