coins-193740-m2Understanding the true cost of an actively managed investment portfolio can often be a challenge for investors and even financial planners alike but a good starting point is the annual valuation report. This will often quote the Annual Management Charge (AMC) as a percentage but my advice is to ignore this figure and seek out the Total Expense Ratio (TER) which may be quoted in small, fine print, hopefully on the same page. The TER is a Financial Conduct Authority (FCA) approved measure that provides a more accurate indication of the true annual operating expenses of your investment. It includes the AMC, legal fees, administrative fees, audit fees, marketing fees, Director’s fees, regulatory fees, and ‘other’ expenses – you get the picture.

However, don’t expect even the TER to be totally accurate as this calculation is based on the previous year’s events and therefore published TERs represent an expectation of costs rather than a guarantee, as the fund manager often reserves the right to charge extra for any ‘unexpected’ operating costs. Having said that, the TER is the most practical tool we have to compare fund costs.

Why does this matter? Well, the size of the TER is important as the cost comes out of the fund, thereby affecting your investment return. Even seemingly small differences in expenses can, over time, have a dramatic effect on portfolio performance due to the ‘miracle of compounding’. For example, if you invest a lump sum of £200,000 and save £1,000 per month over a 10-year period, the difference between the end totals assuming a 7% or 8% per annum growth rate is significant – £565,449 compared to £613,068 (+£47,619). For Trust or pension funds, whereby the timeframe is often longer, say 20 years, the difference becomes staggering (+£245,706 in the aforementioned example). Thus, the marginal savings along the way can potentially ensure you reach your financial goals and maybe even earlier than you planned for.

In summary, once you are able to assess the cost of your portfolio, the next step is to decide if the performance and service you receive is worth this expense. Surely the best performing funds represent the value of having the highest TERs, right? Unfortunately picking funds is not this simple and quite often the opposite can be the case. Reducing fund costs without compromising performance lies at the heart of Paradigm Norton’s award winning investment approach and, as an example, we have recently reduced the expense of our property asset exposure by 0.34% per annum. It may not sound much, but over time we know that costs do matter.

RMT Ref 79/10.14/SL

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