MISINFORMED?

When I entered the financial industry, a few decades ago, I was thought that investments should not be judged by costs but by service. Like we don’t buy the cheapest car but the one with the best engine, the best comfort and looks for our budget to get from A to B. Therefore, so I was told, the best profits are so often not generated by the cheapest vehicle but by the one that has the best manager and service. Yet it does not mean I like to pay too much, or worse pay for no additional service.

For a large part, I do believe that even today there is a truth in that old idea. Yet I see a lot of people who buy investments without judgment of who is managing those. Purely based upon a price, or better said the price they believe is “the price”. People get burned and turn sometimes to "do it your self", to be burned even more.

I wondered why people turn to do it your self or ETF's if you read that Vanguard for example already figured out years ago that the added value of a proper adviser is somewhat around 3% per annum (see my other articles). Do people still believe a not managed product could do better? Some do, but why? I think because they base their decisions on information that happens to be incorrect or at least incomplete.

I do see space for ETF’s in portfolios and online platforms etc. If you have nothing better to do with your life? Go there. But I want to make clear that so many get the wrong information that they do not make money (see my previous articles about 150,000 accountholders burning their assets). So much research shows that clients make decisions based upon emotions and even in the "face to face" space many decide on, what I believe is incorrect information.

The authorities scream for proper information to clients. But when I want to compare products I find that the real information is published in places where even I find it hard to find.

When you have an existing portfolio and would like to work with me I make sure that you will benefit from my advice. I have to base that upon things we know for sure. This means we don’t speculate that the performance will be better (even if we know it was in the past, we cannot guarantee this for the future). Instead, we compare in such a way that our funds generate the same as what you have.

This means I compare the costs of your fund manager plus adviser and platform, with what we can offer. Let me repeat: We compare the real cost of your “platform” plus the real cost of advice, fiduciaries, custodians, accountant reports, meetings, others, etc. with the real costs that we will charge.

In doing so we compare the “annual management charge (AMC) plus all other costs” with “all other costs”. In the industry, these costs are known as the TER (total expense ratio) or OCP or OCF (I spare you the details). But rest assured that when I say “all cost” I mean ALL. Apples with, with apples.

Sounds fair right? You can only buy from me 'if you have an advantage in doing so'. This has been my slogan for many years. 'If you don't profit you can not buy it from me'

As an adviser, the first thing I do is to make a comparison of your listed asset. We start by finding the correct (and latest) fact sheets. And on these fact sheets, a client should find information to judge whether to buy or not buy a fund.

Most clients have never given those fund fact sheets much attention, but those who did think that they are well informed. And this is where I believe that many people are being wrong. Normal fact sheets reveal the AMC (annual management costs) or “ongoing costs”.

Apart from fact sheets fund houses have annual meetings, but who attends those? Other fund managers, yes, large investment companies and accountants. So many clients never even met their fund manager, because they trust the bank or the adviser and they have other things to do.

And as I know almost no clients take the time to actually read 300-page fund prospectus’s I also know that a lot of information is hidden. I know because I actually spend a lot of time reading those things. Many clients might not even be aware that fund prospectuses exist. Obviously, fund houses do also give financial reports but most people I know that have received them only looked at the front page and on their own account statement to judge a fund.

How most clients go about buying an investment portfolio?

Let me introduce you to the average investor client: Mr. Mung. When he goes to the bank he is told “The AMC is 1.5%” Then he considers is this a lot? Is it cheap? Some AMC’s are 1.2% others 1.8%. He can live with 1.5 but is not sure yet. Do I invest somewhere else? Then his friend told him that adviser X is maybe a better option so he listens to him. Adviser X tells him about lower advisory fees and then Mr. Mung drops the question, one of the few technical things that he actually understands: “How about fund AMC?”. The adviser shows him a fund factsheet: AMC 1.3% is what it reads. For Mr. Mung a good reason to go to the adviser even though the adviser charges 5% upfront. Mr. Mung thinks he is cheaper. (And he might be).

Another client walks the opposite route. Miss Emma, is approached by an adviser and asks about the costs. The adviser shows his fund fact sheet with “AMC 1.5%” and as she does not like the 5% upfront charges, she checks with her bank for the same fund. “AMC 1.5% as well and…. no dealing charge on the first order”. As her money is already with the bank Emma is convinced she has done the best deal. But did she?

I believe that both have been misinformed if they have told their adviser/banker to compare like this. And at least they have not been informed enough if this is what they base their decision upon. But none of them realizes. And you might find yourself in the above profiles.

Let me teach you.

The AMC does not reflect all costs, hence 300 pages explanations in what other costs might be involved in running a fund. And obviously much more detailed information. With thousands of funds and investment vehicles, it is sheer impossible for the leman to know everything. But the AMC is the charge which is meant to pay for managing a fund. How come not actively managed fund dare to have an AMC, I don’t know. But they do. No one seems to be complaining. The AMC pays for the management. So far is true. But there are other costs. Costs to hold the assets safe. Costs to check with accountants etc. And therefore all clients should ask: “What are the total of all the costs?”

Is the fund paying a (non-visible!!) trailer fee to the adviser? Like in Mr Mung’s case where the adviser took 0.5% ongoing from the fund plus an initial 5% on the fund on top of the platform set up fees and standard remuneration? I have seen cases of 12% over the total investment paid to advisers. 5% upfront from funds, 5% setup fees spread over time, 2% trailer and other fees. From the cover, those investments looked to have low costs. How a client would understand? Unless all materials would be read. I don't know.

Then the holding fees to the platform? Is the fund white-labeled and hiding another 0.5% behind the scenes? Clients should ask. Unfortunately, our educational system has not included economics on this level and thus clients are totally unaware. Therefore the legislation should be changed in such a way that clients are educated and advisers give a breakdown of ALL charges, visible in a fund fact sheet or not. Do not get me wrong, I have no issues with an adviser making thousands on opening an account because advisers are self-employed, and all costs need to be spread over what they do. A good adviser is busy for each client for years and has a huge risk and investments to make to get clients. If he or she is not paid well how to serve you in the long run? I also have no issues with a banker getting a Christmas bonus but clients need to understand what happens.

I compared a fund for a client against the 1.0% (total expense ratio) that my company pays to a fund manager. The AMC of that fund reads 1.5% on the fact sheet, hence I am not alarmed. The prospectus, however, was very hard to find. The fund being offered as a mirror fund would carry a 0.75% extra charge. In return for that, the client would be able to purchase in very small numbers for his savings plan, in itself a great service.

So far I had no problem with that. But yes this means that the client is paying 2.25% and the client was actually aware. ON the other hand no switching costs. That’s a trade-off. I was very surprised myself that when I added up all costs from the prospectus that I got to between 1.0 min. and max. 2.0% of additional costs possible, depending on the circumstances. The year report said current TER of 2.75%. The fund prospectus also mentioned that they would charge a 15% success fee. In reality, with a TER 0f 2.75% plus 0.5% success fee, the client would pay 3.25%, which I think is the real TER, a lot of money in comparison to the 1.0%, unfortunately, this is not an exception. Many pension funds don't shy away from 3-4% annual costs. But this means clients need to take on more risk than they otherwise would do to reach their goals and it can affect them negatively. Actively managing the cost for a client can be crucial.

There are really great fund managers don’t get me wrong, and it’s a very complex and a difficult job to do well. And these people need to be judges on value, not just on price. Therefore sometimes a higher TER is acceptable, other times it is not. In both of the above cases, I would prefer costs not higher than absolutely “need be”. Trading costs to make the model work? I would like to plaid for abandoning them. Most clients just don't realize until they see the effect.

I have been asked to run a fund myself and looking into all aspects, I believe the costs are not just real, many costs are a necessity to run the fund. If you ever bought a house, you will understand that price is not just the price, you need to add on, for example, stamp duty and agent fees. That’s fully acceptable. If you bought a car, you know that commissioning still eats some money otherwise options do. I am just saying that to be sold a product based upon “AMC comparison” is incorrect. Those fund fact sheets are incomplete. You cannot guess what is in the prospectus or happens behind the scenes. Legislation should demand all cost to be transparent. And I have not even mentioned trading costs. But I get to that.

A very good fund, one I really like, has always given excellent results to my clients. The TER is mentioned on the fact sheet. TER: 1.8%. Great! At first glance, documentation is simple as it should be. But yet I need to read that when the fund grows over a barrier, determined by the interest rates between bank… an extra 15% of the gain is taken as a success fee. Which after some calculation means that the fund managers take 2.25% or more each year. And I only read this in the prospectus. How many clients would know? I don’t know but buying on the AMC is certainly wrong, and on the TER still misleading in this case.

Therefore if there is ONE lesson to be learned. Read the prospectus, or better: Ask in writing from the adviser or banker that those are ALL cost.

When it comes to trading. This is where many go wrong. Bankers mostly use this format, but also online platforms and other institutions offer this. They either ask you to give upfront permission to freely trade between your funds and make cost on your behalf (great model, sold as best service and really makes them money) or, they call you to agree with each transaction. “Act now because…” Whatever the reason might be. And each time you trade, they win. Did they mention “no trade cost” at the start? Easily you see 2-4% vaporize each time you trade. Online easy trade? Of course… an easy gain for them based upon your emotion. This way you might never win.

How fantastic is a movement in the market for them, as a business model I mean? Playing your emotions of fear or greed? When you get that phone call, you are happy to trade, no time to read a prospectus. “Yes AMC 1.5%” ((but we did not mention my Christmas bonus due to trading costs)). The only sure winner is for the person who calls you. Then can we not get proper service and clarity? Is it all bad?

Sure we can. But be careful whom you listen to.  

Not so many advisers or companies are completely transparent or give you a piece of written advice, almost none guarantee that the information is correct and suitable for you. I would demand such a guarantee. Not so many can offer a TER below 1% for retail clients AND no trading cost AND discretionary management. Then if you do not educate yourself you might not filter the information given correctly and might not understand if you come across a good adviser who wants to give you the full openness. This is where you might go on emotions instead of facts.

Good service: it’s available, but do your home work.

Written by Walter van der Boor, Partner at St James’s Place wealth management Singapore, This article is purely informative and does not mean you should invest in anything nor take this as an advice to sell current assets. I am not suggesting your bank or adviser or platform is misleading you, nor has. I am advising you to take note that costs might not be as in the open as they could be due to current legislation. I am aware those who help to invest have to follow a process and it does not mean that you have been misled willingly, purposely by any adviser, or banker or any other person in the industry. If you believe you have you should seek professional help. For those who might like to read any attack in my article. The article reflects my personal opinion only, does not bind me, nor the company that I represent nor any of its members' employees or partners. Whereas I mention “bank”, “banker” or “adviser” this could be any financial institute anywhere in the world and I do not suggest anyone, in particular, to have willingly misled anyone in particular. The article is purely written to make you aware that proper investment is out there but you need to get your information correct before you decide. Thank you. Walter van der Boor 15/08/2019