Investment management charges, what can we do ourselves?(8 Posts)
Not our money but we are two thirds of the trustees. Portfolio worth £500,000, £190,000 of which in bonds. Investment managers are changing the charging structure and it will mean about £7000 a year in charges. A huge proportion of the income generated, and a massive increase over the current £2000approx.
How can we reduce the charges? I accept we are totally unqualified to manage the equities but can we manage the bonds side ourselves to reduce the portfolio and thus the charges?
Is £7000 a fair deal? The same investment managers have dealt with the funds since the start of the Trust, so I don't have a lot of experience.
Any advice gratefully appreciated. This has taken me a bit by surprise. Although I have tried to educate myself financially (even doing OU courses)since becoming a trustee, I don't feel I have the wherewithal to manage this one myself.
Assuming that you are including all the charges and costs (some of which can be hidden in dealing costs and internal charges against assets in individual funds) and also assuming that the balance of the fund is in equities or funds that are being actively managed on your behalf (i.e. someone is making sure that the risks match the returns you deem appropriate and that capacity for losses are also appropriate and that all this is being reviewed regularly) then £2000pa (about 0.4%) was a pretty good deal. Particularly if the overall income yield of the fund is consistently above, say, 6%.
Another thing to think about is what service you actually get for the money. If the manager is doing nothing more than giving you returns that a passive index tracker could deliver and you are happy that this sort of risk/investment is appropriate, then you could do it all for much less money. For 1.4%, I think you can expect a very high level of service and attention throughout the year - that means constantly making sure you take the least risk to get the best returns all the time - not just put you in a couple of funds and review it next year to see how they did.
Finally, you could ask a couple of other firms to tender for the management contract themselves. Bear in mind they will almost certainly rubbish what has been done (as it's in their interest to prove they are better), but you might learn how to ask tough questions as a result.
Sorry for the ramble but hope it helps.
I am a trustee of a large trust.
We invest directly in shares/bonds via a broker. We set up Crest accounts so the trust holds the shares in its own name. Its a lot more complicated than using a manager so you have to think how much your own time is worth.
To be frank, you might be worth ringing around and seeing if you can get a lower cost but reliable manager who will invest in an index tracking fund with very low turnover and minimal management costs.
@MoreBeta - Wow, you must be a "sophisticated" investor to be a trustee and make all those investment decisions! Most people would run a mile from that responsibility and not get paid anything like a city fund manager.
Thank you both.
The funds do need a level of active management, we are fairly specific about the level of risk incurred, and we do have a stop-loss policy which obviously needs a lot of monitoring.
There is no way we could do this ourselves. Maybe I am basing the £2000pa on the last couple of years which have been fairly inactive (as we have been adopting a wait-and-see attitude apart from a couple of stop-loss transactions).
The portfolio is generating about £16,000 a year income (which is not really needed at the moment apart from one-off purchases as the beneficiary is a student) so £7,000 seems a large proportion of it.
We have negotiated an extension of the current arrangements for a month or so to brief ourselves better and seek further advice (which of course I don't really want to pay for!). ALso of course, anyone I do pay will have an interest in telling us they can do it better.
It seems unfair to levy the % charge for managing the bonds, some of which are very long term, I think there is one up to 2027, as presumably you just buy these things and sit back. I might try to have these ring-fenced from the agreement.
So it won't be a quiet new year for me - lots of research I think!
Best book on investing of 2012 is Monkey with a pin by Pete Comley. He's not an expert but speaks more sense than most 'experts'. Good luck. If you beat the market - it's probably luck!
£16,000 income on £500,000 is a yield of 3.2% - in that context the only reason to accept an increase in fees is if they are able to deliver considerably more yield. However, they will only be able to do this by increasing risk taken and that doesn't sound acceptable, given your comments.
I would consider two options:
1) along the lines of MoreBeta, find a few funds that suit your needs that are cheap to manage. Vanguard are a large US manager and their fees are consistently lower than competitors. For example their UK Index Linked Govt Bond Fund charges 0.15% Total Expense Ratio. There are other types found here:
2) pay a little more for a service that matches your risk profile to the best available returns and has a professional investment committee to ensure you get this all the time. Take a look at www.parmenion.co.uk . They provide the service to IFAs for less than many others (from 0.6%) and have a good rep. You will need to find an IFA that can offer you their portfolio and the IFA will charge a fee for setting you up.
I'm not sure why you need active management or stop-losses.
The talk about "negotiating an extension" makes me think you are paying someone who is managing investments for you, rather than simply paying management charges on funds you have chosen. I hope the stated amounts are the total amount for all layers of charges.
As of end-2012, advisers are no longer allowed to receive kickbacks (more usually called trail commission) from investment companies they place business with, I'm guessing your increase in charges may relate to this.
I would like to add my vote for Vanguard funds in general. In particular, the Vanguard Lifestrategy 60% Equity Fund should give you an equity-bond split similar to that you currently have, for 0.31%, so £1550 per year on £500,000.
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