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Why RDR is painful for passive investors

Some of the biggest outcries on Monevator occur when some discount broker or other whacks up the prices it charges DIY investors.

Cue lots of talk about the Retail Distribution Review (RDR) and ‘clean share classes’ and ‘unbundled pricing’.

For new passive investors, it must seem bewildering and intimidating, especially if you just want to know how to get the best deal.

So it’s time for a plain English catch-up post that will hopefully explain why this is such an unsettling time for investors who just want a cheap and reliable home for their portfolio.

Life before RDR

In the good old days – about 12-months ago – a canny passive investor could pick up index funds without worrying about any costs beyond a sliver of Total Expense Ratio (TER).

Trading fees and account fees were problems for other people, provided you did a modicum of research.

Then along came the Financial Services Authority (FSA) to smash up our party like Eliot Ness busting a bar full of shandy drinkers.

What is RDR?

The RDR is meant to end the era of retail investors receiving hookey financial advice.

The headlines are:

  • Advisors must agree with clients how much their services will cost.
  • If they offer independent, whole-of-the-market advice, then bias is supposedly eliminated because they’re paid by the client, as opposed to pushing product that drips commission back to the advisor.

Previously, the commissions earned by advisors were a secret affair buried in the fund charges. This is known as bundled pricing.

Bundled pricing

Bundled pricing is essentially a package deal where you pay for a slew of services, whether you need them or not.

If you peeled back the layers of a standard, expensive 1.75% TER fund, you’d see something like this:

  • 0.75% fund manager fee – Pays for whopping great salaries, hordes of analysts, and the research that still fails to beat the index on average.
  • 0.25% platform fee – The cut for a fund supermarket that piles them high and sells them cheap online. Advisors and most execution-only brokers access funds via a platform like Fidelity or Cofunds.
  • 0.5% trail commission – Baksheesh for the financial advisor. Advice-free, execution-only platforms may or may not share this with their customers.
  • 0.25% other fees – A long list of expenses, including legal, administrative, auditory, regulatory, marketing, and more.

Unbundled pricing

With trail commission for advisors banned by the FSA come January 2013 (trail commission can still be paid on products sold before then), the alternative is so-called ‘unbundled pricing’.

It is how ETFs, shares, and investment trusts already work.

In an unbundled world, all the charges are teased apart, so you can see what you are paying, to whom, and for what.

The trail commission and platform fee are stripped out of the TER or Ongoing Charge Figures (OCF) for a fund.

Funds that have done this already are often described as clean share classes.

That means they are ‘unbundled’ versions of existing ‘bundled’ funds. They generally have shrunken TERs, but they aren’t necessarily any cheaper to own because you’ll end up paying a separate platform fee to get them.

Fund charges before and after the impact of RDR

The platforms respond

Curiously, the RDR isn’t meant to affect fund platforms. The FSA is poking a stick into their workings, too, but no decision is due for several months at least.

But the platforms can see the way the wind is blowing. They need to cater for ‘clean share classes’ and hidden payments fuel suspicion in a society that’s sick of light touch regulation.

Hence explicit platform fees have arrived, much to the anguish of us canny passive investors who were previously getting a free ride.

Most ‘bundled’ index funds only pay a platform fee of 0.1 – 0.15%. It would seem that brokers serviced these customers at a loss or on minimal margins at best, perhaps on the hope that they could lure them on to the hard stuff later.

Now that broker’s charges are out in the open, it’s impossible for passive investors to continue enjoying a subsidy at the expense of active investors.

Many brokers are still platform fee free because they’ve adopted a ‘wait and see’ approach.

But change will come and I predict our options will shrink like a water hole in the Gobi desert as the hidden payments dry up.

Early passive investors thrived because we understood how the system worked. Like savvy savers who switch their bank accounts, we were too few for the industry to worry about. It was too busy tearing meaty chunks of profit from the bovine majority.

Now the regulator is forcing the industry to worry, and those who hacked the system are the losers. We must hope the RDR is worth it for the greater good.

Take it steady,

The Accumulator

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{ 50 comments… add one }
  • 1 john October 16, 2012, 2:57 pm

    Still trying to work out the break even point for a £100 a month into Vanguard Life Strategy 80/20 v the Slow & Steady portfolio. At one point would Vanguard start to surpass HSBC if starting from 5k for instance?

  • 2 DB Sausage October 16, 2012, 7:04 pm

    Thanks for the update – it IS a thoroughly confusing subject… and if I’m honest, I’m still not clear after reading this post! Maybe I need to read it again… 😀

    I’ve recently been re-jigging the funds that my pension is invested in (company pension but held with Aegon), and transferring mostly to trackers. However, the TERs on the tracker funds in the Aegon pension are in the region of 1.75%, which seems high. Most of the active funds available charge between 2.5% and 3.5%. Is this typical with pension products – why are the expenses on a pension tracker more than on a tracker bought through other means (say in an ISA)?

    Sorry for the slightly off topic query!

  • 3 The Accumulator October 16, 2012, 8:33 pm

    @ John – You can work that out by going to the fund cost comparison calculator here: http://candidmoney.com/intro/calculators.aspx
    Scroll down a bit. Pop the TERs in the annual charge field (S&S is 0.37), if you’re paying any dealing charges or flat rate platform fees then put that in the initial charge box. That should give you a good idea.

    @ DB – that’s way too high. My work pension charges 0.7% on trackers and you can do better still with the right SIPP or stakeholder. See these articles for some ideas:

    http://monevator.com/cheap-stakeholder-pension/
    http://monevator.com/cheapest-pension-diy/

    That Aegon pension is still worth it to you to get the employer match but no more. Even then, they’re essentially costing you a chunk of your future pension by offering you such uncompetitive rates. It would be a good idea to find out who’s running your pension and persuading them to cut their employees a better deal. If you’re employer threatened to move pension provider a swift cut in your costs would probably follow.

  • 4 DB Sausage October 16, 2012, 9:46 pm

    I contribute 5% of my salary, my employer contributes a further 10%, so it’s definitely worth it overall. But, I agree the charges look high. I’ll have to quiz the ‘pension master’.

  • 5 Neverland October 16, 2012, 10:24 pm

    @DB Saus

    When I was contributing to company schemes I would regularly empty them into my personal pension either by transferring the scheme when I moved companies or just by closing the company scheme and starting a new one every couple of years

    If your employer is anything like the ones I used to work for, this will be a lot more achievable than getting to actually get a personal pension provider who offers their employees a good deal…

  • 6 john October 17, 2012, 9:05 am

    @ The Accumulator
    Vanguard funds seem to have an initial fee of .5% and then a platform fee of £2×12 would be appropriated. If I was to start off with 5k would that mean the initial .5% + approx .5% (platform fee)? Is it then best to factor in the £24 platform fee into the ongoing annual charge or just take 24 x no of years investing away from any final figure?
    Also in order to get a clearer picture I believe tracking error needs to be factored in. From what I can see at http://monevator.com/how-to-use-tracking-error-to-uncover-the-true-cost-of-an-index-tracker/
    the FTSE All-Share index returned 0.7%
    and the HSBC FTSE All-Share Index Fund returned 0.2% after a tracking error of 0.5%. Would that mean after it’s ter/ocf of 0.27% that the real return would be -.07%?
    Similarly Vanguard FTSE U.K. Equity Index Fund return 0.63% tracking error .07% ter 0.15%. would suggest a true return of .48%?

  • 7 The Accumulator October 17, 2012, 9:13 pm

    @ DB – nice employer match. Doubling is my kind of match. And I like Neverland’s ‘close the scheme’ hack.

    @ John – the return is what you have left after the TER has been subtracted (and it’s usually the main component of the tracking error). Anyway, there’s no need to subtract it again from the return.

    You’re getting into deep water by trying to calculate so precisely. The 0.5% initial charge for Vanguard you mention sounds like the stamp duty you’ll pay on the UK funds? HSBC have to pay stamp duty too but this will show up in the tracking error. It’s impossible to predict what the tracking error will be for each fund over any meaningful timeframe.
    The platform fee will decline as a % of your assets over time, so it doesn’t seem right to calculate it as annual charge. I suppose it will work if you treat it as a fund you contribute £24 to p.a. Then you can see how much that would be worth after x years at y growth and subtract that from your final figure.

  • 8 SemiPassive October 17, 2012, 9:59 pm

    Good advice to DB Saus about transferring pension pot as soon as they leave a company – or just periodically if possible – preferably to a low cost SIPP.
    My target for platform fees is to get the effective cost per fund under 0.1% (eg hold at least £24k per fund under H-L’s fee structure). If you have a smaller pot then Vanguard’s LifeStrategy funds do work out to be more cost effective than separate multiple tracker funds.

    Obviously we don’t want EVERYONE to do this, or H-L will just jack up the platform fees further. But I reckon passive tracker only investors who completely ignore all the active fund sales material are still in a minority – enough so to be left alone for now.

  • 9 The Accumulator October 18, 2012, 8:46 am

    I’m just in the midst of sorting out my own SIPP for contributions beyond my employer match. Bestinvest looks favourite so far. No set-up, admin, platform or dealing fees for a portfolio composed of HSBC, LG and Black Rock trackers.

  • 10 john October 18, 2012, 9:00 am

    @The Accumulator
    Do Bestinvest charge for dividends to be reinvested (DRIP)?

  • 11 Moneyman October 18, 2012, 12:54 pm

    Here’s an idea: don’t invest in ‘funds’, instead learn (on here and elsewhere) how to Do It Yourself.

    It can be scary at times but at least you will have the satisfaction of making your own choices, and knowing than no-one is making an easy buck (or pound) out of you.

    For newbie investors, ETFs are an affordable approach while you build up your portfolio.

  • 12 The Accumulator October 18, 2012, 1:14 pm

    @ Moneyman – what do you mean ‘don’t invest in funds’? If you think ETFs are ok, then why not index funds? I use ’em both but I’d rather invest in index funds than ETFs, all things being equal. And why are ETFs for newbie investors?

  • 13 john October 18, 2012, 1:19 pm

    @The Accumulator
    Thanks for the clarification.

  • 14 Rob October 18, 2012, 2:20 pm

    A bit more clarity is required here. Tracking error is not a cost, it is just a measure of how much a fund jumps around relative to an index.

    AMC is what the manager charges the fund to run it.
    TER includes the AMC and stuff like FSA and audit fees.
    TCO, total cost of ownership, includes all these plus trading costs, custodian and depositary fees. But don’t expect to find a TCO figure for an ETF. Investment banks like using your capital to trade all sorts of stuff for their benefit

    We have created this crib sheet to help investors compare platforms and funds.
    http://www.betainvestor.co.uk/Documents/Fund%20Selection%20Check%20List.pdf

    You can get some, but not all, data to compare passive funds on this website.
    http://www.smart-beta.co.uk/tables.html

  • 15 Moneyman October 18, 2012, 2:39 pm

    The Accuml8tr

    *Most* funds = ridiculous fees.

    Index ETFs in my mind are a cop-out: the majority of shares fall in value over time – better to target the ones that have been shown to rise.

    Simple income ETFs allow you to diversify with relatively small capital
    .

  • 16 Dave October 18, 2012, 3:28 pm

    @moneyman

    I have no idea why you think the majority of shares fall over time, they have over the past ten years but on most time periods you do gain(especially when dividends are included).

    Also it is pretty hard to target the shares that might rise, as the fact they have risen in the past offers no increased probablity that they will continue to do so.

  • 17 Moneyman October 18, 2012, 4:34 pm

    According to research on the US share market (as represented by the University of Chicago’s CRSP total equity market database), between 1980 and 2008, three-quarters of shares lost value

    http://www.the-diy-income-investor.com/2011/09/75-of-us-shares-lose-value.html

    I’m pretty sure the same is true of the FTSE.

  • 18 john October 18, 2012, 6:26 pm

    For costs is it fair to compare the Vanguard World ETF against the Life Strategy 100%?

  • 19 The Accumulator October 18, 2012, 9:50 pm

    @ Rob – as the job of a tracker is to hug its index and the tracking error is where the impact of stealth costs like dealing fees show up, isn’t it fair for a passive investor to consider tracking error as the cost of ownership?

    Thanks for the cribsheet, btw, that’s a great tool.

    @ Moneyman – all ETFs follow indices, bar the occasional abomination cooked up by a marketing department.

    I don’t believe I have access to any special information or talent that enables me to just pick the winners. So I’m happy to take the market return, diversify away as much risk as possible, and keep my costs low. For that strategy, index funds and ETFs are the best available vehicle.

    @ John – yes, they do a similar job but the asset allocations are significantly different. The All World ETF is weighted far more heavily to the US and away from the UK than the LifeStrategy 100%, for example.

  • 20 Moneyman October 18, 2012, 10:27 pm

    Accumulator

    A final input from me – I think it is disingenuous to say that there is no way to find ‘winners’
    1) It is a fact that the vast majority of returns in the stock market over time are from reinvested dividends, not from increases in share price
    2) There is a lot of academic research showing the benefits of investing in medium-high-yield dividend shares (i.e. not necessarily the highest-yielding ‘dogs’), although it is by no means a simple relationship
    3) It is possible to buy these directly (or use ETFs specialising in these, if you are short of capital)
    4) By the way, I also invest in high-yield fixed-interest securities,

    Basic message: generating income (beyond inflation) is the way to build wealth – not floating up and down on indexes.

    For more on the ‘dividend paradox’:

    http://www.the-diy-income-investor.com/2011/09/dividend-puzzle-dividends-earnings-and.html

    Cheers

  • 21 The Accumulator October 18, 2012, 10:53 pm

    I didn’t say there was no way to pick winners. I said I couldn’t. Don’t have the resources, commitment, talent to reliably pick ’em and avoid the losers.

    Dividends are important, yes. Don’t remember reading anything about their responsibility for the vast majority of stock market returns. Doubtless you’ll send me a link.

    I’m not sure how anything you’ve said leads to the conclusion that index investing doesn’t build wealth.

    My personal research has always led me to believe that if I invested for income I’d be losing some of the benefits of diversification without juicing up my returns. And as I’m accumulating rather than living off my investments, I don’t feel the need to skew towards an income-generating portfolio.

    Still, high-yield portfolios have become increasingly popular in a low interest rate world, which is why it’s nice to have co-blogger The Analyst put forward the case for income. There’s room for all sorts 😉

  • 22 The Investor October 18, 2012, 11:13 pm

    Nice debate chaps. 🙂 It’s true that if you look at the return from the stock market over long periods (especially the very long term) dividends account for a vast proportion of the returns.

    The typical way this is shown is by comparing what an investment would be worth if you reinvested the dividends, versus if you just sat on the capital gains and spent the income. The latest Barclays Equity Gilt study, which always doles out these figures, showed that:

    £100 invested in shares in 1899 would today be worth £22,239 in real terms with dividends reinvested, compared with just £160 without.

    However in my opinion it’s erroneous to then assume that means you should concentrate your investments in high income shares *for this particular reason*. (It may well be valid for some other reason…)

    The study does NOT imply in itself that buying high yield shares in 1899 was an optimal strategy. In fact, high yielders then were probably rubber plantations and railway stocks. Literally hundreds of fast growing companies have emerged, grown big, paid out stacks of dividends, and disappeared (not always by ceasing trading — perhaps by mergers, takeovers) between then and now. It’s capturing all this dividend income in aggregate — and reinvesting it — that’s important.

    If anything, it’s probably an argument that can be spun for total market index trackers, although I do have a soft spot for income myself, too. 😉

    The point about a minority of companies producing a majority of returns is also true. 🙂

    However given most people are bad at picking winning stocks and even worse at trading them, it’s again probably a reason for most to invest in index trackers (or if they prefer trusts or funds).

    This isn’t to say Moneyman, or indeed myself, can’t have our crack at beating the market (nor that we will succeed). But it’s not a strategy for everyone. Most can’t — in both practical AND theoretical terms. 🙂

  • 23 Rob October 18, 2012, 11:35 pm

    Tracking error can be good or it can be good.
    Tracking an index very closely as it goes up is clearly very good. But that may mean you track it just as closely when it comes down, or maybe even deliver worse returns.

    One alternative is to modify a fund so that it has a low beta and/or a value tilt. That may mean it lags an overenthusiastic rise in the market but it may also mean that it does not fall as much when the Market corrects. This ismknown in the trade as the maximum drawdown and you can find that on the these Citywire tables that are updated every month
    http://www.citywire.co.uk/money/fund-and-fund-manager-performance/-/ima/uk-all-companies/fund-league-table.aspx?CitywireClassID=9&RankModelID=9&TimePeriod=1

  • 24 Moneyman October 19, 2012, 7:56 am

    Accumulator

    Since you asked 🙂

    Look at the Barclays Capital Equity Gilt Study 2012, the latest in a long series making the same point about reinvested income.

    http://www.scribd.com/doc/83012873/Barclays-Capital-Equity-Gilt-Study-2012

    “The importance of reinvestment

    Figures 9 and 10 show how reinvestment of income affects the performance of the various asset classes. The first table shows £100 invested at the end of 1899 without reinvesting income; the second is with reinvestment. One hundred pounds invested in equities at the end of 1899 would be worth just £160 in real terms without the reinvestment of dividend income, but with reinvestment the portfolio would have grown to £22,239. The effect upon the gilt portfolio is less in absolute terms, but the ratio of the reinvested to non-reinvested portfolio exceeds 400 in real terms.”

  • 25 Rob October 19, 2012, 9:33 am

    The importance of dividends in graphical form
    http://www.betainvestor.co.uk/

  • 26 Dave October 19, 2012, 9:55 am

    In the 1970s there were a group of stocks called The Nifty Fifty which was touted as the ultimate buy and hold stock.

    “The average priceearnings ratio of these stocks was 41.9 in 1972, more than double that of the S&P 500’s 18.9, while their 1.1% dividend yield was less than half that of other large stocks. ” –
    From http://www.aaii.com/journal/article/valuing-growth-stocks-revisiting-the-nifty-fifty

    There growth from 1972-1998 trounced the S&P 500 despite being(at least initially low yielders). It would be interesting to see the analyses carried on as most of these shares will have avoided the dot-com bubble.

  • 27 The Accumulator October 19, 2012, 10:07 am

    Thanks all, it wasn’t the importance of reinvesting dividends that I had an issue with, rather the implication that that meant pursuing high-yield stocks was the optimum strategy.

    The Investor has neatly explained that one.

    @ Rob – if I’ve chosen to track an index then I have to accept the ups and downs. If I choose a tracker that follows a value or small-cap or low beta index then I want it to follow that index as closely as possible. I’m using those tilts to ensure my entire portfolio isn’t prey to the whim of one market benchmark – like the FTSE – but I still want the individual trackers to hold tight to the indices they claim to be tracking. If they don’t then I’m better off with a tracker that does.

  • 28 The Investor October 19, 2012, 11:51 am

    I think the important word here is the “may” that Rob uses a couple of times.

    There’s nothing to stop anyone trying any method they want, good luck to us all, but let’s not confuse matters by using language that suggests there are no-brainer index beating strategies knocking about out there.

    I agree that tilting towards dividend paying (/value orientated) shares has seemingly provided better returns in many cases in history, but that doesn’t mean it will in the future. And as always, there’s billions in smart money out there being paid millions of pounds a year to look for these anomalies and exploit them.

    Finally, by definition, only 50% of people (ignoring fees) can beat the market. If you select a different set of shares (e.g. Mid-cap shares) then you need to make sure you’re comparing your returns with the appropriate index (in this case the FTSE 250 say, which did far better than the FTSE 100 in the last ‘lost decade’).

    I say all this as someone who *does* explore non-index strategies. I invest more of my money actively than passively, but I’m fully aware of the risks, which certainly include doing worse than The Accumulator with his index funds and stacks of extra free time 🙂

  • 29 Rob October 19, 2012, 11:58 am

    I hate quoting experts to explain their success. But this article
    http://www.economist.com/node/21563735
    does suggest that low beta, as well as free money, explains virtually of all Buffet’s outperformance.

  • 30 The Investor October 19, 2012, 1:35 pm

    @Rob — Discussed that in the Weekend Reading section a couple of weeks ago. It’s interesting research but the conclusions being drawn (by others, as much as the researchers) overstate the case IMHO.

    It doesn’t consider pre-BRK leverage years as a partnership. It doesn’t deny he added value with stock picking, it just explains them away with a load of academic filters (something like six!) 40 years after he began doing it. There’s nothing to say that because Buffett-style low beta quality stocks outperformed in the past they will in the future.

    We’re not going to solve this entire multi-trillion dollar chess game in the comment section of this thread, so I’ll leave it there. 🙂

  • 31 john October 19, 2012, 2:11 pm

    “If I choose a tracker that follows a value or small-cap or low beta index then I want it to follow that index as closely as possible. I’m using those tilts to ensure my entire portfolio isn’t prey to the whim of one market benchmark.” So which trackers are you intending to go with via HSBC, LG and Black Rock? Also what cost effective alternative option to bonds are out there in order to have some uncorrelated risk to equity, cash excepted of course? I was looking at a general world tracker from Vanguard although the LifeStrategy 80/20 is still on my agenda. ETF or OEIC seems to be another question to answer too. It also seems that quarterly investing keeps the impact of dealing down rather than a monthly option although that’s related to your quite extensive posts on best brokers. The other thing is Dividend Reinvestment Plans, who charges for it and who doesn’t? Is the trick to go for an Acc fund and it does it itself with the cost already factored within the ter?

  • 32 The Accumulator October 19, 2012, 5:00 pm

    @ John – SIPP-wise, the HSBC index funds I’m considering are as per the Slow & Steady portfolio. Maybe with a sprinkle of FTSE 250 for a smaller cap tilt on the UK-side.

    For my property allocation I’ll plump for the BlackRock Global Property Tracker.

    Emerging markets is a straight-up fight between the L&G offering and BlackRock’s.

    For gilts, I’ll consider the L&G and HSBC trackers.

    For value, global small cap and low beta I’d look at ETFs in the ISA portion of my portfolio. I won’t be putting enough in to my SIPP to justify the extra costs involved in buying ETFs. I haven’t actually researched any Low Beta ETFs yet. Does anyone have any suggestions?

  • 33 BG October 19, 2012, 9:16 pm

    I’m about to take my first steps into the passive investment world.

    Would I be best off waiting until after RDR comes into effect on 31 Dec 2012? At that point I suppose we will all have a clearer idea of which platforms/discount brokers are offering the best deals.

    I intend to invest in the Vanguard Life strategy funds.

  • 34 The Accumulator October 19, 2012, 9:22 pm

    @ BG – there’s no reason to think that the situation will be settled by then as the platforms are subject to an ongoing review that won’t report back until well into 2013. I’ve just had the same pause for thought as I’m about to open a SIPP. I’ve decided to take the plunge and if I need to switch later than I will.

  • 35 Rob October 19, 2012, 10:11 pm

    BG
    The rules regarding payments for platforms don’t come into force until the start of 2014

  • 36 Greg October 20, 2012, 9:02 am

    BG: If I was just going to invest in a single V-LS fund (which I think is an excellent approach as you can fire and forget) I’d probably just go with HL – it looks to me that they have already prepared for the RDR with their £2 a month fee. As long as you have a decent amount in there, that seems a pretty good deal to me! Of course, waiting until the new year might be sound, particularly if you need until then to build up a reasonable starting amount.

    As for the ‘almost all growth comes from dividends reinvested’ stuff, I hate the way people obsess over this. I just read it as ‘if you take out half your gains each year, the other half gets eaten by inflation’. Wow. What a surprise.

    Say I had company A and company B which both had earnings of £10 a share. If company A keeps that £10 internally then my same number of shares are worth more. If company B gives me that £10 and I buy more of that company’s stock with it, I’m in the same position (minus tax, stamp duty, and dealing fees; plus hassle).

    Of course, you could make the argument that you are better at putting the money to work than the company you invest in but I’m not that clever… (Berkshire Hathaway don’t pay dividends as WB can invest it better than anyone else… That’s fine by me!)

  • 37 BG October 20, 2012, 12:08 pm

    @Greg/Rob/Accumulator

    Many Thanks for all your thoughts. I’m going to get on with it and will reassess as I go along. It’s great to know I can continue coming to Monevator to see what other people’s thoughts are as well.

  • 38 BG October 20, 2012, 1:21 pm

    Accumulator

    Out of interest which SIPP did you go for in the end? Do you have a link that shows how you reached your decision? I’m sure there are quite a few variables involved depending on individual circumstances.

  • 39 john October 20, 2012, 7:13 pm

    @The Accumulator
    Did you do through TD Direct as it seems from http://monevator.com/no-fee-discount-broker-options/ that they would be the most cost effective option. That said if a Vanguard Life Strategy is all I am after the perhaps H-L is the best broker option? Do you have a link to the best broker option dependent on no. of funds and how often dealing is done?

  • 40 john October 20, 2012, 7:13 pm

    @The Accumulator
    Did you do through TD Direct as it seems from http://monevator.com/no-fee-discount-broker-options/ that they would be the most cost effective option. That said if a Vanguard Life Strategy is all I am after perhaps H-L is the best broker option? Do you have a link to the best broker option dependent on no. of funds and how often dealing is done?

  • 41 The Accumulator October 20, 2012, 8:27 pm

    @ John – yep, I have an ISA account with TD Direct.

    HL were the best for Vanguard LifeStrategy last time I looked: http://monevator.com/hargreaves-lansdown-vanguard-funds/
    Alliance Trust have put up their fees since then too.

    @ BG – I haven’t pulled the trigger yet. BestInvest is favourite. Here’s some thoughts to be going on with:

    http://monevator.com/cheap-stakeholder-pension/
    http://monevator.com/cheapest-pension-diy/

  • 42 Rob October 21, 2012, 9:51 am

    As is often the way the comments strayed from the theme of the original article.
    To my knowledge this is the only article that picks up this absolutley crucial issue and has been totally ignored by the maninstream press.
    Well done to Monevator for correctly identifying this problem and drawing it to people’s attention.
    As a manager of a low cost fund this is a major problem for us but one that is so arcane that few other people understand want we are on about.
    Everyone takes actions that are in their own financial interests. As fund fees come down there is less fat to grease the distribution companies that constitute the vital mechanism between fund and investor.
    The issue for fund managers is that they cannot advertise or directly promote their funds to the investing public other than in a generic fashion such as images of mountains, boats or cartoon hunters.

    The FSA does not allow managers to put data out, such as tracking error, information ratio and so on that could be construed as advice.
    That is the job of the IFA. Unfortunately, they generally ignore that and simply select the product that is in their best interests, as most people would.

    Platforms too have a limited interest in offering information on fund, especially costs because they prefer to sell high margin products, as most businesses would. As a consequence many platforms simply do not offer cheap passive funds, or only as an add-on to other, active funds.

    Even the platforms that do offer passives often add unbundled charges that destroy the cost advantage of the original product.

    Moreover, platforms may add charges for tax wrappers such as SIPPS and ISAs. Also beware of TER comparisons between passive funds that levy an initial charge to cover stamp duty and those that don’t but spread that cost around all investors through the TER.

    Well done Monevator. Keep up the good work.

  • 43 DB Sausage October 21, 2012, 7:39 pm
  • 44 DB Sausage October 21, 2012, 7:41 pm

    Oh except for the picture of David Cameron with a Black and Decker!

  • 45 The Investor October 22, 2012, 10:36 am

    @Rob — In a Monday morning rush, but cheers for that, and for sharing the extra information.

  • 46 The Accumulator October 22, 2012, 9:43 pm

    Thanks Rob, I had no idea that the FSA blocked the publishing of tracking error. That’s terrible.

  • 47 Rob October 23, 2012, 8:36 am

    It is not quite as simple as the FSA blocking publication of data like tracking error and other risk and returns measures. Because UK regulation is “principles” based there are no clear rules on what you can and can’t do. But if you get it wrong you are in trouble.
    The basic, and sound, idea is not to mislead. So data like TE can be included in fact sheets where the context is clear and it is for advice only.
    Where it gets tricky is in ads where there is no scope for explanation on what index is referred to and the context. That is regarded as promotion.
    That is why ads for funds are about brand not data.

  • 48 ivanopinion November 7, 2012, 4:40 pm

    The thisismoney article is wrong. It says that ATS gives a rebate of 0.75% on Invesco Perpetual Income, but in fact it is 0.5%.

  • 49 The Accumulator November 18, 2012, 2:37 am

    http://www.retailinvestor.org/truths.html#dividendreturn
    Fascinating piece here arguing against the idea that dividends are responsible for majority of returns. Shows that spending your return is bad for returns.

  • 50 Moneyman November 18, 2012, 11:47 am

    Accumulator

    Thanks for the link – interesting reading. 🙂

    And yes, the trick is to make sure you reinvest *returns* (dividends + capital gains). But if the historical *real* capital gain on a total market index is so low, why would you chose to invest in that? Surely there is something more creative that you can try?

    But I’m still not going to hitch my fortunes to a total index of the market

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