Good reads from around the Web.
I like to see the rich being profligate with their money. That’s because I’m pretty worried about a structural shift to increasing inequality in the West, due to everything from technology and network effects to taxation, globalization, and even shifting social mores.
The relentless troops of Trustafarians launching Fintech start-ups in Silicon Roundabout rather than blowing their inheritances in fleshpots and car dealerships dismays me. I want to hear silk slippers coming down the stairs and wooden shoes coming up – not the frugal rich squatting on their gold and shopping for cheap brogues in TK Maxx.
And that’s doubly true of investment fees.
It dismays me when the striving middle-classes pay a financial services firm the equivalent of multiple Porsches through high fees on their relatively life savings – let alone when a blood-sucking IFA tries to siphon as much as 7% from a shop clerk trying to do the right thing with her modest means.
But when the ultra-wealthy spend 2-and-20% a year on their lackluster hedge funds? Mini fist pump! It’s a hedge fund’s most socially useful function.
The notion of the Trumps of this world turning to index funds fills me with dread.
Eat the rich
Of course, a good few of you are pretty wealthy. Heck, I’m getting there myself, in the grand scheme of things.
And like you, I have no intention of volunteering any more of my own resources to supporting the financial services community than I need to.
It’s a classic tragedy of the commons, albeit in this instance the commons are rather neatly manicured. We want the wealthy to waste their money. But not if we get wealthy!
The good news is that while awareness about high costs is rising – and there are signs that hedge fund fees are falling – there remains plenty of ways in which the most well-off can still be relieved of their Gini coefficient-skewing burden.
And even if you’re rich and financially sophisticated, you might not know it’s happening.
In his wonderful post this week about the dangers of private banking, FireVLondon admits that:
…with the recent FT article about fund managers making 2.5% per year on typical portfolios, I wondered, ‘Who are the idiots who are paying 2.5% per year?’
And this got me looking more carefully at my own situation.
Lo and behold, my ‘1%’ figure turns out to drastically underestimate the fees I’m paying.
I discovered I myself am one of the idiots.
The true figure I am paying my private bank, for a ‘discretionary portfolio’ they manage for me, is a gob-smacking 2.04%. This probably excludes a few trading fees within some of the funds that I can’t cleanly see.
How do I get from ‘1% of money managed’ to ‘2.04%’?
Only by being an idiot.
Now anyone who has read his blog knows FireVLondon is no numpty. The private banking vampire squid he has uncovered is only suckered onto a tiny part of his portfolio. As he tells it, even then it’s only there for scientific purposes. (He wants it as a benchmark).
But just think how much richer the richer would be if they collectively woke up to the larceny taking place under the auspices of wealth management?
The old aristocracy noticed if a peasant was making off with a goose under his overcoat every second Saturday.
Let’s hope that financial obfuscation continues to hinder the super-wealthy in spotting the modern equivalent.
Have a great weekend!
From the blogs
Making good use of the things that we find…
Passive investing
- Fund expenses don’t matter? Not so fast – Alan Roth
- Sustaining retirement income in a lower-return world – Vanguard
- Understanding momentum [Note: Canadian ETFs] – Canadian Couch Potato
Active investing
- If you’re buying, who’s selling? – The Irrelevant Investor
- Commodities: An investment only a mother could love [PDF] – GMO & AWOCS
- The John Bogle expected return formula – A Wealth of Common Sense
- Investing tribes and the paradox of choice – Abnormal Returns
- A tool to follow hedge fund trades – StockTwits @ Medium
Other articles
- Why you should take up your workplace pension offer – 7 Circles
- A freedom business case study – Liberate Life!
- Jonathan Clements’ prescription for a ‘happy financial life’ – Vanguard
- Where next for pension fee transparency? – Henry Tapper
- The minimum wage experiment – The Escape Artist
- Losing the Jeep for the journey to financial freedom – Mr Money Mustache
- Je ne regrette rien (yet) – SexHealthMoneyDeath
- The smartphone as a tool of oppression in the gig economy – S.L.I.S.
- The sorry state of risk tolerance questionnaires for IFAs [For geeks 🙂 ] – Michael Kitces
Product of the week: A few years ago you could get a five-year fixed-rate savings bond paying 4.1%. Imagine! ThisIsMoney has explored the options for anyone descending from such heady heights into today’s Norfolk-like foothills when their fixed rate savings mature. It seems the best of a bad bunch is the 2% five-year fix from Shawbrook Bank.
Mainstream media money
Some links are Google search results – in PC/desktop view these enable you to click through to read the piece without being a paid subscriber of that site.1
Passive investing
- Swedroe: Ignore forecasts, they’re usually wrong – ETF.com
Active investing
- How to invest like Warren Buffett’s hero Philip Caret – Telegraph
- Terry Smith: The ‘Nifty 50’ and today’s bond proxies [Search result] – FT
- Why housebuilders are still a good bet post-Brexit – ThisIsMoney
- Avoid leveraged and inverse ETFs – Morningstar
A word from a broker
- What stocks are the Best of British fund managers holding? – TD Direct
- Inflation calculator – Hargreaves Lansdown
Other stuff worth reading
- Merryn S-W: Beat negative interest rates, invest in a safe [Search result] – FT
- The more cash people have, the happier they are – Wall Street Journal
- Too rich or too busy? What we now pay to have done for us [Search result] – FT
- What should you choose: Time or money? – New York Times
- Why do the rich still work so hard? – The Atlantic
- Earn £100,000? Beware the complex new pension taper – Telegraph
- Generation Spend: How the other half lives [In Toronto] – Toronto Life
- The life-changing magic of turning employees into shareholders – The Atlantic
- The 24-year old Coca-Cola virgin – Eater
- Why Silicon Valley is wrong about Apple’s AirPods – Chris Messina @ Medium
Gadget of the week: Amazon is finally taking orders ahead of the UK launch of the Amazon Echo – a voice-operated gizmo that sits in your living room all day waiting for you to command it to buy you more loo roll. Okay, and also to order an Uber and play music from Spotify and read you the news, and much, much more. I have a US friend who owns one and swears by it, and also a British friend – a tech entrepreneur – who asks: “A device that listens to every word you say all day, that’s connected to a vast network of global computers. What could go wrong?” The Echo costs £150. More details at Amazon.
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- Note some articles can only be accessed through the search results if you’re using PC/desktop view (from mobile/tablet view they bring up the firewall/subscription page). To circumvent, switch your mobile browser to use the desktop view. On Chrome for Android: press the menu button followed by “Request Desktop Site”. [↩]
> pay a financial services firm the equivalent of multiple Porches through high fees
Could you have meant Porsche ?
Thanks for the call out, TI.
If only the private bankers shearing the financial aristos by 2.5% (or 4% at Goldman Sachs Wealth Management, if rumours are to be believed) were themselves from the bottom end of the income scale. Alas that isn’t the case. Hence that old adage about ‘Where are the customers’ yachts’ remains as true today as it was then.
I’ve studied the “posh kids start businesses” phenomenon up close and made some profit out of them. We call them “inheritpreneurs” because its always their parents money
Actually your inheritpreneurs mostly start “businesses” which are philanthropic because they never make any money, rather they lose a bucket load before going bankrupt, usually a six figure sum all told
The startups have employees; the employees get wages and sometimes the startups even pay national insurance and VAT like they are supposed to
The business is central to the inheritprenurs identity as it demonstrates their status, acumen, plus it gives some some people to hang out with/boss around
Their shops and restaurants are a treat; gloriously ludicrous ventures selling artisanal beer and loaves for nearly £5 a pop. In three or four years time you walk by and the store front is all boarded up… quelle surprise
I also knew three bewhiskered boneheads who managed to blow just over £1m going bankrupt on a gloriously named mixed use arts/nightclub space just so they could get laid
Mind you, to my belief, its also the reason why the UK’s productivity figures are so woeful
Other thing, never give them any credit..
If anyone ever finished that drivel about brown sugar-water, would they admit it on a blog like this?
NYTimes also has a neat little profile of the head of BlackRock http://nyti.ms/2cRCGQN
$5t under management (!) and another $10t indirectly from outside firms using their analysis software.
Doesn’t something ever so slightly scare the bejesus out of you with Echo? We are only one sense away from the telescreen. I know, I know, I’m just getting old, but at least Orwell’s telescreens were installed for free 😉
I love the generation spend article, what an “interesting” guy.
Can’t believe people would pay 150 for an echo.
Thanks for the links this week, TI.
While I enjoy a good Augustinian irony wherever I see it, and enjoy the idea that we should soak the rich (but not if we become rich) — I think they get a rough ride. After all the rich are the people who have the choice of whether to work or whether to do something more useful with their time. Many spectacularly fail to make that choice (although the tailors and luxury goods manufacturers and retailers thank the spendthrifts for their trickle-down), but some do it with such splendour that it makes you pause and wonder whether you yourself could take a silver spoon and build such a wonderous monument. Luc Hoffman’s recent obituaries are well worth seeking out and reading.
And of course FIRE is simply aspiring to join the class of people who choose what to spend their time on. And in a move from the subline to errr something else, I really enjoyed TEA’s blog this week on bar-work. I know several people who were in that VIP area and his rather uncharitable view of them is – well – a touch uncharitable if you get to know them personally, but do make his point nicely. It leaves on with the question whether his job was to do what he was told or to please the client — in respect of the champagne pouring, for example — does he see his role as some sort of guerilla fight-club waiter, one wonders, but all that aside, I do like that he actually went and did that, not just talk about it.
I am reminded of the time I put in at a friend’s business — a highly seasonal industry with many temps employed in the peak week. The operation was creaking and I mucked in to help out. As I started my second shift of the day some of the other workers asked which agency I was with that allowed double-shifts. They were surprised to hear that I wasn’t with an agency. Indeed. I wasn’t really employed to be there working with them. Or being paid at all. And would they mind knuckling down and not taking so long on their breaks since we were all under the cosh and at least they were getting money…
And this wonderfulness of working because you can comes crashing around SexHealthMoneyDeath’s post this week revealing his “secret diary” and how hard actually retiring is. To my mind, there’s more to self-actualisation than working with other people, but it’s clear that it is a real need for people to work and strive in order to feel some worth.
I don’t know if I could hack a whole year not working as SHMD has taken before throwing out the towel and unretiring. But I wouldn’t mind giving it a go…
Elsewhere, and back in the hardcore investing world, lots and lots on cash. How it’s the place to be. How it makes you feel rich. I have been re-examining my cash holdings recently. I no longer have the nagging feeling that it really *ought* to be doing more. It is dry powder, sitting there ready and waiting for you-know-what… I enjoyed TIIs piece on counterparties. Short and sweet, but completely underlining the point that you need to know what you are investing for and there is no “right” answer, just the right answer for you…
@mathmo > After all the rich are the people who have the choice of whether to work or whether to do something more useful with their time.
I’ve never thought of myself as rich. But I’ve done four years of that, and it’s good 😉
That is not a tragedy of the commons.
I couldn’t achieve the risk-reward balance in my portfolio without the services of a private bank. As I explained on the Fire vs London blog, I use a PB for a number of services. They don’t touch the conventional part of my portfolio (say tracker funds/ETFs in equities/bonds) but I use them for transactions and specific products. Transaction wise, the PB FX app gives me <1-2 pip bid/offer in G10 fx spot/forwards and they offer a flexible credit line at 1.2% (collateralized with funds/securities but I never use it). I'm risk averse and so I prefer a heavier fixed income to equity allocation (I feel more comfortable buying a 5-year IBRD bond denominated in BRL than HSBC stock say). UK online brokers (HL, YouInvest say) are chronically poor on their fixed income offering. In terms of product the PB really shines is in terms of alternative fixed-income (EM local eurobonds, middle market loans, renewables lending, bridge lending etc). I've been doing bridge lending through them for over a decade and get 3-5% better yields than any P2P platform (then again P2P platform margins would make a hedge fund manager weep).
The problem has always been paying them enough to keep their service, without letting them have any discretion. I solved the problem when I took fixed protection on my pension in 2012: I decided to set up an offshore life insurance bond through them. Using a US private bank was around 10bp/annum more expensive than the best price (an IFA/Lux bank). I got a higher credit quality bank as custodian but most importantly I was paying the PB some admin fees and about 40bp running on the NAV of the bond (platform charge). I also insist on my banker being a junior for whom my fees are material and who won't attempt to "upgrade my service"!
@P — Um, yes! Although the fancier porches don’t come cheap.
@FirevLondon — Yes, and I noted your astute comment about an accent meant to reassure generations of handling money… But we can surely agree it helps divide the pie a bit more than £10m in a Vanguard fund. Trickle down! Ahem.
@Neverland — Interesting anecdotes. I suppose many of them do go bust, which might make them the equivalent of the fleshpots and sports cars. Fingers crossed! 😉
@dearieme — I thought it was a very interesting article, which was why I included it.
@Chris — I have a friend a bit like that who I once asked to (anonymously) interview so we could compare and contrast his mindset and “ours”. He’s different though in that he actually pays his own way in the world (rents own flat, buys own food etc). That was the bit that rankled with me with the Generation Spend guy. But then maybe his parents are made happier to have him in the basement eating their pasta while his mum washes his socks than they would be seeing him half as often? Who knows.
@mathmo — Thanks for the recap, and of course you’re welcome. Interesting you new someone at the TEA-tended event. I would love to see a social graph of the Monevator readership. I suspect it would have some interesting spurs and nodes!
@Ross — Yeah, I knew at the time I was stretching the term. I’ve just checked and Wikipedia says:
Here money itself is the shared resource?
Well, okay, that’s the opposite of the tragedy of the commons!
I smiled when reading about the Canadian pharmacist. Im not the type to sit in judgement usually, but that sort of self indulgence is on an epic scale. Presumably he will scrounge off his parents until they die and then hope to inherit the assets he is has no plan to accumulate himself. Or throw himself on the mercy of state provision when he is old. That said, part of me does envy the hedonist aspect – a life filled with experiences etc. Overall, if he was my son id boot his ass out into the street and make him pay his own rent. Perhaps im a killjoy though…..
Interesting article about AirPods – they do look sexy but .. http://teamcoco.com/video/apple-airpods-ad?playlist=featured-videos
@TI I accept a bit of IFA bashing goes with the territory of this blog, but have you ever sat down and worked out how a business is meant to make a £100 per month regular investment profitable in the heavily regulated financial services industry? When you do figure out how to monetise providing such a service please let me know!! Note: These same people are more than willing to spunk their money on the latest iPhone, fancy car on credit, shopping at waitrose etc, but not it seems on paying a modest fee for a professionals time. Their loss.
Surely the problem with inequality is the fact that the high consumption levels of the rich mean too little of the world’s resources and attention to to the poor.
If the rich squat on gold and buy brogues at tk maxx, surely there’s no problem. How do all those zeros on bank accounts that never get spent affect us?
@mikkamakkamoo – starting from the premise of how does one monetise a punter paying £100 a month, then i suppose the only way to do so is to rinse the poor soul for commission over 20 years. Oh hang on….theyve been stoppped from doing that.
I can possibly see the point of consulting an IFA if you were getting into Lifetime Allowance protection, or something else complex where you wanted a bit of comfort and reassurance, but otherwise i dont see the point of them for the vast majority of punters in the accumulation phase of life. I learn new things about personal finance all the time and dont claim to have all the answers – but 80% of financial planning is pretty obvious in my humble opinion.
Where i can see them having a role is for all those newly retired people who dont have a clue about how to handle their pension freedoms. To the uninitiated that will be scary stuff and i guess many people will be concerned about making bad choices. Having an IFA walk you through your choices and implementing tour decisions would be a comfort for many – but tbh even then most people could work things out for themselves if they felt confident.
@SurreyBoy Totally agree that most people don’t need an adviser, especially for accumulation stage of their life, but the reality is most people are also lazy or simply not interested enough to do their own research and DIY so they simply put it to the back of their mind to “sort out another day” (along with writing a will, getting some life cover, building up an emergency fund etc).
These ‘lazy’ people just want someone to tell them what to do so they can get back on with everyday life (maybe the readers of Monevator are the weird ones for wanting to DIY!!). The problem is that when a financial adviser tells them its gonna cost them a few hundred quid they don’t see the value in that.
These are the same people who don’t see a problem spending £50 a month for the latest shiny iPhone and probably another £300 a month to change their car every 3 years, but they’ll be buggered if they’ll pay one of these “swindlers and leeches” a relatively small amount to help them secure their financial future.
The other problem is this fixation with % costs. Let’s say I was willing to provide the TI’s friend with initial advice for £240 which they could pay upfront or by taking £20 per month from their regular contribution for the first year. Now TI will come along with his calculator and go “You swindler and leech! You’re trying to rip off my friend! That’s the equivalent of an initial charge of 20%!!”.
I say so what. The problem is they’re comparing apples and oranges because if this person doesn’t take advice they probably won’t end up ever setting up a pension as they’re too lazy to DIY. I believe people should try to separate the costs of advice in their mind from the cost of the product/fund. Yes, the product/fund costs should be kept to a minimum, but whatever they pay the financial adviser is money well spent compared to not doing anything at all…
@mikkamakkamoo — I agree it’s not economic. They know that but the client (my friend) doesn’t. The honorable thing to do is to say “sorry, it’s great that you’re saving but on these small contributions paying us is going to make it substantially harder to reach your goals. I suggest you go read this or that book. Please do remember that instead of soaking you for 20 years (as was still possible at time of my friend anecdote) we treated you decently, and maybe you or friends you have can trust us if you do come into a bit of money and more complex problems.”
Is “read a book” perfect? Definitely not. But I think it’s better than the alternative in these cases! 🙂
@mikkamakkamoo Id agree with much of what you say. I think most people are financially illiterate, and have been exploited and mis sold to so often, and for so long, that the financial adviser community has a real problem. The whole brigade needs to build trust up in a population where presumably 75% dont think they need the services and another 24% think they are swindlers.
I do feel the need to come to the defence of IFAs, but I do so first accept that your distrust of them is based in truth. Pre-RDR, the industry was a haven for crooks, shysters and the totally inept. A vast number of these have gone out of business since RDR (20% of advisers left in just the first two years), but this has been widely accepted, to borrow 1066 and All That parlance, A Good Thing.
The IFAs who were able to stay afloat did so because they were the ones putting the customer first. The qualification requirements are extremely heavy (DipPFS being basically a degree in itself, and APFS Masters-level), as are the compliance functions.
The industry is changing massively, and this is a seriously good thing. The age of 3% initial is thankfully behind us (except in extremely rare cases where the amount of work is huge such as complicated DB pension transfers etc, but even they are usually around the 2% mark), and due to the financial situation monitoring that good IFAs give, combined with the often better deals on products than are available to Joe Public, the access to certain products (Prudential ISA for example) that are exclusive to intermediaries – there are benefits to IFAs.
Sure, there will always be the DIYers such as you and myself, but for a lot of people, they simply want someone to handle everything. That and some situations (trusts, tax planning etc) are simply far beyond the scope for even the keenest amateur.
Keep it up, I love the blog.
I’m sure I’d find the author incredibly tiresome if I had to spend any time with them in person, but I actually quite enjoyed the Coca-Cola virgin article…
Anyway, thanks for the links, Investor!
“But when the ultra-wealthy spend 2-and-20% a year on their lackluster hedge funds? Mini fist pump! It’s a hedge fund’s most socially useful function.”
I share your sentiment, and when it comes to vanilla hedge funds – absolutely, the fees are ludicrous. But. (There’s always a but).
Take Berkshire Hathaway for instance. It’s a hedge fund, it leverages insurance to invest the float, which is essentially borrowed funds. Many of the investments these people make are not available to the general public. We have Berkshire portfolio trackers all over the internets, but the thing is, (1) SEC only requires to disclose minority investments in publicly traded shares, and (2) when buying publicly traded shares higher reg. market concentration limits apply (because investments are easier to offload when they are traded on a relatively liquid market). So having looked at BRK’s top whatever investments it’s easy to (erroneously) conclude that their return on investment comes exclusively from picking publicly traded shares.
That is not the case. What you won’t see disclosed are smaller tax efficient money makers: structured private equity investments registered in low tax jurisdictions, infrastructure funds and such. They are more expensive to acquire, are marketed to select few investors, but when they go right they pay for the effort. THAT’s what the rich pay the fees for.
@zxspectrum48k. I agree the mainstream brokers in the UK are woeful for fixed income – absolutely terrible. Hardly any of them offer Clearstream/Euroclear settlement of Eurobonds and those that do, really don’t have any expertise to interact with market makers or hunt out the more obscure stuff. As for anything other than the most straight forward of tender offers, they are all at sea and need to be handheld through the process.
They have hardly any agreements in place with market makers to trade (often, not even the big five investment banks who dominate). I’ve found a good – execution only – home now for fixed income that will accept ISAs and SIPPs (via a full SIPP provider) and whilst the commissions are much more than typical retail broker trades, the prices that they obtain are also far, far better in my experience. Sure, I pay more than hedge funds (per execution trade) and in a low yield environment am pretty much forced to work at the longer duration end, but it has worked really well for me.
But if you are that wealthy why would you want to spend your free time researching and DIY investing when you can be partying, picking out a yacht or going for a trip into space or founding a new startup?
Would the artistrocats of the past have spotted a peasant running off with a goose? Or would it have been the steward or the butler or the groundskeeper or the Gardner or some other loyal servant on the pay roll?
Though if you get rich following the frugal save hard approach then you certainly do look on with shock at those who squander what they have either earned quickly through a great idea or through inheritance. It is a mindset that is hard to comprehend. Having said that I am a long way off having enough money to even visit a private bank website. Maybe if I did, and I wanted the ‘status p’ of carrying around a bank card and cheque book, I would perhaps be up for trying it out……
@zxs & jwb – thats impressive fellas. Its like a whole other language, esperanto maybe. Is anyone able to translate?
@The Rhino.
Direct active investment into fixed income is not an option for retail investors using standard low cost brokers in the UK. As a result, there are good reasons to use something that is more expensive, provided you don’t give them the stuff you can do much more cheaply elsewhere. I think that is the point @zxspectrum48k was making and my experience concurs with that. It’s actually quite difficult to find some of these services without being charged an ad valorem fee for assets under management.
Just like the retail banking model where those who are perennially in overdraft land subsidise the free banking of those who never are, so it is with these wealth managers and private banks. If you are execution only, avoiding the fees for assets under management, then you are almost certainly getting a subsidy.
For fixed income the reasons retail are shutout are:
1) Bloomberg Terminal needed for price discovery/transparency (if you don’t have access, you need your broker to send you the prices via a screen grab).
2) Minimum trade size has gone from 50K -> 100K -> 200K (that is GBP/EUR/USD) for new bond issues, due to EU/US prospectus regulations to “protect investors” (which is really nothing more than ensuring any and all fixed income has to be bought institutionally via funds).
3) Fixed income is settled via the Euroclear and Clearstream settlement systems (there is decent support for this at retail level in the mainland EU, but not in the UK).
4) Nearly all fixed income is settled over the counter, even though it is also usually listed on an exchange somewhere (such as Dublin, Luxembourg), so your broker needs to have agreements in place with a wide variety of market makers, since they are the ones that provide the liquidity to trade.
There is a severely restricted subset of fixed income on say the LSE ORB, but that usually involves blocking a portion of the bond in Euroclear and reallocating to the CREST settlement system, so that the bonds can be traded electronically on the LSE. So say there is a £100M issue of a Corporate Bond, £10M might be blocked in Euroclear and reallocated to CREST. The retail investors then trade that £10M electronically through CREST, often in a minimum trade size of 1,000 nominal (so around £1,000).
Buying or selling foreign denominated securities via UK retail brokers sees very wide spreads on the FOREX. This really matters, no point in trading for £10 per trade, if the broker is taking 2%+ on the FOREX and you are trading in size.
@jwb many thanks. Still a bit beyond my pay grade though. My problem not yours of course