Are secret costs silently pickpocketing your profits?
Will Carling, Associate Partner and Financial Planner at Hebden Consulting, questions whether the current bullish US market be hiding some insidious home truths about your investment portfolio?
On 7 May 2021, the S&P 500 Index achieved its record closing high of 4,232, capping a remarkable winning streak in risk assets which has left many investors happily counting their returns. While it’s always pleasing to see positive returns from investments, it’s also important to guard against complacency and ensure your portfolio is making as much money as it should. Sometimes, this can be hard to gauge – especially if you have an offshore investment that was recommended to you while you were living and working outside the UK.
Over the course of my fifteen or so years providing financial advice to expats, I’ve become all too aware that because there is little to no regulation, consumer protection and a lack of transparency in the unregulated offshore marketplace when compared to the UK, many of the products and underlying investments that are recommended, such as portfolio bonds or regular savings plans, come laden with hidden fees and charges. Such buried charges can silently pickpocket unwary investors leading to significant and damaging financial planning implications.
Hidden charges that hurt
It is not uncommon to see product charges of around 2% in addition to portfolio costs of more than 2%, meaning overall someone could unwittingly be subject to an Ongoing Charges Figure (OCF) of 4% (or more!). Such costs might not sound like much, especially given the huge strides that markets have made over recent years, but from a professional perspective they might ruin your chances of retiring early or having sufficient funds to comfortably pay for ever increasing school and university costs.
Like Hebden Consulting, I adhere to an evidence-based investment approach which encompasses two key elements and the use of:
1. Investment Platforms as opposed to life company products to hold investments, and
2. Index Funds for the investments themselves (also referred to as ‘ETFs’ or ‘Trackers’), which drastically reduce portfolio expense to around 0.2% per annum vs. typical offshore portfolio costs of 2% or more, which in turn means overall costs can be as little as an average OCF of 1.5% per annum – less than half of the typical offshore setup!
Evidence-based examples
Let me take the two example OCFs of 4% and 1.5% above and apply them to two hypothetical investors who each start with £250,000 invested into a balanced portfolio. The balanced portfolio comprises a mix of higher risk assets (equities) and lower risk assets (bonds) to give an overall moderate exposure, which I would typically expect to make around 7% per annum before portfolio and product costs. In the first example, with an OCF of 4%, the net return is 3% per annum, which looks pretty good when compared to the current UK interest rate of 0.1%, and over 15 years would result in £250,000 growing to £392,070 – a total net return of £142,070.
If I then consider the second, evidence-based investor who has a lower OCF of 1.5% and therefore a net return of 5.5% per annum. Over the same investment period of 15 years, by simply reducing the costs associated, the £250,000 grows to a staggering £570,434 – more than double the initial capital invested and a net return of £320,434, resulting in a happy client with an extra £180,000 to travel the world or retire earlier than planned on!
To find out if you’re burdened by an inefficient portfolio or subject to hidden charges, click on the link below to book your free Hebden Consulting portfolio review today. You’ll have access to a UK qualified adviser for a 30-minute tailored, no obligation discussion on your situation and how you can make sure that you’re getting the most out of your hard earned money.
Contact Hebden Consulting today or email: info@hebdenconsulting.com.
The information is provided in good faith without any warranty and is intended for informational purposes only. It does not constitute investment advice, recommendation, or an offer of any services or products for sale and is not intended to provide a sufficient basis on which to make an investment decision. For further details see our Regulatory Statement.
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