The Value Chain - How your money disappears in charges.

When an investment portfolio is performing well there is rarely a requirement to look under the bonnet at the machinery.  Its only when problems occur that we start to analyse why.  When investing it is good practice to take a look under the bonnet even if you are not interested in the mechanics.

Let me explain:

The Value Chain

So, you want your money to get to an investment, what would you think could be the most direct route

Your money   –  Adviser   – Investment

That would make sense !  But there are layers of charges that are not visible to you. 

Your Money

Independent Financial Adviser (IFA) - if you use one !

The commission earned by the adviser should typically be about 4% depending on the amount invested.  It is roughly the same amount as you would expect to pay by going direct to the investment company yourself.

IFA Company

This is where the charges start to add up, because you might be paying the company that the advisers work for another 4% on top without knowing it.   This is normally paid in undisclosed commission.

Broker Sales Consultant

When you are recommended a product to invest in, the man who has to sell that to the adviser is probably earning another 1%.

Product provider.  If it is a Bond wrapper then the company concerned will normally be receiving about 8%

Fund marketer

Alot of investment funds are marketed to the end customer as exclusive or specially designed for the advisory company with whom you are working with.  The reality is that the majority of the time, the reason why these funds are recommended is because the adviser will get paid more for placing your money with that investment house.  This is know as ‘soft commission’ and does not have to be disclosed to you!  The man who sells this concept to the adviser will normally work to a 1% fee.

Fund Manager

The standard fee that you will pay to the investment portfolio manager is 1%

Fund Range (1%)

Custodian (0.3%)

Dealing Costs (Can be as high as another 1.5% - look out for the TER, Total Expense Ratio) 

AND FINALLY INVESTMENT.

The percentages above are the amount of your original investment paid to the respective parties concerned.

So, by my calculations that makes 21.8%.  That of course needs to be spread over the average term that a Bond must be held, which is usually 5 years, and you have an approximate annual charge of 4.36%

To put this very simply, your portfolio needs to make 4.36% every year before you will start to see a profit.

I don’t think it takes much to see that in a fluctuating market, a negative market or even cautious investments, you are highly unlikely to see any returns in the short term.  If you are investing for income it is even worse since 3-4% is normally the expected long term return, so any withdrawals you make are eating into your underlying capital.