The employment scene is changing not only in the UK but globally too. And this change also affects the investing and pensions landscape. Many entrepreneurs who are starting up are so occupied with the everyday needs of their business that after a 14-hour day in front of their laptop – their pension is the last thing on their mind.
Yet, it’s one of the most important aspects for every single one of us. Whether we’re running our own business or whether we’re still employed, investing is the key to your future.
The dream for achieving financial security is very real. It is also very fuzzy and feels out of reach for many. Most people and entrepreneurs are trusting their earnings, savings and retirement accounts to the professionals – the financial industry. Impenetrable language and terms used, all these complicated financial products – it’s all there to act in your best interest, right? It’s all there to help you secure your financial security, right?
But the financial industry has a dark side to it that we don’t often talk about.
The term financial industry is wide and encompasses many professions. For the purpose of this article I’ll be referring to companies and the individuals working for these companies to whom you give control over your savings, investments and retirement accounts.
The financial industry is essentially a middleman between you and the investments. As we previously covered you need to invest in stock markets to achieve growth for your assets despite inflation. Most people think stock markets are too complicated to understand themselves, so they use the financial industry to act in their interests. For a fee, of course.
When you think of the financial industry what comes to mind? Designer smart suits, expensive cars, prime high street locations?
All that is funded is funded by the nation’s savings, investments and retirement accounts. No one is allowing the financial industry to rent the offices in the “Square Mile” or in Canary Wharf out of the goodness of their hearts. The financial industry makes enough profit to be able to afford all those luxuries.
A large percentage of all investments are invested in mutual funds. These are managed by educated and experienced professional fund managers. Their job is to ensure the money in mutual funds is invested in various investments classes (stocks, bonds, commodities, real estate etc.) and so that the risk for the capital held in the mutual fund is spread across many different assets.
There’s a fee to have your money invested in a mutual fund. These asset management fees can be around the 2-3% of your total assets. Not too bad, right? 2-3% a year is a fair price, surely… I don’t want you to rely on my opinions to affect yours so let’s consider what happens to £10,000 invested in a mutual fund by Ana. Ana wants to secure her retirement so as well as £10,000 she invested upfront, she will also be investing £200 every month. For the purpose of this calculation we will presume that mutual fund achieved average of 9% returns a year (in line with the average returns achieved by passive investment in S&P500 index fund).
2-3% a year doesn’t seem like a lot when we look at it from the perspective of a few years, but when it comes to 20 or 30 years, you’re looking at anything between 25% to 52% of your total wealth eroded due to the fees.
Your retirement fund might be gone but that lovely Canary Wharf office spot is almost paid for…
You might be thinking to yourself “OK so the mutual funds are expensive but surely they perform better than alternative options.”
If you thought that, you’d be wrong. Depending on which research or comparison study you look at between 92-98% of all mutual funds fail to beat or even match the performance of S&P500 over long period of time.
Fund managers of mutual funds and other active investments are essentially trying to time the market. Sell when the stock or commodity is high and buy when it’s low. It does involve a certain amount of predicting the future and however unlikely that sounds – the financial industry still believes it can do it. Persistent existence of mutual funds is proof of that belief. And if you’re tempted to believe fund managers can predict the future – I’d encourage you to go back to what was happening in the financial industry in 2008. The financial crystal ball clearly didn’t see that one coming!
And if all the above was not enough, there are the transaction fees and taxes which further erode whatever wealth you have left after fees and a questionable performance.
You might think that I don’t like the financial industry very much but that’s not really the case. As with every single industry, there are some brilliant advisors out there, and some that are not that good. There are some great professionals out there who could help you save a lot of money in a long run and there are those that would make a lot of money on you.
The truth is you have no way of knowing unless you learn more about the financial world so that you can have a different conversation with people who are looking after your investments or, better still, take control of investing yourself and use the professionals on ad hoc basis only when you need help with your decision making.
If you’re still inclined to have a 3rd party looking after your money, here are some of the things you might want to ask:
- How are you being paid for your services? Do you receive any commissions or any forms of incentive for recommending specific products?
- Are you an independent advisor?
- Have you got a legal obligation to act in my best interest?
- Do you have access to all financial products from across the market?
- What are all the fees and charges are deducted from my assets?
- How will you invest my money?
- What’s your investment philosophy?
- How will you consider the part of my assets you’re not managing? (such as properties and other investments held elsewhere)
- What happens if I die?
- How often will we talk/meet?
- Where will my money be held?
- How will you manage the taxes?
- How are my assets performing against S&P500, VTWSX (which is total world stock index fund) and FTSE250, FTSE100 or FTSE All Share? (which all track various number of the UK companies listed on the London Stock Exchange)
It’s important you understand what the financial advisor will tell you. Don’t be fobbed off by more impenetrable terminology or grand, philosophical ideas – this is the time to be practical and ask ‘stupid’ questions to make sure you understand how, where and why your assets are being invested.
These are some of the reasons why I invest and manage my assets myself.
You see, I believe the very presumptions on which the modern financial industry was built are flawed. I think the idea that we should have professionals managing our money is ludicrous. I believe relying on professionals to manage our money is as ludicrous as relying on professionals to bring up our children.
Before you decide I’ve lost my mind – hear me out.
All parents I’ve ever spoken to feel like they have no idea what they’re doing. And let’s be honest, the facts really do stack up against them… They have no previous experience or any child rearing qualifications to speak of, yet they are given responsibility for a new life. And messing that one up brings the consequences so severe that they simply cannot be even compared to any potential financial loses.
All parents are exhausted, confused, constantly questioning whether they’re doing it right and quite frankly are themselves dealing with their own personal challenges which have nothing to do with a kid that has just took over their life. When you think of it like that – parents are certainly not the best qualified, often not the most experienced to bring up their own child.
Surely, leaving our kids to be brought up by the professionals who were educated in doing just that would be better than our imperfect selves taking on such responsibility.
So why don’t we?
The reason why we don’t let professionals bring up our kids for us is because deep down, we know they will not care for them as much as we will. No professional will be as invested in our kids as we are. And no amount of knowledge, certificates, diplomas or experience will outweigh that.
I believe the same analogy goes for managing our assets and investments. No professional out there, however qualified or experienced will look after our retirement better than us.
Nowadays we can all manage our own wealth. Not only can we, but we also should all be managing our own money. If you have less than £1 million of assets under management, you should be able to manage everything by yourself. If you do have more than £1 million, work with the advisor who will help you streamline the taxes – even with this amount or more – you should be managing your wealth. But the advisor who will help you avoid unnecessary taxes is going to be worth his or her weight in gold.
That’s why I believe educating yourself on personal finance and investing is crucial. I’ve read over 40 books on the subject and have lived and breathed all things money related for the last couple of years.
You might be only one article away from opening a retirement account. You might be only one book away from beginning to rewrite your financial story. You might be only one educational course away from starting to invest yourself.
You don’t have to be another Warren Buffett to be successful in investing. You just have to start.
Just like with new parents – at first you won’t feel like you know what you’re doing. You’ll mess up at some point. You’ll learn and do it better next time. Don’t take big risks when you first start – just start and find your feet in the world of money. You can do it. And for those that do, the rewards go way beyond the financial benefits. If you would like to find a friendly space to talk all things money – join our community on Facebook – Smart Money Society. You can find free resources and training there as well as a large community to support you on your journey. Whether your journey is taking you out of your debts or taking you to early retirement – you’re more than welcome there.
Kat Kuczynska Transformational Coach & The Founder of Invested ME
Kat Kuczynska Bio Kat is the founder of Invested ME, an obsessive mind, a stock market and property investor. Invested ME was created to help people and small business owners improve their finances, to stop living from payday to payday and learn personal finance and investing skills. Kat spent her early career years in the corporate world. She decided to start her own business after being diagnosed with late-stage cancer. As a former promiscuous spender on the brink of bankruptcy, she’s here to prove that anyone can rewrite their financial story and start building the financially secure life they once dreamed of.
All views expressed are those of the author and we accept no liability for advice given.