From 1 January 2013 the way UK financial advice is provided and paid for will change with the banning of commissions in favour of explicit fees and an increase in the level of qualifications for Advisers.

We strongly welcome these developments and believe they represent a much fairer deal for the consumer. So much so, that we’ve been operating an ‘RDR friendly business’ for almost a year now. And just to reassure you, our qualifications comfortably exceed the minimum level required and have done for almost 10 years now.

This short video from Axa covers the main changes. Please have a look. Should you have any queries please let us know.

Bogle refers to investment companies’ habit of presenting time-weighted returns based purely on the change in the asset value of each fund and points out that the returns actually earned by the average fund investor is often much lower. To get a true reflection of the returns achieved by an investor, consideration must also be given to the money-weighted return which takes into account the flow of capital in and out of the fund by investors putting money in and taking money out. (As you may know already – money tends to flow into most funds after good performance has already been achieved and goes out when mediocre performance follows.)

To illustrate his point Bogle undertook a review of returns achieved by the S&P 500 Index (an index comprised on the 500 leading companies from industries in the US economy) covering  the period from 1980 to 2005. The research showed that during these 25 years an S&P Index fund provided an annual return of 12.3% whilst the average equity fund achieved an annual return of only 10%. To make matters worse, after money-weighted returns are calculated, the average investor received only 7.3% a year.

The figures show that $10,000 invested in the index fund during these 25 years would’ve grown to $170,800 whereas the average equity fund achieved only $98,200. However, the average investor faired worst of all, receiving just $48,200 – a paltry 28% of the return of the index fund. So the investor provides 100% of the money and takes100% of the risk and receives just 28% of the index value. Does this sound like a fair deal to you?

Please don’t be fooled into thinking these principles only apply in the US. Lukas Schneider of Dimensional Fund Advisors specifically researched this issue in the UK with similar findings to Bogle. The research covering 1992 to 2003 showed that the FTSE All Share Index (an index representing approximately 98% of the market value of UK companies) delivered an annual return of 8.99% whilst the average fund active in this sector returned 6.93%. When money-weighted returns are factored in the results are even more alarming with the average investor receiving just 4.91% over the same period.

Putting these figures into context reveals the staggering gap between the performance figures reported and the returns actually achieved by investors. Assuming an investment of £200,000 in 1992 the index would have grown to around £562,000 by 2003 whereas the money-weighted return would have provided the average investor with a figure of around £356,000 – an astonishing deficit of £206,000 over the same period. How many years will it take to catch up? How many years will this postpone your ideal lifestyle?

Thankfully, there are more cost-effective ways of investing which will help you stay on track. In my experience a simple investment approach works best. By this, I mean investing in a wide range of assets, keeping dealing costs low and rebalancing your portfolio so you’re always selling high and buying low.

Thankfully, Warren Buffett agrees:

“Most investors will find that the best way to own common stock is through an index fund that charges minimal fees.”

By keeping things simple you won’t let the numbers fool you.

Whilst obviously it makes sense to cut down on the tax you pay and to retain more of your investment returns it’s rarely pointed out by the very same investment companies that ‘ISA season’ can prove to be one of the worst times to use your allowance.

Firstly, human nature being what it is, it’s common to leave ‘boring’ and ‘mundane’ tasks to the very last minute. However, if you send your form directly to an investment company with a missing national insurance number or signature, this could result in your paperwork being returned to you. By the time you realise this, the deadline may have passed and you’ve missed out on using your valuable allowance. The net result is you may end up paying more tax than you needed to further down the line. (I should point some progressive companies are flexible enough to accept applications online and payment by debit card. Many still don’t so it’s important not to rely on them).

Also, by buying in late March/early April there are other potentially unforeseen costs. With many investors scurrying to beat the ISA deadline, a flood of new money comes into the investment markets on the same day. And with the surge in demand it’s common to see an increase in the price of investment fund ‘units’ so you end up buying fewer units than if you were purchasing at a different time in the tax year. In laymans’ terms, this is the financial equivalent of buying your airline ticket on the day of departure so you’re getting less ‘bang for your buck. Why would you knowingly do this?

Avoid the unnecessary costs and stresses by ensuring your Financial Planner takes care of all your tax allowances (not just ISAs) as part of their ongoing service. We prefer to use our Progress Meeting checklist to ensure client investment needs and all other issues are addressed with plenty of time to spare.

If you find your Adviser continually leaving your ISA arrangements until the last minute, you could always consider asking them how this eleventh hour approach really benefits you. And if you’re not satisfied with the answers you get you’ve got a decision to make. Life’s too short for spending time or money on things you find a chore, especially when there are many other trusted professionals out there only too willing to do the ‘heavy lifting’ for you.

]]> http://www.phillipsfp.co.uk/why-%e2%80%98isa-season%e2%80%99-can-be-bad-for-your-wealth/phillips-financial-focus/feed/ 0 http://www.phillipsfp.co.uk/money-will-make-me-happy-is-a-lie/phillips-financial-focus/?utm_source=rss&utm_medium=rss&utm_campaign=money-will-make-me-happy-is-a-lie http://www.phillipsfp.co.uk/money-will-make-me-happy-is-a-lie/phillips-financial-focus/#comments Tue, 22 May 2012 09:14:55 +0000 Gary Phillips http://www.phillipsfp.co.uk/?p=1205 Money is simply something to be exchanged for the more important things in life.

Life is not a rehersal. So plan it, live it…and have no regrets!