A friend of mine gave me a proposal he had received from a very well known UK wealth manager. I was so appalled by the double, triple and quadruple level of fees it proposed I thought I would publish the letter I sent to this canny farmer who realised it must be a rip off:
It was good to speak to you and Margaret yesterday and I am glad that all goes well at beautiful XXXberry. I return the various documentation you gave me to look at back in the summer with apologies for the delay.
Let me just reiterate that I am not qualified to give you investment advice and I recommend you should take this letter to your accountant and ask him to look at the tax and investment aspects of the pension and ISA transfer as well as complete the necessary account opening forms and transfer if you and he deem appropriate. I have no idea about the tax requirements so you should cover it with him. Get him to quote for opening a new brokerage account for you at (by way of example) Fidelity and dealing with the transfer of the pension and ISAs if you do not feel comfortable handling it yourself. It is a very simple matter indeed and one you could actually manage yourself quite easily, nonetheless if you do not feel up to the tedious effort involved it may be better to have it done for you.
Referring to the advice you have received by XXX plc I am, frankly, appalled and horrified at the greedy and unnecessary fees. It is total insanity and should be avoided at all costs. The recommended fee to XXX of 2% of the net pension transfer is an obscenity and if you transfer to an equally reputable outfit like Fidelity there will be minimal fees provided you do not ask them to manage your money on a discretionary basis. In other words, deal with them on an execution only basis and use them simply for dealing and custody.
As regards the suggested annual charges of 2.58% for investment management and custody services I am nothing less than appalled. As I said last night you should be able to achieve total annual fees of less than 0.30% at Fidelity since you simply do not need investment advice and can hold extremely cheap index tracking Exchange Traded Funds at Fidelity (“ETFs”).
I had a long chat with Fidelity and spoke with an advisor at the Fidelity Investor Line on 0333 300 3350.
They confirm there is no charge for a transfer of the funds into Fidelity and that provided you buy ETFs, the total annual charges by Fidelity would be £45 per annum.
There will of course be a fee charged by the manager of the ETFs but since I suggest you buy index tracking ETFs (as explained below) these will be less than 0.25% per annum.
By contrast the underlying funds charge quoted by XXX amounted to 0.73%.
I do not object to the actual asset allocation XXX recommends.
At your age (not so much older than me) you should focus on caution and not take any great degree of risk with your hard earned cash. The investment with the lowest risk of all is short term government securities (preferably highly secure governments such as the UK, the US, Germany and France) and bonds. Probably relatively short dated given the risk of interest rates rising. Shares carry a high degree of risk and at times of crisis fall dramatically in value – thus at the very depths of a crash your equity investments could lose dramatic amounts of money. You would be ill advised to sell during a crash so you need to lock equity investments up for the long term. Equity investments are not suited for monies you may need to use in the near term.
Let me give you some examples. In the 2008 crisis the major developed world stock indices were down well over 50% at their worst. Emerging market indices were down up to 80% (India for example). In the crash of 1929 and the subsequent depression US and UK stocks lost 90% of their value at the worst point – not a good time to have to realise your investments. In the tech crash of 2000 the Nasdaq index was down over 80% at one point, if I remember correctly.
To avoid volatility and steep drawdown you need to invest mostly in bonds and cash and only devote a smaller percentage of the portfolio to shares. Then there are currency risks – any investment in non-sterling assets will bring profits and losses on the currency element of the investment. Perhaps the safest course of action is therefore to keep mostly sterling investments although some currency diversification is probably wise.
Here is what you could do by way of asset allocation:
65% fixed income (bonds)
25% equities (shares)
5% gold (other)
If you want to take more risk, allocate more money to equities. If you want less risk allocate more money to bonds.
Once a year re-balance your portfolio so that it returns to the asset allocation split you are happy with (EG 65/25/5/5 in the example above).
It is that simple. Once you have made your asset allocation split all you have to do is sit there, hold your investments in cheap index tracking ETFs and re-balance annually. No absurd investment advice required.
Here are some index tracking ETFs from top investment managers with some example allocations:
Asset Allocation Bonds Trading Currency % Allocation iShares GBP Ultrashort Bond UCITS ETF £ 20% iShares £ Index-Linked Gilts UCITS ETF £ 10% SPDR Barclays Capital 1-5 Year Gilt ETF £ 20% SPDR Barclays Capital 15+ Year Gilt ETF £ 5% iShares $ Treasury 7-10 yr UCITS ETF $ 5% iShares Euro Government Bond 3 -5yr UCITS ETF Euro 5% Subtotal Bonds: 65% Equities Vanguard FTSE 250 UCITS ETF GBP £ 15% iShares Core MSCI World UCITS ETF USD 10% Subtotal Equities: 25% Other iShares Physical Gold ETC USD 5% Cash GBP 5% Subtotal: Other 10% Total Allocation: 100%
Please do not hesitate if you want to discuss any of this any further
With my best wishes