Fees vs investment returns
A long standing client of mine recently referred her parents to me. They had a significant amount of cash in various banks and building societies earning them less than 1% a year in interest. They also had an Inheritance Tax problem.
My solution was an investment of £100K into an Inheritance Tax Scheme, ITS, paying 3% a year interest. After two years of Investing the investment would be free of Inheritance Tax.
The clients thought this was an excellent solution. However, when the wife learnt that our fees would be 2% up front and 1% a year she became very unhappy! This was in spite of the fact that their income would have more than doubled net of our fees and they would have saved £40K IHT after two years. Our fees would have been deducted from the investment.
I thought this was fantastic advice and great value for money but she disagreed. As a result I informed her that we could not act for her. She still wanted the investment but wasn’t prepared to pay our fees. I think a case of cutting off her nose to spite her face.
In my experience the least successful investors tend to make the wrong decisions about investing. The particular couple had about £400K on deposit earning them less than £4K a year in interest. With inflation currently at 3% a year that means they are losing 2% a year in real terms. However this lady’s issue over fees has completely skewed her judgement to her’s and her husband’s detriment.
The fear of loss of money when investing in stocks and shares is, in my experience, totally illogical. That is why people have ten times as much money in cash than in shares! Bearing in mind that the the average yield on FTSE 100 shares will be 4.1% this year and 4.4% next year compared to the average bank deposit interest rate of 0.36%, it remains a mystery to me why anyone would leave so much money on deposit. By the way the yield takes no account of the potential future capital growth of the shares too.
So with yields on FTSE 100 Index shares currently 10 times the return from the average deposit account you know it makes sense to not invest money into bank accounts other than for short term spending needs.
To become wealthy you need to invest the bulk of your money in real assets, the ones capable of capital growth, such as shares and property and only a relatively small proportion into fixed interest stocks and cash. You know it makes sense.