1

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?

5

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:

(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.

  • Many thanks for your detailed answer! To answer your questions: - I want to invest in a 40-60% equity fund, or in term of risk, about 6/7 out of 10 - They are trying to sell one specific fund, a new one with no track record from Legal and General (i'll give you the ISIN if you want) - Nutmeg seems reasonable compared to HL, considering their .45% charge since Nutmeg is "only" .75% when > £25k which I'm going to achieve in a short time - As for the advice from NW, well £ 840 just to tell me to invest in a new fund with no track record seems a bit much... – Antoine Jaussoin Feb 15 '16 at 13:03
  • 1
    Oh I see, so they're only recommending one of six funds, all through Legal & General, four of which are multi-manager funds that distribute your investments into other L&G funds. In that case, you're hardly getting independent advice. So that's not £840 worth in my view. Oh and I'm hoping you are considering the ISA wrapper btw – did your Nationwide adviser explain how to make the most of that? – marktristan Feb 16 '16 at 16:00
  • Another option would be some of the big investment trusts which have < 1% charges. – Pepone Feb 16 '16 at 22:57
  • @marktristan : it's indeed not independant, although to be fair the adviser told me so. He also explained the ISA wrapper, and I am of course going to use it in any case. But still, £ 840 for selling me something they are in business with is slightly grotesque. I think I made my mind, at least about not doing business with Nationwide on this matter. I'll probably use Nutmeg to start with (simple), and may diversify when I know more (I intend to educate myself :)) – Antoine Jaussoin Feb 17 '16 at 16:29
  • For the DIY approach, there's a good, periodically updated survey of alternatives to HL at monevator.com/compare-uk-cheapest-online-brokers – timday Mar 27 '16 at 0:25
3

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.

  • 1
    Actually, I already simplified it a bit!! It was 3 fees, not 2! One for the underlying fund, one for the "platform" (Nationwide website... why isn't that free??), one for Nationwide on going advice. Plus the initial advice. So that's 3 ongoing fees, 1 one-off. Indeed, they are trying to make it look reasonable, but it only made me more skeptical. What I might end up doing, is investing half in Nutmeg, half in a DIY that roughly mirrors Nutmeg's asset allocation, and see where that leads me and compare in 5 years time – Antoine Jaussoin Feb 15 '16 at 13:13
  • @AntoineJaussoin Absurd isn't it. I'd actually suggest you don't try and mirror Nutmeg in any way, following them at all but without their knowledge and with different timing, could mean you under perform them significantly. It's not like they are going to publish what they are doing before they've done it, that would be madness. Also you don't give yourself the same opportunity to excel and take advantage of your own insights. Just my opinion :) – Michael Feb 15 '16 at 13:21
  • Fair enough: would you then say that investing in an auto-rebalancing ETF (if that's easy to find) that has a good default asset allocation, and let it run, would be ok? Because I don't feel confortable enough to try to guess the market and switch my allocation regularly. I need something that's fire-and-forget (at least for a few years at a time, I can always reassess every year or so if need be) – Antoine Jaussoin Feb 15 '16 at 13:26
  • 2
    I'm a bit hesitant to offer too much advice detail, as being a self execution investor I don't necessarily know a lot about these things, but I'd say practically there's not necessarily a lot of reason to choose between Nutmeg or any fund as such, other than their performance and fees and the availability of risk or any other useful knobs and dials that might be available. Watch out for hidden fees though. – Michael Feb 15 '16 at 13:38
  • 2
    High street banks fund offerings are not good value – Pepone Feb 16 '16 at 22:58

Your Answer

By clicking “Post Your Answer”, you agree to our terms of service, privacy policy and cookie policy

Not the answer you're looking for? Browse other questions tagged or ask your own question.