There are dozens of fund managers, each offering multiple alternatives and substitutes with different objectives, strategies and styles. Who are these people? What’s behind their obscure fund names? Which one is right for you? What if you choose badly and other funds do better?
It’s intimidating and confusing, deliberately so. The investment industry did not create advisors to support its complexity; it created complexity to support advisors and, by extension, the distribution of its products. By making investing seem overly complicated it forces investors to consult an expert, to help with their selection.
Investors pay for this ‘expertise’, up to 1% of their savings every year. 1% may seem like a small amount, until you compound the impact over 30 or 40 years. By the time you retire, that 1% pa will have eaten 20% of your savings.
Broker commissions in disguise
Of course, it would still be worth it if your advisor chose a fund that delivered an above average return. That’s possible, but it’s unlikely. That is because their recommendations are not based on any kind of science or prescience. They may be based on past performance but, as every piece of fund literature will tell you, that’s no guide to future results. Those polite disclaimers aren’t just there to keep the FSB happy – many studies have proven it to be so.
Even worse, your advisor may simply recommend a fund that will maximise their own commission. Rather than increase your odds of a better outcome, the additional costs will likely give you a worse outcome.
Just like everyone else, your advisor does not KNOW which fund will do well. It must be so for the markets to function. Yet, despite this fundamental truth, a multi-billion rand industry pretends that its manager recommendations are “professional know-how” that is worth paying for. Don’t fall for it. Don’t pay advice fees that are linked to the product you buy.
What advice should you pay for?
Simple: pay only for advice that will likely improve your outcome.
Such advice relates to the disciplines and essential elements of investing. For example, you would pay an advisor to help you:
- draw up a retirement plan or an investment policy that had a high chance of meeting your investment goal;
- stick to the plan, even if others appeared to be working better from time to time;
- identify the most suitable and/or tax-efficient products for your goal(s);
- set a level of market risk (allocation to the share market) that was appropriate for your time horizon;
- ensure your portfolio was properly diversified;
- avoid unrewarded risks, such as active management or fund manager selection risk; and
- select low cost products, to minimise the detrimental long-term impact of compounding costs.
Ideally, you would pay for this advice directly, based on the level of service, not by an annual (seemingly small but ultimately massive) deduction off your savings.
Take charge
In today’s information age you don’t even need to rely on an advisor to achieve your investment goals. The elements of a sensible investment strategy are straightforward and can be implemented with online financial planning tools, such as the 10X Retirement Calculator. You’ll find that the key is not to find the “best” fund manager; the key is to have the appropriate amount of share market exposure and to keep fees low.
You now have ready access to simple, low cost products to help execute your plan. Index funds such as the 10X Prime High Equity unit trust deliver similar or better returns than comparable actively-manged funds, at a third of the cost.
Or you can buy our index fund-based RA without the help or the cost of an advisor. This gives you access to life-stage portfolios that embed the essential investment advice you need. These portfolios incorporate a glide path that automatically gives you the appropriate amount of share market exposure for your time horizon.
Bottom line
Don’t incur advice fees that are product commissions in disguise. Such fees are guaranteed to add to your cost with no guarantee they will add to your return. Only pay for advice that is likely to improve your outcome by managing the factors that are under your control: your investment strategy, your fees, your emotions.
Or take charge of your own investment affairs. It’s never been easier to avoid the industry’s “advice” fees eating up your return. And it’s never been easier to invest in an effective, sensible, low cost manner. It is on you to take advantage.
Ready to take charge of your own investment affairs? Why not make use of one of 10X’s Retirement Calculators or take a look at our Investment Products.
