Why efficient investing gives you better returns than just simply lowering fees

Jan 9, 2019 | Tony Byrne's View

I recently read a White Paper called The Efficient Investor by a US company called United Income. The company conducted a wide-ranging study into 62 different US retirement solutions and over 26,000 potential combinations of future market returns.

Their 5 main conclusions were as follows:

1. Non-fee costs incurred by investors from their investment products and wealth management services can include higher taxes, stunted investment returns and reduced money from public benefits;

2. More than 75% of the retirement solutions we analysed have low relative prices, but also include potentially high non-fee costs created by oversimplifications or imprecisions;

3. Reducing non-fee costs generated seven times more wealth in retirement for a typical retiree compared to the effect of reducing investment management fees by 100 basis points (bps);

4. On average, retirement solutions with lower non-fee costs have a 42% better chance of generating enough money for typical retirees compared to products that just have a low relative price;

5. The typical retiree accumulated an average of 124% more wealth during retirement when using a solution with lower non-fee costs compared to solutions that just have a low relative price.

Investment management fees have reduced by 50% in the last 35 years, which is seen as a huge benefit for investors, because they maintain more of their wealth over time. However, the benefits of lower prices may be undermined by other non-fee costs created from features that are oversimplified or imprecise in investment products and wealth management services. These non-fee costs can be more pensive for investors than product fees! Surprising, but true. So, what are these non-fee costs? Broadly speaking, these costs can be broken down to the following three areas:

1. Inaccurate investment allocation (over or under exposure to market risk);

2. Higher tax bills;

3. Lower value state benefits.

The good news here is that this study vindicates our approach and in particular our Wealth Investment Strategy (WIS). We review our clients’ attitude to investment risk and capacity for loss annually to ensure they have an accurate investment allocation.

92.5% of our funds under management on the Parmenion wrap are tax free, because we encourage clients to maximise their contributions into both their ISAs and their pensions annually. We maximise clients’ use of their Capital Gains Tax exemptions annually too. These strategies save clients up to 45% Income Tax and 28% CGT.

We advise clients on how to maximise their state benefits too. For example, we advise them whether or not they should defer their state pensions; We advise them how to maximise their long- term care benefits. All of our strategies save clients significantly more money than by simply reducing their annual fees by 0.5% a year and not offering our investment management services.

Therefore, if you would like to have your money managed by a professional firm that knows what it is doing, why not contact us? You know it makes sense.

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