Independent research from Numis Securities has exposed the fees for discretionary fund management in the UK. It makes for pretty shocking reading. We dug a little deeper into the numbers and found that expensive fees could cost you almost 40% of your portfolio’s value over 20 years.
Firstly – what is discretionary fund management?
Discretionary fund management is where a fund manager is paid to make decisions about your investment on your behalf. They will actively decide where to invest your money, in accordance with your risk preferences, to get the best possible return for you.
Discretionary management is what we do here at Nutmeg. However, unlike a typical discretionary fund manager, we offer the service online, and you can start with as little as £1,000 (some providers ask for a minimum of £250,000), with a minimum monthly contribution of £50.
The published research1 is based on an investment portfolio of £500,000, half invested in funds and half invested in ETFs. In the case of Nutmeg, that would all be in ETFs, as that’s what we prefer to invest in.
The figures, as published by CityWire, outline the amount of money that each investment firm earns on a portfolio expressed both in pounds sterling and ‘bps’ or ‘basis points’. Basis points refer to fractions of a percentage when used to talk about investment. For example 1% is 100 basis points, 0.01% would be one basis point.
Nutmeg’s fee was more than 30% lower than the next cheapest discretionary wealth manager in the UK. Some managers’ fees were an astonishing 400% more than ours. We’ve summarised the research in the table below, but you can read the full article here.
Source: Numis’ pricing model with Citywire input, 20th February 2015. Please note, we’ve altered the figures that Numis were using for Nutmeg, to reflect our accurate charges.
The naked truth about compound fees
We’ve calculated the difference that this could make to your investment over 20 years and it’s a real eye-opener. You can see the full details in the table above.
Taking the example £500,000 portfolio from the research, we applied the charges for each of these providers over 20 years. We assumed an annual return at an average of 5% (though of course this isn’t guaranteed) and no further contributions. The charges shown include all underlying fund costs, and 24 trades per year.
What we found is that a portfolio of £500,000 with the most expensive provider, charging 2.4%, could be worth £843,624 after 20 years (before tax). With Nutmeg the same portfolio could be worth £1,178,462. In other words, you could have lost out on £334,838 because of high fees and the effects of compounding.
We find it staggering that anyone could consider that a fair price to pay for the service they receive. We believe that if people really knew the effect that compound fees can have over time they would never sign up to hand over so much of their money.
Some of our customers have told us that they’re fed up with the expensive, opaque way traditional financial services companies are run and that they want to have full visibility and flexibility over their investments. Investors want to understand the fees they’re paying, they want to access their investments online and make changes to suit them without being penalised with extra charges.
We think that’s how investing should be.
Risk warning: As with all investing, your capital is at risk. The value of your portfolio with Nutmeg can go down as well as up and you may get back less than you invest. Past or future performance indicators are not a reliable indicator of future performance.
1. CityWire: Discretionary fees laid bare: let the calculations begin… – 20th February 2015