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Are charities overpaying for investments?



  • The average all-in cost of a managed portfolio is approximately 1.82%p.a.
  • A 1.25% fee reduction saves £1m in fees for £1m invested over 30 years
  • Advisers offering portfolios of Exchange Traded Funds can help reduce cost of investing for Trustees
Trustees could reduce investment costs by up to £1m on a £1m investment over 30 years by using low-cost “Exchange Traded Funds” within portfolios instead of relying on active management.
Focus on fees
Traditional wealth managers’ fees average 1.82% each year to cover costs of fund research and stock selection, according to some reports[1].
However a broad body of investment research[2] suggests that the main driver of portfolio risk and return is not which stocks to choose, but the mix of assets that make up the overall portfolio. By using low-cost Exchange Traded Funds that track major asset classes, fees can be saved on the selection of funds and shares, to focus on the mix of assets instead.
Exchange Traded Funds
Exchange Traded Funds – collective investment schemes that are listed on the London Stock Exchange and can be dealt daily – are low cost funds with fees ranging between, for example, 0.07% to 0.60% each year.  Including custody and administration fees, ETF Portfolios can be delivered for under 0.50% to 1.00% each year all-in: a significant reduction compared to traditional managers.
Difference in fees
For a portfolio with a starting value of £1m and returning 5%p.a. before fees, the difference in fees between a portfolio with similar mix of assets that uses active funds costing for example 1.82%p.a. and one that uses passive funds costing for example 0.57%p.a. (a reduction of 1.25%p.a.) amounts to £1.1m in fees saved over 30 years.
Source: Compound effect of fees as defined by Total Expense Ratio (“TER”) on a £1m investment over investment term in years.
Fiduciary duties
Under the Trustee Act 2000[3], Trustees have an ongoing responsibility to keep under review arrangements with agents, including their investment providers, as well as considering investment characteristics such as suitability and diversification.  Ensuring good value for money should form part of these review arrangements.
Low-cost innovation
With a growing range of low-cost funds available from providers, Trustees can work with their wealth managers or financial advisers to consider how the overall cost of investing can be reduced.
NOTES
[1] The traditional wealth manager fee of 1.82% is calculated as the average total expense ratio (TER) of the wealth managers listed in research by Numis and Citywire published by Citywire Wealth Manager in February 2015. http://citywire.co.uk/wealth-manager/news/discretionary-fees-laid-bare-let-the-calculations-begin/a799209 .
[2] For example Ibbotson & Kaplan (2000) Does asset allocation policy explain 40, 90, 100 Percent of Performance? http://papers.ssrn.com/sol3/papers.cfm?abstract_id=279096

NOTICES
I/we have no positions in any stocks mentioned, and no plans to initiate any positions within the next 72 hours.  I wrote this article myself, and it expresses my own opinions. I am not receiving compensation for it.
For research purposes/market commentary only, does not constitute an investment recommendation or advice, and should not be used or construed as an offer to sell, a solicitation of an offer to buy, or a recommendation for any product.  For more information see www.elstonconsulting.co.uk Photo credit: www.baconscouts.com. Chart credit: Elston Consulting
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