Saturday, 12 December 2015

DIY vs Funds - The Costs

Do-It-Yourself
Source

As a Do-It-Yourself Investor, I always believed costs would always be lower than going to the professional wealth managers - the 'men-in-suits'.

Recently I came across a study that tried to calculate how big the savings of DIY Investing might be - and the results are quite shocking....

The study is by the stockbroker Numis, as reported by the Daily Telegraph, which concluded: "Handing over your investment decisions to a professional is far more costly than taking the DIY route."

The DIY Investing approach involves:
  • having your own account with a DIY, execution-only broker
  • making investment decisions yourself (i.e. foregoing professional advice)
  • keeping an eye on the portfolio yourself

Fees applied by DIY brokers typically range between 0.9% and 1.1% a year, including the fund cost.
By contrast, investing through a so-called “wealth manager”, private bank or other portfolio management service. The total charges levied by these companies typically range between 2% and 3% per year. These figures represent the total annual cost, as underlying fund charges and fees were also included. These costs were not clear or easy to establish, Numis found.

So, in other words, the costs of a DIY Investor are half to a third of that of the professionals.
Source: Daily Telegraph


What is more, if you (or your adviser) is investing in 'funds', there will be additional costs, compared with buying securities (such as shares and bonds) directly. This is the case also for 'low-cost' Exchange Traded Funds - but these ETFs allow you to invest in places and classes of assets that it would be difficult to invest in directly.

Of course, I cannot hope to equal the 'expertise' of people who do this for a living (however they might define it); I don't doubt that 'expertise' exists in many cases - experience over decades of stock market cycles, for example, is invaluable is avoiding the 'buy high, sell low' syndrome.

However, some of the key lessons of investing are that very clever people can go bust really quickly and that few investment strategies work all the time or for ever (because successful strategies are quickly duplicated).

Avoiding a 'deadweight' of one or two percent additional costs per annum on your portfolio does give the DIY Investor an advantage over the 'big boys'. And as long as you have an effective investment strategy, you should come out well ahead.



I am not a financial adviser 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.

11 comments:

  1. Interesting point.

    I invest directly in company shares and trade about once per month, either a buy or sell. Let's assume my portfolio is £100k, then I have a £10 broker fee on each trade plus 0.5% stamp duty on buy trades.

    If I have 30 holdings that's about £3.3k per holding and so stamp duty is £16.50 (on average).

    6 buy trades in a year is 6 * (£10 + £16.50) = £159 and 6 sell trades is 6 * £10 = £60.

    So my annual fees are £159 + £60 = £219, on a £100k portfolio, which is 0.2%.

    My stock broker platform charges £20 per quarter (I think) but gives that back in free trades, so if you trade more than twice per quarter (as I do) then there are no platform fees.

    Of course there is also the bid/ask spread, but I'm not sure (and severely doubt) that funds include the bid/ask spread of their underlying holdings when they calculate their fees.

    So DIY investing by directly holding company shares can be super cheap, and even comparable to the uber-low fees of Vanguard.

    Very interesting, assuming those fag paper calculations are about right.

    ReplyDelete
    Replies
    1. John, how many trades per month (and therefore cost associated) to replicate the diversification of a fund or a ETF?

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  2. But a good IFA doesn't just invest money in funds, tax efficiency advice and other comments are (at least in my case£ extremely valuable, not just to me but to my childrenwhen I die

    ReplyDelete
    Replies
    1. True Tinman - but maybe even better to read up about IHT yourself? It's not rocket science...

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  3. You are telling in the preamble that the results of the study are shocking. I expected a twist, but obviously nothing is cheaper than DIY investing.

    P.S. Great blog. Good luck on the market :)

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    Replies
    1. Haha - good observation! What I meant was, no-one has tried before to calculate how expensive it is *not* to DIY.

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  4. --"Let's assume my portfolio is £100k, then I have a £10 broker fee on each trade plus 0.5% stamp duty on buy trades. " --
    Even this is expensive for me. I always use the broker's cheap regular investor days when the dealing charge is between 1.50 (Halifax and iii) or 2.00 (AJBell). In addition, Halifax have a cheap dealing day once a month when you can sell and buy for 3.95.
    Steve

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  5. My fees for ISAs and SIPPs, including all platform/trading/etc. fees come to less than 0.5%pa, and closer to 0.4% pa for the bigger ones. This gets me a range of assets (equities, bonds, property, infrastructure, etc.) that's globally diverse, and I really can't see why someone would pay more to achieve exactly the same thing.

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  6. Could anyone recommend a company that I can move my pension to as Skandia are currently charging up to 1.5% of the total fund each year ?
    The returns have been good up until this year and have beaten the FTSE by around 6%.
    However , the 1.5% is rather high for my liking now.
    Thanks

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  7. Can anyone recommend a platform to move my pension to as Skandia are currently charging up to 1.5% of the total fund.
    The performance has been good beating the FTSE by around 6% up until the start of this year.
    Thanks

    ReplyDelete
  8. I also am a DIY income investor. 3 years ago I decided to try to test properly whether I had ability as an investor. The 3 years are just up, and the results are a complete surprise to me. I hold a mixture of shares, investment trusts and low cost trackers. All with an income bias. For fairness, I have compared the return on each asset with FTSE total return over the period the asset was held. Over the three years the FTSE totsl return has been 9.85%. My results are: Shares +17.5%, Investment trusts +1.8%, Trackers +5%, all above the FTSE. Probably a fluke, but rather fits the DIY thesis

    ReplyDelete