In a previous post, we discussed the three key elements that make up the total pension fund management fee. In this post, we discuss investment management fees, why these are paid and to who.
The Pension Investment Process
Those with a pension fund to invest (perhaps as a result of entering a pension drawdown arrangement) may self invest or engage an Independent Financial Adviser (IFA) to help. If self investing the individual will make their own choice on the provider and/or assets groups they wish to invest in.
If an IFA is employed their first step will be to collect detailed information on an individual’s personal circumstances. They will then perform an in depth assessment of attitude towards risk.
Armed with this information the IFA will choose an investment portfolio that meets the needs of the client and their attitude to risk. The IFA can either design a custom portfolio for each client or they may suggest the client uses one of a selection of pre built portfolios. Each approach has its own benefits and risks.
A customised approach will be the right approach for some but it does increase costs. Researching a specific solution for each client requires a significant amount of skill, time and resources. It also potentially increases risk.
The opposite is true of the standard portfolio approach but there is a risk of a ‘one size fits all approach’ and shoe-horning clients into a portfolio that does not fit their requirements.
With the portfolio in place, it is then the responsibility of the investment manager to oversee and control that portfolio. This requires experience, market awareness and sound judgement on the impact of changing circumstances.
Given specific boundaries and objectives, the investment manager will move assets in and out of the portfolio to maximise investor benefits. In short, they should select good funds (assets) and maximise fund growth.
The investment manager is controlled by an investment management committee of highly experienced people. They meet on a regular basis to take an overall strategic view of the portfolio. Based on their view of the market and what may change in the future they may decide that everything is proceeding well and to plan. Or they may decide that some re-balancing of the portfolio is required.
It may appear from the above that the investor gives up control. This is not the case as performance can be monitored on an ongoing basis via a platform.
Some movement of fund values up or down is normal and monitoring performance on a daily or weekly basis can be a waste of time and effort. A monthly or quarterly check is more appropriate. If there are any concerns these should be raised with an adviser (if one is employed) or directly with the investment manager to discuss the best way forward.
Active vs Passive Funds
There are two types of funds – active and passive. The difference between active and passive investment is covered elsewhere on this blog. As the name suggests passive investment seeks to track (match) overall market returns while active seeks to beat the market. The costs (fees) of active investment are therefore higher than passive.
It is up to the individual investor to decide if they prefer active or passive investment. It is important to judge if the active investment manager will actually be able to beat the market and therefore justify their extra fees? There are no guarantees.
Some level of fees is appropriate. The fees pay for the services of professionals and specialist technology. If those services deliver an appropriate level of returns then there is no major need for concern. However, it is important to ensure individual fees are not (without good reason) significantly higher than industry averages.