United Income carried out extensive research on the efficiency of retirement portfolios which culminated in a white paper which was made publicly available in January 2018. Its results were very surprising to investors but totally unsurprising to financial planners. Let me explain why.

Retail investment management fees have fallen by more than 50% in the past 35 years which has been led by the trend to investing in low cost passive, or index tracker, funds. 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. To assess this potential, United Income analysed 62 different retirement solutions in the market and over 26,000 potential combinations of future market returns (from highly bearish to bullish). These were their findings:

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. These largely hidden non-fee expenses arise from oversimplified or imprecise approaches that suboptimally invest and disperse money for individuals, particularly in retirement.

More than 75 percent of the retirement solutions we analyzed have low relative prices, but also include potentially high non-fee costs created by oversimplifications or imprecisions. About 96 percent of the 62 solutions we analyzed do not strive to minimize some or all non-fee costs generated by their approaches, including costs created from inflated tax bills and deflated investment returns and public benefits.

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). Larger wealth gains for retirees are the result of greater tax savings from increased use of the tax code, a higher equity premium from more accurate management of an investor’s risk preferences, and the greater relative ability of these approaches to anticipate and plan for more diverse future outcomes, including health spending shocks that increase in likelihood during retirement.

On average, retirement solutions with lower non-fee costs have a 42 percent better chance of generating enough money for typical retirees compared to products that just have a low relative price. Increases in wealth are the result of greater use of public policies to increase retirement income (e.g., higher Social Security benefits, lower tax bills), higher investment returns from more accurate management of an investor’s risk preferences in retirement, and other factors that reduce costly inaccuracies.

The typical retiree accumulated an average of 124 percent more wealth during retirement when using a solution with lower non-fee costs compared to solutions that just have a low relative price. Improved financial outcomes were due to the greater relative use of public policies that can increase or protect income in retirement, as well as the use of more information to diversify a retiree’s finances to survive in a higher number of potential future market outcomes.


Interestingly the financial media, our regulator the Financial Conduct Authority, most investors and many financial advisers believe that low cost passive (index tracker) funds are the best solution for investors.  I disagree.  The results of United Income’s large research study back my opinion.  My recent blog “Is there a bubble in passive funds” further expounds my theory.


Whilst it is true that passive funds tend to outperform active funds on average according to a number of surveys over the years  (source: Smarter Investing by Tim Hale) there is little doubt that the best actively managed funds outperform passive funds.  For example, hedge funds which have the highest fees consistently outperform lower charging retail funds (Source: More Money Than God by Sebastian  Mallaby).  Our own sister company, Minerva Money Management’s, CCM Intelligent Wealth Fund is up 64.9% over the last 12 months at the time of writing*.


It’s an actively managed global thematic equities fund which has significantly outperformed its benchmark the IA Global sector over the last 12 months and has left major stock market passive funds in the shade.  Proof positive that the very best active funds outperform passive funds.

What’s more, once you take into account fees, no matter how low they are, a passive fund is guaranteed to always underperform its index and I do not consider even matching a stock market index to be particularly impressive anyway.  What passive funds have proven over the years is not that they have performed well but that the majority of active funds have been poorly managed.  The FCA’s damning reviews of the fund management industry just a few short years ago is testament to that view.

I’ve always considered that a good financial planner adds huge value to clients.  Not only the United Income White Paper supports this view but also Vanguard’s own white paper on Adviser Alpha.


This comment from United Income’s white paper I found particularly telling.

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). 

In other words, the amount of extra wealth created by reducing non-fee costs was found to be worth seven times compared to the reduction of 1% per annum in management fees.  That says it all and puts to rest the flawed theory that saving costs produces greater returns.   The fact is that paying higher fees means that you hire the world’s best fund managers to get better investment returns for you.  It’s exactly the same as in all walks of life.  You get what you pay for.


So don’t be fooled by the flawed logic of passive funds enthusiasts.  Instead, invest in the very best active funds like the CCM Intelligent Wealth Fund.  You know it makes sense**.

*Past performance is not a reliable indicator of future results.

**The value of your investments can fall as well as rise. You may not get back what you invest. The contents of this blog are for information purposes only and do not constitute individual advice.

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