There has been plenty of press over the years on how high fees can impact your investment, leading to the trend toward exchange-traded funds , trackers, and DIY stock portfolios. It’s interesting to look back at how the average person invests and how that has evolved over the decades.
When unit trusts came on the scene, everyone could get stock diversity without having the critical mass that you needed to buy a share. You needed to swap your fundamental understanding of the company whose shares you were buying that you used previously for an understanding of the risk associated with the unit trust you were buying. Certainly, historically, ‘share concentration’ for retail investors was a real thing, as retail investors were likely to hold on to a share once they had bought it.
Unit trust asset managers used not only stock picking but also the skill of allocating assets to a wide range of asset classes . This naturally commanded higher fees, and these started to inch up into the 2% range. At some point, performance-based fees were also introduced. Once unit trusts are wrapped in a life licence to house your retirement capital, this can add another 30 basis points to the cost.
That is not the case with a unit trust. If the market tanks, your investment tanks with it, and the asset managers just get a slightly lower fee until the market recovers. A very large unit trust, especially in a small market like we have in SA, stands the risk of owning a large part of the free float shares in issue for a particular company.
There are numerous reasons you should have a financial advisor , but in my experience, it is not so much the increased performance that comes from choosing the right asset allocation, but the numerous ways we can save you from wasting or losing your wealth by understanding the regulatory environment, the economy, tax, trusts and other structures, estate law, offshore investment pitfalls and regulations and how any of these might impact your specific set of circumstances.
If you have more than one source of wealth, remember that consolidating your wealth with one advisor/asset manager team can be used to drive down your overall EAC. I know that there are still the ‘all my eggs in one basket’ concerns, but there are many safeguards that have been put in place since 2008 to protect the client, mostly through the use of third-party custodian banks.