Reduced fees don’t have to mean reduced quality

I was brought up in the 1990s to view passive funds as the enemy. What a narrow-minded view! But in my defence, when I joined the profession, passive funds were rarely sold to clients by advisers, largely, in my opinion, because these funds didn’t pay commission. But when I started working for a private bank and then again when I joined SK, my views changed. I began to see a different approach to investing, a much more enlightened one, that had its beginnings way back in the 1970s.

In 1975, Vanguard’s founder, John C Bogle structured Vanguard for just one purpose – to build wealth for its clients and only for its clients. The crucial difference from other fund companies was that Vanguard would redirect net profits from economies of scale to fund shareholders in the form of lower costs. The arrangement was similar to that of a credit union or a mutual building society. Sales commissions were eliminated, and operating expenses were kept low. Vanguard then opened its first index mutual fund.

The power of planning and acting long term

In 1976 the annual fund charge for the Vanguard Wellington Fund was 0.56%. Now it’s 0.17%. The same year, the Vanguard First Index Investment Trust launched (now Vanguard 500 Index Fund). I believe that fund launched at an annual fund charge of 0.44% and now its 0.04%. In the UK, the Life Strategy fund was launched in 2011 at 0.33% and after three price drops, it now costs just 0.22%.

As Vanguard has grown, it has reduced its average annual fund charges from 0.68% in 1975 to 0.35% by 1990 and then to a mere 0.10% in 2019. How often do you receive a letter from your fund manager that your fees are being reduced?

I was, and still am, inspired by this vision of the late John C Bogle. It reminds me of the importance of putting the client first. He also thought long term, acted long term and planned long term.

Fund manager fees explained

There was a time when the fund manager charged a total fee of 1.50% on the monies it managed. Loosely 0.75% was retained by the fund manager, 0.50% was paid out as commission to advisers and 0.25% covered the administration costs. This was known as a bundled arrangement.

When you look at your fee statement (the annual costs and charges statement that you receive once a year) these fees are now unbundled. For our ongoing service, this is our fee structure:

Adviser Charge0.50%0.50%
Fund Charge0.55%0.13%
Platform Charge0.25%0.25%

NB: The fees above are based on the maximum fees that would apply. Lower fund and platform charges tend to apply.

An additional fee called the total expenses ratio will also apply. This is not an explicit fee, however, as this takes the additional expenses of the portfolio into account (how many trades have taken place; how many stocks have been purchased or sold and the auditing and reporting of costs). These expenses might range from 0.01% -0.2% and tend to be reported in arrears.

What percentage is the right percentage?

In a previous article, I mentioned that the associated costs for how your investments are managed can range from 0.40% – 2% per annum.  In the absence of any comparison tools these figures from the FCA can at least act as a benchmark to you on how our fees compare.

The FCA also calculated the average adviser fee was 0.82%. Whilst there is some use to knowing this figure, it does not address what range of services advisers offer to their clients and what services are important to the client. It also does not factor in the reassurance that advisers provide to their clients.

Negotiating better fees for our clients

As advisers, we use our influence and your assets that are held under our agency to negotiate reduced fees with platform providers. Currently we have reduced fees in place with two of the three platform providers that we regularly use. This saving is passed on to you.

We regularly check that your monies are invested in the lowest share class, often called free share classes. These shares classes lead to higher transparency and fewer conflicts of interest. Any saving that is made is also passed onto you.