Despite my best endeavours and regular reminders from my wife, I find the act of frugality challenging. The abundance mentality is more attractive than the scarcity mindset.
That is not to say I do not have massive respect for anyone who can stick to a tight budget and count the pennies. Advertising and clever marketers have turned us all into consumers. Conspicuous consumption is everywhere. It is probably destroying the planet and it is definitely harming our bank balances.
As a financial planner I should know better but the allure of new toys and fun experiences always trump a life eating baked beans. As long as I avoid the use of debt and keep my financial plan on track, I am not too upset about the pricey gym membership that went unused for most of the summer.
With that confession out of the way, I want to turn my attention to our collective obsession with cost.
The FCA has been banging the drum recently about rip-off fund management charges. Combined with other findings in its interim market study report, the fund management sector is likely
facing a fundamental reform.
Passive investing evangelists were quick to get behind the findings, which included a shocking amount of investor cash sitting in “partially active” funds. In other words, investors are paying higher fees for active fund management but only getting something equivalent to an index tracker.
We have all known for a long-time about the prevalence of closet tracker funds. I imagine that any IFA still recommending actively managed funds is taking care to avoid these, looking instead for funds with a high active share, which academic research has proven to outperform the index.
If your clients are paying through the nose for lazy active fund management, you still have a few months to rectify this before the regulator takes serious action.
Paying for performance
Because managers with high active share outperform their benchmark indices and the active sasure significantly predicts fund performance, it is worth paying a little extra to access this secret sauce. That said, as a community, our view of charges has always been fairly myopic and considered in isolation from the far more important value.
This message was repeated by the man who gave me half of my genes (although he often tells me I got my mother’s brain because he still has his) during a panel debate at the Personal Finance Society National Symposium in London last month. Nick Bamford reminded the audience that higher charges for financial planning are justified in light of the value advisers add.
We certainly charge what look like expensive fees to some. In the context of what we do, though, they are excellent value for money. It is entirely our responsibility to communicate that value.
Whether people are rehearsing for the role of Ebenezer Scrooge in their office Christmas productions, or simply miserly at all times of the year, this regular challenge over pricing is not going to go away. We all need to stop being so apologetic for the many occasions where what we do adds significant value and makes positive changes to lives.
Martin Bamford is managing director of Informed Choice