Good reads from around the Web.
The RDR era has arrived. A three letter acronym hasn’t caused so much excitement since as a tiny chap my co-blogger The Accumulator first heard EMF’s Unbelievable in 1990 and started wearing his baseball cap backwards.1
Fund manager Rob Davies has written a very clear outline of what RDR means for you on his Munro blog.
Noting that few will choose to pay the £250 an hour that a truly independent financial adviser could charge, Rob concludes that:
The DIY approach is appealing for those with portfolios of less than £100,000 where a few hours advice could be equivalent to 1% of the assets. As with any product or service, more informed clients are more likely to make better decisions even if they use an adviser.
Basically, RDR really means that investors have to learn a lot more about what they invest in.
Over the past year or so numerous websites have sprung up hoping to capitalise on so-called ‘orphaned’ investors looking to take charge post-RDR.
To my mind, calling investors shut out from the financial service industry’s grasp ‘orphaned’ is a bit like saying Snow White was orphaned because she ran away from her evil step-mother.
But then we’ve long been advocating that most of us can manage our own investments, provided we take the time to do some research.
Common sense and history suggests simple portfolios will deliver adequate returns for most savers. Simple portfolios major on diversifying among the main asset classes and periodically rebalancing, and so sidestep many of the pitfalls plunged into by unwary DIY investors.
Unfortunately a lot of personal finance journalists seem to prefer to make life complicated. Pointing readers towards a sophisticated online tool that promises to help you reach some perfect asset allocation for your risk level – for a big fee – makes for a better story than pointing them to a blog page.
Or maybe I’m just miffed that we weren’t mentioned in the FT’s roundup of five fee-charging websites for DIY investors:
A clutch of online services has sprung up for “RDR orphans”, who want guidance with their finances but cannot justify spending £160 an hour – the average cost of post-RDR advice, according to BDO.
Some of these sites are backed by established firms, such as big advisory practices or insurance companies. Others are start-ups. However, even the ones that offer advice by phone are not a direct replacement for an individual adviser.
There is a clear separation, too, between those that recommend actively-managed funds (bestinvest, Fundexpert) and those that advocate an approach based on index-tracking (Money Guidance, Nutmeg). There are also different business models, from flat fees to trail commission.
I’m not slighting those services, incidentally. While I think all have drawbacks as well as strengths – not least their fees – I’m not one of those zealots who thinks everyone can do it themselves. Some people will need their hands held. As we’ve discussed before, the Internet offers lots of interesting possibilities here.
It’s just that I think getting an education and then creating something like our Slow & Steady Passive Portfolio is going to serve an neophyte ‘orphaned’ investor better in the long run then plugging some numbers into a website and buying without understanding.
Still, you could do much worse than start with those online tools. As the ever excellent Merry Somerset-Webb explains, again in the FT, banks are lining up to make a mint from offering advice post-RDR:
Let’s pretend we have £200,000. We go to Lloyds and invest in the stuff they suggest. That’s £5,000 (2.5 per cent of £200,000). At HSBC the same investment would cost £2,425 (£950+£975+£500). At Nationwide it would be £6,000 and at RBS £3,000 (£500+£2,500).
Are you stunned? I am. And this, remember, is before you take into account the advice fees. You don’t have to take this option, of course, but if you see an adviser at, say, RBS it is hard to see him suggesting otherwise. There’s another £1,000 gone.
What might you get in return for these vast fees? Odds are they’ll have a soft spot for funds run by another part of their business. So you’ll get to pay those fees to the bank too. Let’s say you end up in funds with total costs of 1.2 per cent a year (this, by the way, is a generously low estimate on my part). There’s another £2,400 gone (assuming your adviser doesn’t suggest you use the money to pay down your mortgage instead, of course).
As Merryn says, the good news is that post-RDR, all these costs are transparent. Get out your calculator and you can add up how much it will all cost you.
The bad news is that few people will.
From the blogs
Making good use of the things that we find…
- Choosing simplicity in the new year – Abnormal Returns
- Couch potato returns for 2012 – Canadian Couch Potato
- REITs: A word of caution – Vanguard blog
- Benjamin Graham: Lucky or skillful? – Greenbackd
- Testing Terry Smith’s view on income investing – Mindful Money
- Case study: N Brown – UK Value Investor
- Gold priced in pound sterling [graphs] – Retirement Investing Today
- Isn’t it better to wish the best for others? – Objective Wealth
- 2013: The year I plan to fail – Tim Hartford / Undercover Economist
- Slavery: An epicurean business model – The Psi-fi blog
Product of the week: Cheshire Building Society is offering 5% interest on its Platinum Monthly savings account. You can save up to £500 a month. There are higher rates out there, but they require you to have a current account, too.
Mainstream media money
Note: Some links are to Google search results – these enable you to click through to read the piece without you being a paid subscriber of the site
- The most important chart of the last decade – Motley Fool (US)
- Five brutal years teach investors to sit tight – BusinessWeek
- US sees record surge into equities [Graph] – Business Insider
- Try Iraq for a true frontier market [Search result] – FT
- Is the market’s good vibe a reason to stress? – Yahoo Finance
- Cambria Automobiles: Potentially cheap – iii
Other stuff worth reading
- Ghastly personal finance gurus – Economist
- Global house prices: Winners and loses – Economist
- 2012 ‘shockers’ have lessons for 2012 – Roth@CBS
- One in four people age 65-74 still a wage earner – Telegraph
- Annuity rates could rise by 25% – Telegraph
Book of the week: Just out – The Physics of Wall Street – which promises a brief history of “predicting the unpredictable”. I can tell you the first law of investing: ‘What goes up must come down”. And vice versa!
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- Apologies for a 20-year old cultural reference. Believe me, if you are under 30 you did not miss much.