Monday 31 January 2011

Avoid Bad Financial Advice - go DIY! (UK)

You really can't trust anyone else with your money - particularly if they stand to make money out of your decisions!

A recent article on This Is Money (which I recommend that you add to your daily reading list) pointed out shameful examples of well-known financial institutions failing their customers. It noted that:
"Half of all investments recommended by banks, financial advisers and other intermediaries are wrong for consumers because they involve more risk than savers are prepared to take."

The key point to understand is that almost all investments generate commission for the seller, tempting salesmen to put their own financial needs ahead of those of the customer.

What is more, you need to know that Unit Trusts other similar packaged investment often have very high initial and annual charges associated with them that will virtually wipe out any profit you might make from them.

Initial charges can be as high as 6%, often because part of this is used to pay an adviser commission when you put your money into a fund (you can often get a much lower initial charge by going via a discount broker or fund supermarket). Annual costs are typically in the region of 1.5% (index-tracking funds and funds that invest in corporate bonds are usually slightly cheaper). There may also be additional costs, like audit and trustee fees, which aren't included in the annual management charge and which are deducted at source from any added value on your investment.

As Harvey Jones of the Motley Fool discovered - he is buying someone a lot of lunches...

One reason for buying these collective investments is to reduce the risks inherent in buying single shares yourself. However, under the DIY Income Investor approach uses diversification to produce a degree of risk reduction by yourself.

I am not a financial advisor and the information provided does not constitute financial advice. You should always do your own research on top of what you learn here to ensure that it's right for your specific circumstances.

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