At EFPG we strive to inform our clients of every cost that their investments might face whether it is a pension, savings product or investment bond.
On occasion we health-check any plans or policies that clients already have in place to judge whether it would be better for them to stick with their current arrangements or jump ship to save money.
In doing so, we have to look under the bonnet of a range of different products that we are not familiar with.
EFPG has found that the two most insidious wealth-killers are bid/offer spreads and trading costs.
A bid/offer spread is the difference between what you can buy an investment for and what you can sell it for. For example if you were to buy an investment fund for £102.50 at the same time another investor would be able to sell it for only £97.50. This is a 5% bid/offer spread. 5% of the value of the two trades would disappear. If you had been saving into a plan for a number of years, each trade on the way in would buy at the higher price and when you were to sell your investments when you cash in you would sell at the lower price.
Hidden Trading costs.
In conducting some research EFPG initially looked at a 2% trading cost for regular investments into a single investment fund over the course of a long-term savings plan. The effect was actually quite minimal.
EFPG then looked at the effect of the same 2% cost of trading and rebalancing of a portfolio of individual investments over the same period.
By way of explanation, rebalancing is the process of making sure a portfolio of investments has the correct percentage of each investment in it. Over days, weeks, months and years investments can vary in value considerably and a portfolio manager will have to sell some investments and buy others to get the portfolio back in shape.
EFPG developed an interactive model to examine the effect of such costs might have on a pension.
The model is not perfect. It assumes that:
There are no upper and lower limits on trading costs.
The rebalancing will be the same over the whole term.
Contribution increases and investment growth will be the same each year.
The investment manager will not periodically sell 100% of a particular investment and buy another.
We also did not take into consideration adviser costs, or custody fees but by entering a 1% lower figure for investment growth we hope it is as accurate as can be achieved for a long-term theoretical model.
We have made this model available for you to play around with to see the possible effect of trading costs with a portfolio of funds. You can use the model by changing the trading costs, investment growth, monthly contributions, how much those contributions grow by annually, how many years your pension will be in effect for, how many times a year your portfolio will be rebalanced and how much of your portfolio will be rebalanced each time. There are pull down lists next of each of the editable fields accessible by clicking on the arrows.
The message we hope to convey is that before entering a long-term arrangement it is important to READ THE SMALL PRINT and CAREFULY EXAMINE WHAT YOU ARE SIGNING FOR. Ensure that you have been informed of all implicit and explicit costs, if you are not informed of a cost that might be applicable ASK.