Highstreet bank fund, custom ETF or Nutmeg?

Question

I want to start investing a regular monthly amount to a fund, and by choosing a highstreet bank fund I'm wondering if I'm not making a mistake.

Basically, the fund they are trying to sell has, in total, an AMC of 1.43% (fund charges, plus bank charges), PLUS an advice fee of 3.5% of my invested money over 4 years (so over the course of 10 years, I'll have paid 1.78% per year... which seems to me like daylight robbery).

So my question is: is it really worth it? Considering that apparently in most cases actively managed funds are underperforming compared to simple ETFs, I wonder if I should not buy some ETFs with a similar asset allocation to my high street bank fund, and save a lot in AMCs.

The other option (I live in the UK) would be to go with Nutmeg, but their AMC is also around 1.2/1.3%, which is a bit less but still quite a lot.

A bit of context: I'm an IT consultant, but I work in finance so I know a bit about it; without being an expert.

It then boils down to: is an "expert" manager at Nationwide (my high street bank...) will do better than me taking some ETFs, knowing I'll save 1.5% in fees. And if you advise going by myself, what company should I use? Hargreaves Lansdown or something else?

Thanks!

[edit] : After the few discussions below, I thought I might add some actual fees over a certain amount and a certain period to make the comparison easier:

So for say £ 50,000, over 10 years, I would pay:

• Nationwide: 1.78% (1.43% platform + fund + 3.5% spread across 10 years)
• Nutmeg: 0.94% (0.75% platform + 0.19% fund)
• HL: 0.55% (0.45% platform + 0.10% fund)

That means that for Nationwide to be competitive, their fund would need to outperform my HL tracker funds by 1.23% per year on average, and Nutmeg's by 0.84% per year. Is that realistic?

Answer 1

It's a good question, I am amazed how few people ask this. To summarise: is it really worth paying substantial fees to arrange a generic investment though your high street bank?

Almost certainly not.

However, one caveat:

You didn't mention what kind of fund(s) you want to invest in, or for how long. You also mention an “advice fee”. Are you actually getting financial advice – i.e. a personal recommendation relating to one or more specific investments, based on the investments' suitability for your circumstances – and are you content with the quality of that advice? If you are, it may be worth it. If they've advised you to choose this fund that has the potential to achieve your desired returns while matching the amount of risk you are willing to take, then the advice could be worth paying for. It entirely depends how much guidance you need.

Or are you choosing your own fund anyway? It sounds to me like you have done some research on your own, you believe the building society adviser is “trying to sell” a fund and you aren't entirely convinced by their recommendation. If you are happy making your own investment decisions and are merely looking for a place to execute that trade, the deal you have described via your bank would almost certainly be poor value – and you're looking in the right places for an alternative.

~ ~ ~

On to the active-vs-passive fund debate:

That AMC of 1.43% you mention would not be unreasonable for an actively managed fund that you strongly feel will outperform the market.

However, you also mention ETFs (a passive type of fund) and believe that after charges they might offer at least as good net performance as many actively managed funds. Good point – although please note that many comparisons of this nature compare passives to all actively managed funds (the good and bad, including e.g. poorly managed life company funds). A better comparison would be to compare the fund managers you're considering vs. the benchmark – although obviously this is past performance and won't necessarily be repeated.

At the crux of the matter is cost, of course. So if you're looking for low-cost funds, the cost of the platform is also significant.

Therefore if you are comfortable going with a passive investment strategy, let's look at how much that might cost you on the platform you mentioned, Hargreaves Lansdown.

Two of the most popular FTSE All-Share tracker funds among Hargreaves Lansdown clients are:

• Aberdeen Foundation Growth tracker – annual management charge 0.10%
• HSBC FTSE All Share Index tracker – annual management charge 0.07%

(You'll notice they have slightly different performance btw. That's a funny thing with trackers. They all aim to track but have a slightly different way of trading to achieve it.)

To hold either of these funds in a Hargreaves Lansdown account you'll also pay the 0.45% platform charge (this percentage tapers off for portolio values higher than £250,000 if you get that far).

So in total to track the FTSE All Share with these funds through an HL account you would be paying:

• 0.10% + 0.45% = 0.55% with the Aberdeen example
• 0.07% + 0.45% = 0.52% with the HSBC example

This gives you an indication of how much less you could pay to run a DIY portfolio based on passive funds.

NB. Both the above are a 100% equities allocation with a large UK companies weighting, so won't suit a lower risk approach. You'll also end up invested indiscriminately in eg. mining, tobacco, oil companies, whoever's in the index – perhaps you'd prefer to be more selective.

If you feel you need financial advice (with Nationwide) or portfolio management (with Nutmeg) you have to judge whether these services are worth the added charges. It sounds like you're not convinced! In which case, all the best with a low-cost passive funds strategy.

Answer 2

And it's only as cheap as 1.78% if you stay with them 10 years! They'd love that. You can kind of tell they really want to lock you in for over 4 years.

I also think it's daylight robbery, but as a self execution investor I tend to have to talk myself out of that belief by default to be fair.

One can wonder too, why are there even 2 fixed (percentage wise) fees? They are desperate not to have one number that is too big sounding, either the advisor fee is a rip off because they have to do all the same analysis regardless, or you could take the view that it's the only valid fee as you're paying for a slice of something, where as the other fee is what? A share of the fixed costs? Well, isn't advising as essential as anything else?

I actually think Nutmeg is OK, I've not used them or dealt with them in any way but they are, to a greater or lesser degree, what I've wished for to recommend to friends who don't want to DIY, which is a cheaper next generation online investment facility, and their fees drop significantly over 100K. Going by their claimed past performance and fee structure, whilst I'd like them to be cheaper, I personally think they are not a bad choice in the market.