Unpleasant surprise!

I received my MIFID II “Annual Ex-Post Costs and Charges Disclosure Statement” from the Discretionary Fund Manager (DFM) that manages my pension investments last week. It is the first such statement to arrive. As someone still close to the retail investment market I know I should not have been surprised with the content. But I was.

The “Total effect of costs and charges on return during the past 12 months” added up to an unpleasant surprise.To avoid any envy (or pity!) and to make the maths simple, I have re-calibrated the actual numbers on the basis of a portfolio value of £1 million pounds and added in the fees I pay to my IFA. On that basis the charges total just over £20,000. Yes, £20,000!

And here is the thing. If I chose to take 4% income, as seems to be quite typical, my £40,000 will be £24,000 after tax. Just £4,000 more than my charges. So, what can I do to reduce my costs?

First; I could try and get the DFM and adviser fees down.  Second, I might consider suggesting to the DFM that we reduce the amount invested in expensive collectives and increase the exposure to direct securities. Third I’m now thinking of a much more radical solution. Even though I know it carries a fair degree of risk.

What about creating a well diversified passive portfolio with regular rebalancing? I imagine the cost would be around 25bps. On my notional £1 million that is £2,500. And maybe I could come to an arrangement with my IFA to pay an hourly rate for financial planning and other advice? Say £200 per hour and maybe ten hours a year. That is another £2,000. So, all in all a fee of £4,500 rather than £20,000. An additional gross income of £15,500. And a net increase of about £9000 pa. That would increase my drawdown income by more than a third and pay for a couple of holidays.