Cheetham Jackson - Smart Investment

4 SMART MONEY What is the true cost of investing? Typically, investors are told the AMC 1 is 1.5% per annum. But this is only part of the cost.There is more – much more.The truth is that explicit costs –TER 2 , and implicit costs, PTR 3 , add up to a much more expensive 3% to 4% per annum. Initial charges vary from 3% to 8%, and from these charges initial commissions are paid by the financial institutions to financial advisers as payment for selling their funds; these charges are recovered by them from your investment funds. Your fund manager has to make the investments grow in value by the same amount as the charges, simply to maintain the original value of the investment. Aiming to achieve higher returns to compensate for higher costs usually involves higher risk. In our view, this simply does not make good sense. For example, homeowners have been unable to repay their mortgages because endowment policies failed to produce the returns they were expected to deliver. Borrowers have been encouraged to take on ever-increasing debts using credit cards and unsecured personal loans. And investors have taken stock market investment risks but have not been paid the full return for taking such risks. You could be forgiven for expecting highly paid, highly skilled fund managers would be able to easily beat the returns provided by the UK stock market as measured by the FTSE All-Share Index.The truth is shockingly different: No-one could reasonably object to paying higher charges if higher returns were achieved. But paying higher charges and getting lower returns just doesn’t make sense.The investor is paying too much and not getting rewarded for the higher costs being incurred. At Cheetham Jackson we believe the investor deserves more. Many investors are getting a very poor deal at the expense of commissions, charges, and expenses. It is time for change – it is time for investors to get the lion’s share of the profits and that means the institutions and fund managers should get less – much less. In recent years investors have placed their trust in the established financial institutions but have often been poorly rewarded. The cost of investment is too high and must be driven down High Charges Annual Return £100,000 Invested Return FTSE All-Share returns (1986-2003) 8.99% per annum £432,088 100% Published average UK fund manager 6.80% per annum £305,992 29% less Actual investor average return 4.10% per annum £197,998 54% less Data Source: Lukas Schneider ‘An examination of the Difference Between UK Fund Returns and UK Fund Investors’ Returns’ July 2007 2,3 Data Sources: See notes on page 17