OUCH!

Its the small print that carries the big news.

I am looking at a Hargreaves Lansdown sales letter that suggests I buy Artemis Strategic Assets fund. In small print is the bit about expenses.

Imagine it grows at 6% for ten years, with inflation at 3%. Unspectacular, boring even. But if you have just been hit by a 30% drop in share prices it could look quite attractive.

You give them your £1000. Now their calculations show that you might get back £1420 after ten years, after deducting £366 in expenses. Hmm. Your money has 'grown' by £788, and you get to keep £420 of it. They [the finance industry, not just HL] get the rest. This is terrible. And here's why - inflation.

After 10 years you need £1344 just to keep up with inflation. The 'growth' in your savings (in tomorrow's devalued pounds) is actually £447 - and they get to take £366 of it. Three quarters of the growth in your savings they take.

And finally it gets worse - you could invest your savings in government index linked bonds (say at 1%) then you end better off after ten years, with virtually no risk.

You have allowed someone else to take a bet with your money. They reap the rewards, you take the risk.

How do they (the industry) get away with it? HL are doing nothing illegal. They are not unusual in this. The 6% example is standard across the industry sales literature. The annual charge of 1.5% is also pretty standard (implying it costs £150 000 to run a £10million fund, but it takes £15million to run a billion pound one. Discuss).

The figures I have added in (1% real return for government bonds, and 3% for inflation) are not outrageous. Changing them changes the outcome - but then so would changing that stately 6% growth every year for ten years.

And that may be the answer. Year on year changes of 6% are rare; annual share price swing are much greater. Up 20%, down 25% and the ordinary punter (you and me) feels that within this context the odd 1.5% is neither here nor there.

Well it is.

By the time you work out your average net return over ten years, and then work out the return after inflation - and then you work our what you could have got completely safely with gilts - suddenly that 1.5% becomes a very big chunk of what is left. In many years its all of it.

And don't forget, you are being charge a premium on the assumption they can outperform the market (otherwise why not just hold the FTSE100). So even when the market massively outperforms gilts, they still haven't earned their money if they haven't outperformed the market.

How to fix this? How about if funds only charged if they outperformed the market,*  and only then on the portion of outperformance. If you have an active  fund manager (and I hope you don't by now) why not write and ask them whether you can switch charging regimes, and how much their fees would be. Let me know how you get on.

frequently unasked questions

When I do the calculations, ten years of index-linked is still a few quid behind the Artemis example; are you wrong?

Index linked money is todays pounds, you have to multiply by the inflation factor (here its 4/3) to turn it into tomorrow's money (£1 now has the same purchasing power as £1.33 in ten years time). Try it, and you really will wish you had stuck with gilts.

But at least with shares I stand a chance of making bundles

Yup. You'll win some, and you'll lose some. But win or lose the finance industry still gets your money.

It's a bit like estate agents - house prices may go up or down but...

Estate agents get their commission once when you buy/sell.... financial advisors go on getting it year after year. Even if you don't move or change your holdings at all for the rest of your life.

So I should buy individual shares to avoid the charges?

No - too risky. Buy collective investments like trackers and etfs

But they will still charge me won't they?

Yes. Maybe 0.5%, maybe less if you search hard enough.

But saving 1% a year... is that really worth it?

...sigh

*Even that is not a solution. Because they are smart, fund managers would then start making enormously risky bets with your capital. The winners would make them bundles, the losers they would never have got any commission on anyway. Under this system, the size of your loss would not impact on their fees.