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Money to burn?

18th Feb 2016
Brought to you by
ICPA

ICPA is a professional organisation for accountants in practice.

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Have you found this content useful? Use the button above to save it to your profile.

Roddy Kohn explains why not taking investment advice can be a very expensive mistake.

If you were at the ICPA’s Daventry conference you may remember me talking about the Sunday Times feature on what its journalist saw as the hidden charges of companies such as St James’ Place that somehow regulation had not seen fit to nip in the bud.

But I have my own beef with the Sunday Times. As they continue to rail about how the industry ‘Big Boys’ get away with high charges they rarely, if ever, tell you the stories of those investors who really could have done with some financial advice. What’s more, I have never seen any newspaper tell readers how buying direct or not taking advice can cost those penny pinchers incredibly large sums of money.

I’ll give two recent examples – the names have been omitted to protect privacy.

Case #1

A professional husband and wife were recommended to us. They had come into a large sum of money and wanted to invest it. They thought it was as simple as that. Of course on further inquiry it transpired they had a number of pension policies. I’ll save you the in-depth details of each, suffice it to say one of them had a guaranteed annuity rate payable equivalent to 9% per annum interest. So far so good. That guarantee was going to come in very handy in terms of generating a fabulous rate of return when one considers deposit rates are at best 1%!

And that, of course, is where the good news ends. It transpired the client got recommended to us six months too late. The guarantee was real. The 9% was real. But the condition was that the investor had to elect to take the option by their retirement date in the policy, which had passed, and they just didn’t realise that said date was so important. A mistake that based on a fund of approx £97,000 meant the client lost out on a guaranteed income of £8,730 a year. The average life expectancy of the investor from policy retirement date is 28 years, so in total he would have lost out on £244,440!

Case #2

A company executive accumulated a £750,000 pension pot. She chose to invest it in a DIY investment platform. This is the place people who feel they can sort their own investments go to. They believe (erroneously!) that all the choice and all the value has been brought together under one roof, a sort of Aldi or Walmart, if you like. But it’s just not true. Inevitably, companies who want to maximize profit from their customers develop very clever and well-worded marketing propositions, such that the investor inevitably concludes “this is where I’ll get the best deal”. It doesn’t occur to them that just because you fill your own basket with investment funds the company will offer you a better deal. They are just like those self-service tills at the supermarket – and the price is not all it’s cracked up to be. It’s like buying one pack of biscuits and being told the second one is free – except the cost of the first is broadly the same as you’d pay for two packs in the first place!
In this case, what we found was that despite the website (and trust me it’s a famous one) telling investors how great its deals were, when put under the microscope it transpired the funds chosen cost a staggering 1.92% TER (total expense ratio to you and me) and that was for selecting her own funds. Not only that, she has no investor protection against bad advice – because she didn’t take advice. If she had, what might she have paid? Try 1.25%. That’s a saving of £5,025 per year on that £750,000. The client is in her mid 40s and if we assume an investment time horizon of 30 years, even without taking into account investment growth that’s a massive saving of £150,750.

Who says advice doesn’t pay?

• Roddy Kohn is Managing Partner at KohnCougar ([email protected])

This article is taken from “Accounting Practice” the ICPA quarterly magazine. Dedicated to supporting and promoting the needs of the general practitioner. You can find us at www.icpa.org.uk or email [email protected] or by phone on 0800-074-2896.

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