2 Jun 2012, 3:44pm
personal finance
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  • Retail Distribution Review ISA Reflections

    Looks like I wasn’t the only one to find the results of the RDR not to my liking from the comments on the iii fee changes :( Thanks for all the great info in those comments, which helped me get things clearer in my head. I’ve mulled this over and this is the conclusion I’ve come to.

    What seems to have been happening is that the kickbacks and backhanders from active funds have been subsidising the costs of servicing other investors. This means passive investors in particular have been getting a free ride and though I’m not passive I appear to be an extremely inactive trader so I’ve also been getting a free ride.

    What’s likely to change about DIY investing in the UK as a result of RDR?

    Looking ahead it seems that there are some obvious changes coming up:

    1. many platforms that used to let you trade funds without dealing charges will start charging like iii will do.
    2. The small guys will get rocked as fixed costs are a higher part of a small ISA.
    3. Spreading your isa accounts to gain provider diversification will probably cost you more.
    4. Passive funds will get less attractive compared to passive ETFs, because the lack of dealing fees which was a gift to drip-feeders may go. That leaves the daily forward pricing model on funds, which sucks because you never know what you are buying or selling at.
    5. Passive investors in general will get the shaft/have to pay their way. Once you get a few years’s worth of ISA contributions into one ISA provider this won’t make a great deal of difference but it will be dispiriting for people at the start of their investing careers.
    6. Some actively managed funds, such as Neil Woodford’s Invesco Perpetual High Income fund will become more attractive to Ermines because there will be fewer snouts in the trough :)
    7. The difference between investment trusts and OEICs may get smaller though governance probably still favours investment trusts. This may favour people who dislike NAV discounts on ITs
    8. The whole active/passive balance may shift away from the latter.
    9. There may be some platform fee structures that work better for funds and different platform fee structures that work better for shares/ETFs

    I’m lucky in that I have two-and-a-half years worth of ISA and coming into the third so I have got over the early hump where the £80 charge would look high as a proportion of the income. Although I’d rather not pay an annual charge of £80, in practice it will probably be more like £40 as I will use some of the bundled trades. As a proportion of the £1500 dividend yield on my £30k (at the moment and going down) ISA the fees are 5% of my income. I’m sort of making a first approximation that over the long run capital appreciation will compensate for inflation ;) A 5% hit is tedious, but not earth-shattering. However assuming I had the same spread of holdings in my first ISA year then the fees would be 15% of my income. That’s getting close to a taxman-size bite!

    How do I need to adapt how I am investing right now?

    For me the fee isn’t a deal-breaker on the existing HYP. However, what does affect me is the passive section of my ISA. I buy £100 a month of CPUKI (HSBC FTSE All-share) and a bimonthly purchase of £100 a month of LGAAAK emerging markets tracker. I did that to gain a passive investing benchmark and a feel for drip feed index investing; some things you have to actually do to find out whether you believe in. III have been becoming increasingly crap for funds purchases – the latency seems to be stretching to several days over that last couple of months. It looks like iii want to get out of the whole funds business if they start charging dealing fees.

    That game has to stop, and I will sell these funds out while it’s still free to do so in June. I’ve only got £1400 in these. However, I do want to continue the experiment, and because I am into market timing (I know you shouldn’t, but heck, it worked well for me in 2009 in my pension AVCs) I want to do this in the coming Eurozone bloodbath.

    I was going to do it in my iii ISA, however, I will probably look at another provider which is targeted to funds and still offers free fund trading. I’m leaning towards selftrade or bestinvest for these. Selftrade are candidates because they have recently changed their pricing structure (thanks to Oliver for the heads-up)  to adapt to RDR so hopefully they won’t change it again in the near future. Bestinvest because they charge a £15 per-account quarterly custody fee for index funds and they run Vanguard funds which will form part of my post-retirement investment approach. Because they charge an explicit fee they will have less need to change this to reflect RDR. And if I do this then they will work for that fee :) Other providers I am considering are Cavendish Online and Commfreefunds. The latter seem due to take a direct hit from RDR but may be suitable for the Grexit daily purchase plan.

    I’ll do funds this year outside the ISA wrapper. The whole process of transferring ISAs to keep the wrapper seems grief-stricken and painful. Hopefully investment platforms will have sorted out their fee structures in a couple of years, and I can sling this lot into an ISA then. If by then funds are still dealing charge free then I’ll split my ISA into a passive section on a suitable fund platform, and leave my HYP on iii. If funds aren’t dealing charge free anywhere then I’ll run a passive section in my regular ISA using tracker ETFs. Perhaps Vanguard will sell a Lifestrategy 80%equity ETF by then ;)

     What opportunities does this open up for me in the longer term?

    One of the interesting things that came out of Pete Comley’s book for me is that the fundamentals behind the active/passive mantra is not as clear cut as some people lead you to believe. One of the reasons that it looks clear cut is that at the moment the results for the end customer are clear cut. Although some professional investors do seem to be a little bit better at the job than ordinary grunts, actively managed  investing delivers bad results because of the layers of fees drawn off by various intermediate snouts in the trough.  The RDR will shoot some of these hogs, and load some of the costs onto passive investors who had hitherto been getting a cross-subsidy from fund kickbacks. Self-select shareholders like me were also getting a cross-subsidy, and will take a little bit of the heat.

    My high yield portfolio is not passive, and the values and aims are very similar to those of Invesco Perpetual’s High Income Fund run by Neil Woodford – heck I hold nearly half his top 10  shareholdings and came to those conclusions independently with some help. Which begs the obvious question.

    I have spent an awful lot of time and nervous energy on trying to understand the investing universe, because it seems the only way to avoid getting slaughtered in the markets and have some chance of making an income from it. However, I don’t have the deep inquisitive fascination for the field that for instance shines  through Monevator‘s writing. I’ve gone for understanding as a means to an end. I’m sick of working for a living and reporting to The Man. I didn’t prepare early enough so what most people seem to do over 5-10 years I had to do in three, which telescopes a lot of the learning together.

    This was my role model in the dotcom bust. It isn't what I want to be like now :)

    For all that, I don’t plan to buy a shedload of plasma screens and cover the wall of my den with them and live like Gordon Gekko in the movie Wall Street. Neil Woodford is probably a far better HYP investor than I am, particularly in the area of rebalancing the portfolio which seems to be another thing I am not particularly good at, just how do you rebalance a HYP? I’d be happy to turn the job over to him via the IP High Income fund – if the fees come down for his  fund and/or the fees go up for me doing the job myself.

    There are other things I want to be doing with my time. Although I’m not a candidate for spending time in Westfield shopping mall, in the end spending money is more interesting than making it. Once I have got enough money in the right places to make enough income, I want to close the door on it and let it get on with giving me a passive income to get on with the rest of my life.

    Although the RDR has given me the shaft in one way, may actually be opening up other ways for that to be possible. TANSTAAFL so it’s time to man up and work out what I’m prepared to pay for in a investing platform. It may be as simple as a fund platform with half in IP High Income and the other half in Vanguard LifeStrategy 80:20 :)

    A lot of folks are spending a lot of energy boiling iii’s head about the fees change. That’s great if it makes them feel better, but in the end there’s not much you can do about it, and it is difficult and expensive to move an ISA. They’re dearer but not outrageously dearer now. One of the interesting posts on that thread however claims that the company is in an extremely weak financial position

    Interestingly I’ve just had a better look at the Interactive Investor Group (I know, I should have done this before I put money there). The group made a £2m loss last year, on £14m turnover, which is pretty bad, and has made a loss every year except 2010. Despite being a plc, they are not publicly quoted and only have 63 shareholders. Venture capital is involved. Their reserves are negative and they had to have a round of fund raising after their last year end.

    Now compared to a £80 p.a. fees increase this is something that is more concerning! I haven’t been able to substantiate this from a second source, however.

    Just a follow up to my earlier comment about TDW. Their fee structure has been updated for July 2012:

    http://www.tddirectinvesting.co.uk/~/media/uk/pdf/rates-charges-upcoming.ashx

    so they are probably post RDR and unlikely to change, apart from usual caveats.

    why don’t you avoid equities completely for the next few years?

    what do you believe (it is faith not science) you will lose by it?

    interest rates will either rise to average levels of the past or they will not – either way it will be bad news for equities…..

    Maybe the answer is to make greater use of your SIPP. Then you begrudge the fees less because you feel as if you are winning since you get hefty tax relief.

    @SG good to add to the mix, particularly as they’ve updated the structure recently. They batch fund purchases into two Wednesdays a month by the looks of it, which is a -ve.

    @Trevor

    why don’t you avoid equities completely for the next few years?

    what do you believe (it is faith not science) you will lose by it?

    1) buying into 2009 significantly boosted my AVC fund, which is at the moment in cash 2) I don’t want to run down my savings over the next up to 8 years before I have to draw my company pension. Interest rates compensate for inflation in normal times, I don’t expect to make a real return on cash.

    I’m happy with the return on the HYP but it’s not yet enough and I’d like to buy some more income. And I accept that the world economy may go titsup and stay down if this is the beginning of Peak Oil pasting industrial civilisation in which case that will have been a bad thing to try and do. Known unknowns and all that.

    @Rob > you feel as if you are winning since you get hefty tax relief.

    Not as of the end of this month for me! I do not aim to be a taxpayer until I start drawing a pension. I’d done my bit for society over the last 30 years. It’s payback time now ;)

    Yes I could contribute about 3k to a SIPP and get a 20% uplift even as a non-taxpayer, but since my company pension puts me in BRT I’d have to pay the BRT on the SIPP when I draw it, so nuts to that and all the restrictions on paying out. I agree that for most people of working age that’s a good way to go. I was an anomalous case in that AVCs did the same job for me.

    FYI, it was me who originally posted the info on another website about iii’s financial state – should you wish to substantiate it, all info was from Companies House and the Fame companies database.

    [...] have an ISA with iii, who jacked up their prices, in particular charging for funds and generally carrying on in a cavalier fashion. So more than a month ago I initiated a shift to TD Direct, telling both iii and TD, and filling [...]

    [...] power, and power corrupts. Why did Al Capone rob banks? Because that’s where the money was! I may buy some Vanguard Lifestrategy as part of my portfolio because it will form only part of the whole, but a [...]

    [...] This doesn’t hurt what I have already, because the yield I earn is the yield on the price I paid. The problem is everyone else is bidding up the price of the shares so it makes it harder to find value.Some would advocate taking the profits and trading the portfolio but I’m not going to do that because this is not how a HYP is meant to work and I have no skill as a medium term trader I will sit on my backside and take the divi, indeed I have managed to avoid selling anything this year other than that mandated by iii’s change in funds policy. [...]

     

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