It’s showdown time: Online brokers are finally being forced to reveal the fees they will charge in the post-RDR world.

No longer can the holdouts mask their costs with commission. Over the next couple of months everyone will have to reveal their hand, because trail commission can no longer be paid from new investments from 6th April.

In other words, you will no longer be paying for superficially ‘free’ broker’s services via an inflated Ongoing Charge Figure (OCF) routed via your fund manager.

Take a look at our broker comparison table. Every firm in the commission-funded broker and fund supermarket categories will have to come clean on its prices shortly; don’t be fooled into thinking they’re offering a good deal until they’ve revealed their post-RDR fees.

To attract new money from customers, brokers are now scrambling to offer what are known as Clean Class1 funds. And they will have to levy an explicit platform fee for their own services.

Clean Class funds are just a sweet-smelling, compliant variant of the old-style Unit Trust and OEIC funds that most brokers offer now. The difference is that the Clean Class funds have stripped out trail commission and platform fees from their OCF.

So generally Clean Class funds are cheaper than their Dirty counterparts – but then you’re stung for the broker’s fee on top.

At least you can see what you’re paying and to whom, but if you’re a passive investor like me, then your costs are expanding faster than the waistlines of the Western world.

Fund laundering

If you’re already sitting on a pile of Dirty Class funds, then one of two things is likely to happen:

Conversion – Your old funds will be converted into their equivalent Clean Class variant. This shouldn’t cost you anything and your broker should tell you if it’s happening. The unit amount and price of your new fund will likely be different to the old, but the value will be exactly the same.

You are not liable for Capital Gains Tax when your fund converts, even if you aren’t sheltered by an ISA or a SIPP.

Stasis – Your dirty fund is closed to new investment. It can still grow / plummet in value, but you can’t put new money into it and it will continue to pump trail commission into whichever financial organ is feeding from it. Any regular investment scheme will cease but you can still sell your fund.

Even so-called legacy funds must stop commission payments by 6th April 2016, so they will all have to be converted by then.

Best broker bugaloo

By the end of the next few months we should finally have a good idea of how competitive our current favourite brokers are really going to be.

We’ll track the changes on our broker comparison table and keep you in the know.

If you have a small portfolio (£30,000 or less) then look for a broker that charges a percentage of your assets and no dealing fees on funds. The current champion of the little guy is Charles Stanley Direct.

Investors with large portfolios suffer when fees aren’t capped, so look for a fixed cost broker. Interactive Investor looks very cheap now on that score, especially for families with multiple accounts.

Note that some brokers don’t charge a platform fee for Exchange Traded Funds (ETFs) in ISAs or trading accounts. This can work out well for large investors, as dealing fees make ETFs a costly business for anyone who can’t trade at least £300 a throw.2

If you want to leave your broker after a price hike then ask them to waive their exit fees. Some will do this automatically to offset bad PR and some will do it if you twist their arm. Others will just be complete gits about it.

Bear in mind that prices will never be set in amber. The cheapest broker one quarter could well be trumped the next. If you’re fuming over a price rise then check how many years it will take to earn your exit fees back if you switch, even if you pick the best option. (You might do this if you decide to switch funds, too).

Don’t get ripped off but don’t agonise over a comfortable place in mid-table either.

Take it steady,

The Accumulator

1. Super Clean is an industry term that refers to discounted variants of funds. Super Clean variants are offered exclusively to powerful platform players in return for greater promotion / not being destocked, that sort of thing. Super Clean equals a bit cheaper but definitely not cleaner. [↩]
2. A dealing cost of 0.5% via a £1.50 regular investment fee is the maximum I could stand to bear on a single ETF purchase. [↩]

Good reads from around the Web.

A lot of stock market pundits have been dancing on the grave of gold bugs recently.

I’d warn: Not so fast.

The key fact: The price of gold has fallen by as much as 38% from its peak in dollar terms – from over $1,900 to below $1,200 – before a slight ‘dead metal on a trampoline’ bounce took it back above $1,200 again.

So that’s a big fall that’s happened fast. A genuine plunge! And since the most vocal of the Internet’s gold promoters boasted of only owning gold (with perhaps a smidgeon of silver to make their gold look golder) it must have been a 2008 experience for many goldinistas.

Even more diversified portfolios have struggled with gold. The permanent portfolio asset allocation – which became far more popular after gold’s five-fold rise – was negative in 2013. (It wasn’t helped by having a 25% allocation to government bonds, as well as 25% in gold.)

In contrast, those invested primarily in shares made out like bandits. Given how often shareholders were called ignorant fools by gold bugs in the past few years for believing the economic world wasn’t about to end, you can understand why there’s some schadenfreude.

The danger of being ‘all-in’ anything

One reason not to dance on the grave of gold bugs, however, is because most of them aren’t dead.

A 38% decline is not a 100% decline. Unless they were leveraged up into gold (and I’m sure some of the vocal minority were) then they still have nearly two-thirds of their money left.

Gold has had a terrible year, but it hasn’t been evaporated.

And that’s important, because the critical thing is not to make the same mistake that the 100%-in-gold crowd did.

Sure, it’s easy to feel gold bugs earned their comeuppance. As Barry Ritholz put it in his 10 Reasons the Gold Bugs Lost Their Shirts on Bloomberg this week:

More than any other investment, gold seems to involve a stream of fantastic tales of imminent societal collapse. Every potential problem gets blown up into a coming apocalypse. Fiat currency leads to worldwide collapse, as the dollar falters and hyperinflation appears. All paper money is going to be worthless, so you better have some gold if you want to feed your family.

Except that the fear-mongering is always backward looking. The dollar had already collapsed by 41 percent from 2001-2008; we had very strong inflation in the 2000s, and much more moderate inflation after the financial crisis.

Here speaks a man who has clearly encountered the most devoted investors in gold – and I speak as one who knows from experience.

Yet the rest of Ritholz’ article is an excellent primer on why nobody should get too besotted with any asset class.

He discusses how people create narratives that they believe no matter how the facts change. How they ignore prior price moves and assume it’s a one-way bet. How they attack the skeptics and construct elaborate theories to explain it when things don’t go exactly as predicted. And so on.

He could be talking about the late 1990’s Internet bubble as much as the recent gold rush.

Beware becoming an equity bug

For me, the takeaway from 2013 is not that it was wrong to own any gold, or even that it was wrong to put 25% of your money into gold, as with the permanent portfolio. That particular asset mix has seen negative years before, but it’s done perfectly well over the long-term.

The lesson is don’t put all your money in any one asset class – or at the least don’t do so without knowing you’re taking a big risk.

After 2013’s blistering run in the stock market, that’s something for equity investors to think about, not gold bugs.

[continue reading…]

“Annual income twenty pounds, annual expenditure nineteen nineteen six, result happiness.

Annual income twenty pounds, annual expenditure twenty pounds ought and six, result misery.”

– Wilkins Micawber (David Copperfield, by Charles Dickens)

Were you to stick to just one New Year’s Resolution – and assuming “I will not kill again” is surplus to your personal requirements – then you could do a lot worse than vowing to spend less than you earn.

Living within your means is about the least sexy concept in personal finance, I know.

The magic of compound interest, the principle of risk versus reward – heck, even the Dr Who-ish sounding Time Value of Money – they all have a certain frisson.

But none of them adds up to a bean if more money goes out the door than you have coming in.

And that’s true regardless of your net worth, or the size of your monthly wodge.

One rule for everyone

Some think that watching the pennies is only a concern for people on the poverty line, Dickensian characters, or natural born tightwads.

They’re wrong. Spending less than you earn is as important when you’re rich as it is when you’re trying to get there – assuming you want to stay that way.

Just think of all the sports stars who’ve gone bankrupt, or the lottery winners who end up with nothing.

There are many ways to go broke, but persistently living beyond your means is the one that never fails. Anyone who’s seen Brewster’s Millions knows that even reckless investments occasionally pay off. But outgoings exceeding income is guaranteed to leave you with nothing.

You might be thinking those sports stars were retired, and hence their days of earning mega-bucks were behind them. Surely they had a licence to hoover up designer goods to ferry across town in the supercar that best fitted their mood?

As for the lottery winners: who wants to win a million to be freed from wage slavery, only to keep their spending to a few measly tens of thousands a year?

But that isn’t the right way to look at it. Not if somebody wants to stay wealthy.

Sports stars and lottery winners who give up work are no longer earning, but their capital can still earn for them. A sensible approach would be to figure out what inflation-adjusted annual income your loot can give you, and then live with those means, just like a wage earner.

Result, happiness!

How to start growing your fortune

The joy of spending less than you earn is it always leaves you with something.

An acorn. A spark. A bit of grit that you can grow into a pearl.

And that leftover money you have every month holds the key to your future financial freedom.

By saving and investing this surplus – by never spending more than you earn and so continually saving and adding a little more, and then a little more again – the daunting task of securing your financial security becomes nothing more onerous than a habit.

Yet the results can really add up. This is the bit where any decent financial writer busts out a compound interest calculator, and I’m not about to let the side down!

• Invest just £200 a month from age 21 into the stock market and you might retire at 67 with a pot of over £400,000, in today’s money.1

• Start late but put away your full ISA allocation of £960 a month from age 40 into a mix of shares and bonds, and you might end up with around £500,000 in today’s money.2

Or ignore me and choose instead to spend more than you earn. Then you will have £0 to save. And you will have £0 to invest.

Which whether you leave it for 21 years or 46 years or 100 years will still see you end up with a big fat £0.

Become an automatic millionaire next door

A great book to read to discover the power of this simple strategy is The Millionaire Next Door. It’s the result of a lot of research that shows that ordinary people often become rich over their lifetimes by spending less than they earn, and saving the difference.

What’s a good target? Up to you. Perhaps 10% of your earnings. If that seems impossible right now then maybe start with 5%, and try to save most of your pay rises from here.

Of course there’ll be a bit more to learn. For instance:

• You’ll want to invest in very cheap passive funds to capture as much of the market’s return as you can.

• You’ll want to decide whether an ISA or a pension – or both – is the best tax-sheltered way for you to save.

• You’ll want to subscribe to Monevator to get occasional nagging reminders like this one to keep you on the straight and narrow.

Too boring? Want to start a business to make your millions? Invest some of your money in fast-growing companies? Build your own property empire?

Go for it! More power to you.

But whatever you do, spend less than you earn. Attempts to sidestep this simple rule (such as by borrowing to invest) have a poor track record of short-term success, and a guarantee of eventual failure.

That said, there’s one group who are allowed to splash the cash.

You’re over 75? Feel free to figure out how to sensibly spend the lot before you discover you can’t take it with you.

The rest of us? That’s what we’re aiming for!

1. I’m assuming a 5% real return here. A real return is an inflation-adjusted return, so you can think of it in today’s money. This assumed rate of return is a smidgeon less than the average from UK shares over the very long-term. [↩]
2. I’m assuming a 3% real return here, a lower rate than in the previous example, to allow for the lower return potential of the bonds. [↩]