If you are one of the many people who shy away from managing your own stock market investments, choosing to invest in stocks through mutual funds such as unit trusts and investment trusts instead, then you are damaging your investment returns on your Life Savings more than you realize.
You see, whether you realize it or not, the fund managers that you are trusting to manage your investments on your behalf are stinging you for a complicated variety of fees.
And just to make it worse, they charge you fees whether they make you money or not.
Before I start talking about how you can fix this problem and make bigger returns from your investments, let’s examine the problem in more detail…
Fund Managers Take a Big Slice Of Your Money
These are not my words – this is the view of Which? Magazine, a well-known consumer organization in the UK.
In their July 2012 report, they highlight that
investors are being stung by fund manager’s performance fees that we believe are often too easy to earn and too hard to understand.
In theory, performance fees are only supposed to be charged by the fund manager if the fund you are invested in performs particularly well.
If this were the case, this would seem fair, wouldn’t it?
But it all depends on what the benchmark threshold is for assessing when the fund is doing “particularly well” as opposed to making normal gains.
Fund Management Fees
Most mutual funds have an initial fee of anything up to 5% of your initial investment amount when you first buy a fund.
In addition, almost all funds charge an Annual Management Charge too, typically around 1.5% although it can be higher or lower.
Performance fees are additional fees, on top of the first two, that some mutual fund managers charge as well.
According to Which?, these are typically 20% of any gains made above a designated benchmark.
And these fees are uncapped, just like the Annual Management Charge is uncapped.
Whilst these fees are only supposed to be charged in the good years, they are not clawed back in the bad years.
So they have the effect of rewarding the fund managers when times are good and not penalizing them when times are bad.
They also have the effect of encouraging fund managers to think and perform in the short-term, not the long-term.
For me, this raises several issues:
1) Is it fair to share your profits with the fund managers in the good times when they don’t share the losses with you in the bad times.
2) If your funds do well, there seems to be an implied assumption that this is due to good work by the fund manager, but is it, or is it just a rising market?
3) Is the benchmark, where the performance fee kicks in, set at a level that truly reflects extraordinary performance due to the fund manager?
Fund Performance Fee Benchmarks
This last one is a major problem according to Which?
For example, many funds use the interest base rate as their benchmark, which is currently a paltry 0.5% in the UK.
So, in other words, if your mutual fund investments grew more than 0.5% in a year, the fund manager would get 20% of everything above that 0.5%.
In other words, if your fund grew by 5.5%, then the fund manager would charge you a performance fee of 20% of 5% i.e. 1% of your total fund.
This would therefore turn an annual management charge of 1.5%, into 2.5% and could be higher if your fund grows more than 5.5%, which is entirely possible as I chose this figure arbitrarily.
Even more worrying is that some fund managers do not set a benchmark, which has the effect of making the benchmark zero.
These funds are particularly bad because they take a sizable chunk of everything you make above zero but share none of the losses that you might make from time to time.
In my opinion, this is like fund managers “having their cake and eating it.”
Why Are You Trusting Fund Managers?
We’ve had the problems with greedy bank managers gambling with our money (and losing it big style).
We’ve had our Governments bailing bankers out with our money to the extent that they are bankrupting themselves (and ourselves) with sovereign debts (some Governments doing it faster than others).
We’ve had previous problems with endowment mortgages, which still annoys me when they send me letters asking me to put more money into an investment that will now only pay me HALF of the figure that THEY advised me it would (no I am not going to throw good money after bad, thank you very much)!
We’ve had the Payment Protection Insurance (PPI) scandal.
Are we now about to have the mutual fund fees scandal?
What You Can Do Instead
If, like me, you are sick of trusting these financial people, then the alternative is to manage your investments yourself.
This is what I now do and I have been doing it for years.
What’s more, I’ve proven to myself that I can manage my own money better than these so-called experts can.
And you can start doing the same.
Are you ready yet?
If you want to start learning now, sign up for the FREE guide below.
Alternatively, if you already have my free guide and want some help applying it to your own situation, you can now book a 1 on 1 coaching session with me at a special introductory price.