The impact of costs on your financial plan

Date Published:14/02/2008

Everyone wants your money….It’s up to you and your financial planner to make sure they don’t get it. You could easily lose 50% or more of your returns.

You will recall that you should establish defined objectives so that you know exactly why you are on the hamster wheel of life and when you can jump off.

Your financial planner will have then prepared the financial roadmap that will ensure you know exactly what needs to be done to achieve your objectives.

Along the way, an investment strategy will be prepared so that you can be certain that your money is being properly invested to give the best opportunity for returns, rather than being gambled with by someone else on their ‘best bets’.

The final and rather significant step for you to take is to ensure they keep the returns you have earned rather than letting them slip away at the final fence.

Clearly, you will need to pay fees to your financial planner. These fees should be clearly stated and not commission payments dressed up as fees.

Remember, as stated recently by the Financial Conduct Authority, ‘Product providers often remunerate advisers, and there can be a misalignment of advisers’ interests and those of consumers, adding to the risks of consumer detriment’

This type of commission arrangement may well not be in your best interests. It could even work out to be significantly more costly for you.

Fund management fees levied by the managers of all investment funds vary widely. The Financial Times recently concluded that UK based retail investors, in other words, you pay significantly more for your investment funds than US institutional investors.

Dealing fees within actively managed funds will be significantly detrimental to your returns. These costs are very difficult for you, or anyone else for that matter to work out.

Imagine the scenario of a massive amount of shares being placed for sale in the market. In addition to dealing costs, it is very possible that this large sale order will cause the price to fall just as you are trying to sell the shares. Not a great way to make money.

Then, to make matters worse, the cash generated needs to be invested into other shares so purchase orders are placed. This may cause the share price to rise as the shares are being purchased. In addition, there will be dealing fees and Stamp Duty Reserve Tax to be paid. Again, not a great way to make money.

Actively managed funds will ‘turn-over’ their entire fund on average every 12 to 18 months.

Passive funds will suffer significantly lower total dealing costs.

The taxman will also want his share of the profits you make.

A well structured investment portfolio that takes advantage of all the appropriate tax reduction strategies will ensure that you pay away as little as possible to the taxman, and stay within the law.

So in summary, you should look for a financial planner who charges fees for financial planning and investment services, recommends appropriate passive funds that have low charges and ensures that you pay as little tax as possible, whilst helping you meet your objectives.

Stop gambling and start investing to achieve the returns you deserve.

By doing this, you have the greatest chance of meeting your objectives, possibly even their wildest dreams.

Next time I will discuss some of the tax year end investment opportunities.

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