Question
My wife and I are fortunate enough to have £800k in cautiously managed funds with a discount broker which we aim to pass on to our children, over the next 20 years or so.
These have grown by about 5% p.a over the last7 years, I have been happy enough with this, but my concern is that I am paying 1% management fees to the broker, £8k p.a, so possibly 160k over 20 years and I am concerned that charges will be a significant drag on performance.
Do you have any suggestions. I am cautious and not happy about managing my investments myself, so I would aim to leave the majority of the funds where they are. I am wondering whether to put 100-200k in a UK or global tracker or stick with the present arrangements.
Answer
The first step is to establish exactly what you're paying and the service you're receiving in return.
Discount brokers don't provide advice/management and nor do they generally charge an explicit fee - they instead rebate most sales commission, keeping some for themselves. A few brokers have started to rebate all commission in return for a fixed fee, which is usually the cheapest route and likely to become the norm over the next few years.
If you're paying a 1% management fee to the broker this suggests you're probably using some sort of investment management service, most likely discretionary management. This means the broker (or, more accurately, investment manager) is actively managing the money on your behalf, making all the day to day investment decisions.
The upshot is that you're probably being charged on two levels, the fess on any underlying investment funds in your portfolio plus those of the investment manager.
I would expect the manager to be using institutional versions (or 'units') of funds held, which means no initial charges and annual charges of around 0.75%. Or, if they use versions with commissions built in (called 'retail' units) the commission should be refunded in full to get a similar end result. If this isn't the case you're being taken for a ride and I'd switch broker without hesitation.
Add on the broker's 1% fee and you're probably paying a total of around 1.75% a year, perhaps less if the portfolio has high fixed interest exposure (as these funds tend to be a bit cheaper than stock market funds) or invests directly in shares/fixed interest (which means no underlying fund management fees).
Is this too much? If the broker is doing a good job of managing your money then perhaps not, although given the size of your portfolio it wouldn't be unreasonable to try negotiating the 1% fee down to 0.75% or less. Percentage based fees always risk becoming excessive on large sums, which is why fund managers and advisers like them so much. Unless a few of the larger players make a stand or consumers flex enough muscle to force a fairer deal I can't (unfortunately) see things changing.
You could consider re-directing some of the money into low cost tracker funds, but it's important to reflect how this will affect overall risk. Plus your broker will need to take this into account when selecting investments in the remainder of the portfolio they're managing.
A big issue you need to consider (I'm sure you are already) is tax; primarily capital gains and inheritance tax.
Assuming the investments aren't held in ISAs or pensions, it's important your wife and yourself both realise gains within the portfolio to fully use your annual capital gains tax allowances (currently £10,600 each), else you'll just store up an increasingly large tax bill when you pass the money (or investments) across to your children. Your broker should already be doing this, but double check.
When you gift the money/investments to your children you'll need to live for at least seven further years for the assets to fall fully out of your estate. If you pass away while it's in your estate they'll be subject to inheritance tax (assuming your £325,000 nil rate band is already eaten up by your home/other assets). It's possible to use trusts if you're in a position to give away money now but want to retain control, although this opens up a whole new set of pros and cons. I won't cover in detail here but take a look at our inheritance tax page if you're interested in reading more.
My wife and I are fortunate enough to have £800k in cautiously managed funds with a discount broker which we aim to pass on to our children, over the next 20 years or so.
These have grown by about 5% p.a over the last7 years, I have been happy enough with this, but my concern is that I am paying 1% management fees to the broker, £8k p.a, so possibly 160k over 20 years and I am concerned that charges will be a significant drag on performance.
Do you have any suggestions. I am cautious and not happy about managing my investments myself, so I would aim to leave the majority of the funds where they are. I am wondering whether to put 100-200k in a UK or global tracker or stick with the present arrangements.
Answer
The first step is to establish exactly what you're paying and the service you're receiving in return.
Discount brokers don't provide advice/management and nor do they generally charge an explicit fee - they instead rebate most sales commission, keeping some for themselves. A few brokers have started to rebate all commission in return for a fixed fee, which is usually the cheapest route and likely to become the norm over the next few years.
If you're paying a 1% management fee to the broker this suggests you're probably using some sort of investment management service, most likely discretionary management. This means the broker (or, more accurately, investment manager) is actively managing the money on your behalf, making all the day to day investment decisions.
The upshot is that you're probably being charged on two levels, the fess on any underlying investment funds in your portfolio plus those of the investment manager.
I would expect the manager to be using institutional versions (or 'units') of funds held, which means no initial charges and annual charges of around 0.75%. Or, if they use versions with commissions built in (called 'retail' units) the commission should be refunded in full to get a similar end result. If this isn't the case you're being taken for a ride and I'd switch broker without hesitation.
Add on the broker's 1% fee and you're probably paying a total of around 1.75% a year, perhaps less if the portfolio has high fixed interest exposure (as these funds tend to be a bit cheaper than stock market funds) or invests directly in shares/fixed interest (which means no underlying fund management fees).
Is this too much? If the broker is doing a good job of managing your money then perhaps not, although given the size of your portfolio it wouldn't be unreasonable to try negotiating the 1% fee down to 0.75% or less. Percentage based fees always risk becoming excessive on large sums, which is why fund managers and advisers like them so much. Unless a few of the larger players make a stand or consumers flex enough muscle to force a fairer deal I can't (unfortunately) see things changing.
You could consider re-directing some of the money into low cost tracker funds, but it's important to reflect how this will affect overall risk. Plus your broker will need to take this into account when selecting investments in the remainder of the portfolio they're managing.
A big issue you need to consider (I'm sure you are already) is tax; primarily capital gains and inheritance tax.
Assuming the investments aren't held in ISAs or pensions, it's important your wife and yourself both realise gains within the portfolio to fully use your annual capital gains tax allowances (currently £10,600 each), else you'll just store up an increasingly large tax bill when you pass the money (or investments) across to your children. Your broker should already be doing this, but double check.
When you gift the money/investments to your children you'll need to live for at least seven further years for the assets to fall fully out of your estate. If you pass away while it's in your estate they'll be subject to inheritance tax (assuming your £325,000 nil rate band is already eaten up by your home/other assets). It's possible to use trusts if you're in a position to give away money now but want to retain control, although this opens up a whole new set of pros and cons. I won't cover in detail here but take a look at our inheritance tax page if you're interested in reading more.
Read this Q and A at http://www.candidmoney.com/questions/question633.aspx
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