More and more people are choosing ready-made investment solutions. Rather than agonising over all the individual components, we’re getting the investment provider to blend one for us. It’s like going to M&S to buy a ready-meal, rather than a basket of ingredients. But how to decide where to go?
One of the most obvious ways to compare them would be to look at what you stand to earn: the actual £ value of projected returns minus the charges. But some platforms have charges that others don’t, some call them by different names, and some seem to hide them completely. And most fund managers only tell you what they’re going to charge for the brainpower and administration, not including the additional charges you pay when they buy and sell.
It’s too hard. And it’s bloody frustrating. So we decided it’s time to do something about it.
1. We opened 20+ test accounts with different investment platforms and robo advisors.
2. We invested £500 into each of them, choosing simillar investments and portfolios.
3. We came back after a year to measure our new account balances.
The endless and complex industry debate around performance attribution, methodologies and cost disclosures is intellectual self-indulgence - all I care about as a customer is what is the £ balance left in my account at the end of my investing timeframe?
– Holly Mackay, Boring Money CEO
2018 was a pretty rough year for the stock market, with values falling left, right and centre. As a result, all our test accounts lost money (though most of them still beat the FTSE 100), but some investments did remarkably worse than others once the charges were paid.
We’re not just talking a difference of £10, £20 or even £50 here. The gap between highest and lowest return was a whopping £120: our Wealthsimple account balance dropped 4% to £481 (including charges of £3.43), compared to Alliance Trust Savings’ drop of 28% to £361 (including charges of £120). More on charges shortly.
Here’s what that looks like on a chart:
Does this mean some platforms are just rubbish compared to others? No. Not quite. There are a few variables in play here.
What’s actually inside these portfolios
Although we picked funds that were as similar as possible to each other – own-brand funds managed by the investment outlets with about 60% allocated to shares – the exact make-up of these shares differs from provider to provider.
• Some parts of the world did better than others so those with more in US shares, for example, will have done better.
• And some people got cold feet about shares during the year and reduced their holdings from 60%. Given the dodgy markets last year, this would have boosted their comparative returns. If something’s heading down, you do better if you own less of it! Our top three performers reduced their exposure to them by 15%–17% over 2018.
The way charges and fees are handled
Market movements affect the value of your investments – that’s a given. What’s surprising is just how big an impact the charges had too.
• As you can see on the chart above, the five lowest balances belonged to accounts with either a flat fee pricing structure or %-based fees with minimums. In proportion to an investment of only £500, these fees have a huge impact – Alliance Trust Savings charge £120 a year, for example, which is colossal here but a drop in the ocean for a larger investment.
• So to be fair to the guys with fixed fees or monthly £ minimum fees, we would expect them to look bad based on these small test account sizes. But if you’re Jeff Bezos, for example, paying £120 a year for your gazillions is not a bad deal!
• If we had invested £10,000 or £100,000 instead, these charges would likely have balanced out and our leaderboard would look quite different. After all, before subtracting the charges, our combo of Vanguard (investment) and Alliance Trust Savings (admin) was actually the third best performer, not the twenty-first.
Take a look at the rankings in this table for greater detail (best to worst: dark blue to dark red):
Because we’ve only looked at 12 months’ performance so far, and investing is a long game. There will always be good years and bad years, ups and downs, which is why we always recommend you invest for at least 5 years. As long as you’re not forced to withdraw your money during a bad year, you should be okay.
When it comes to bad years, 2018 was a stinker.
January was particularly dodgy, with larger daily swings in market values than usual. They were peaking when we set up our test accounts (of course!), and then they started a tumble that hasn’t yet recovered. If we had waited until February to invest, our accounts would probably have been in the black by now. Typi-bloody-cal.
That’s not our way of telling you to try and time the market – nobody can read the future – but it’s worth noting that our reduced balance wasn’t entirely the fault of the online investment platforms and robo advisors.
Besides, the funds still beat the market
As we mentioned, it was a bad year for the FTSE 100 in the UK, which fell 12.75% over the same timeframe as our test accounts. It’s a similar story for the S&P 500 in America, which fell 10.9%.
Compare these figures to our test accounts, which spread our investments across these two markets and beyond, and we still get a small success story. Before accounting for charges, our test accounts fell by between 3.8% and 9%. So despite losing a little, we were still protected from the full force of the stock market’s slide, which shows the benefit of globally diverse portfolios that are managed by professionals. They can’t dodge every bullet, but they can certainly thicken your armour.
1. Knowing how charges work is important. If you’re only investing a small amount of money, don’t choose a platform with a high annual £ fee that eats up your earnings. Do the maths to see if a %-based fee will leave you better off.
2. Diversify and spread those bets around. All our test accounts outperformed the FTSE 100 before charges were applied.
3. The best performers were Wealthsimple and Wealthify. Whether you include or exclude the charges, these two robo advisers always came out on top. Special mention too for IG Smart Portfolios, which came third after charges were applied. But (sorry to rain on a short-term parade) 12 months is just the start and not long enough to evidence skill over luck.
4. The industry needs a big kick up the jacksie. They need to cut the smallprint and tell us how they’ve done in a way which makes sense.
In the words of Holly Mackay, Boring Money CEO:
Conducting what should be a simple analysis was head-bangingly difficult. I needed to have over 20 test accounts, take a day to trawl through the data and to have 20 years’ experience of looking at platform charging models to produce these findings on a comparable basis. If you’re shopping around, have a look at our Best Buy tables to see what other customers have to say. And keep an eye on performance after charges. If you have any questions, send them our way.
Come back next year to see how our test accounts fare as the economy rises and falls.
After all, a long-term view is the best one to take with investments. And who else is crazy enough to drop £10,000+ on an experiment like this to give you that view? Not Joe Public, and not Mr Moneybags of BigCorp. This is a job for your friendly neighbourhood money owls, so watch this space.
[CEO’s note: It’s actually more like £9,300 now. Scowl.]
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