My wife has a personal retirement pension managed by her accountant on her behalf.
On Saturday, she received her latest 6-month statement showing her how her personal pension was doing.
It showed the latest value of her pension fund, the income that had been received in the last 6 months, the re-investment of that income into certain investments and the charges that she incurred from the pension provider.
All pretty normal stuff so far.
It then showed pages and pages of other transactions, which were selling small fractions of each and every one of her individual investments every month!
What’s all this about?
My wife was unperturbed by this and passed me the document to examine like she always does when she receives financial stuff in the post.
That’s because, like most people (even very intelligent people like my wife) she is not comfortable with financial stuff that she does not understand.
As you might guess – I WAS perturbed!
Incensed in fact!!!
What Were The Transactions For?
The transactions that I had a big problem with were selling small amounts of my wife’s investments.
The pension provider was doing this to raise funds to pay their monthly charges i.e. – the charges for providing the service to my wife.
Now I understand that my wife has to pay her charges, but there are several potential ways that she could do it:
- She could leave her investments as they are and pay the charges out of her normal bank account.
- She could leave her investments as they are and pay the charges out of the income generated by her investments.
- She could sell some of her investments to release cash to pay the charges.
The first of these is the best way to pay the charges, because it is taking cash from an account that is earning little or zero interest to pay the charges and leaving her investments (which presumably earn a much bigger return) intact.
Unfortunately, the pension provider does not provide this option.
The second of these methods is the next best way as it leaves her investments intact but it reduces the amount of income that is being reinvested.
Unfortunately, the pension provider does not provide this option either.
The pension provider only provides the third method, which is the worst possible method for its investors.
Why The Pension Provider Only Offers The Worst Option?
In short, because it is the best option for them and their “colleagues” in the financial services industry!
The more buy and sell transactions they undertake on your behalf, the more they can charge you for their “services”.
There are also costs associated with the funds themselves, that the provider is buying or selling on your behalf, such as the “spread” between the buy price and sell price of the fund units.
The fund managers will then incur stockbroker charges when they buy and sell the underlying stocks and shares in the stockmarket, which erode the value of the mutual unit trust funds that you have your money invested in.
All these costs and “costs on costs” add up and have the combined effect of zapping your overall investment returns.
Ever heard the proverb:
Too many cooks spoil the broth?
Well this is a great example of the Financial Services Industry’s version:
Too many financial middle-men spoil your investment returns!
The beauty of all these costs and charges for the financial services industry is that they are invisible to you.
You never get to see what these hidden costs are.
And you certainly never get to see an analysis of the effect they are having on your long-term investments.
How To Avoid These Costs
The most obvious way to avoid such costs is to cut out the financial middle-men that are creating them.
My wife’s money is passing through the hands of her accountant, a pension provider and various fund managers before being invested in stocks and shares in the stock market.
She could eliminate the accountant, pension provider and fund managers and invest in company shares in the stock market herself.
This would strip out multiple layers of unnecessary costs, at a stroke and would have the effect of generating much bigger returns on her investments.
As it happens, my wife does this with her spare cash and she is fortunate enough to have me to do it for her.
But if you don’t have someone to do it for you and you want to cut out the middle-men to minimise your costs and maximise your returns, what can you do?
How To Invest In Shares
If you want to read more about how to manage your investments yourself then you can start by accessing a copy of the How To Invest In Shares ebook right now.
With opportunities like these, if you want to minimise your investment costs and learn how to invest in shares, then there’s no reason to wait any longer.