What is portfolio management and how to avoid overpaying for it?

Your portfolio refers to your money and the places where you have invested it. The ‘management’ side of things is how you decide where to put it. And the cost of portfolio management has been coming down, so there’s never been a better time to invest.

The value of investments can fall as well as rise, and you may get back less than you invested. Past performance is no guarantee of future results

Portfolio management is one of those generic financial terms that is a lot simpler than it sounds. Manage your portfolio well and you could make a lot of money. Manage it poorly and you could make big losses.

This is why the world’s top portfolio managers can afford to charge big fees for their services, as well as getting a handsome commission on any returns. They can also bill for exit fees, share trades, new money added, fund fees, and VAT. Unsurprisingly, these charges can add up over time. A recent study by the Financial Times found that a £1 million portfolio cost an average of £20,000 per year in portfolio management fees. This means that you need to make a return of at least two per cent per year just to break even.

Watch Andrew Craig, author of ‘How to Own the World,’ explain how high fees and inflation are eroding your investment returns.

Read: Are high fund fees wiping out your investment returns? 

So it’s no surprise that more and more people are looking at ways to reduce the costs of portfolio management without putting their investments in jeopardy.

Whether you are investing for the first time or just looking to make a change, there are a wealth of options out there which can help you to save money on your management fees – even cutting out the cost entirely.

  • Shop around for an investment manager

If you want to hire an investment manager, you have to accept that you’ll be paying fees. Most managers charge a joining fee, plus an annual fee (usually around 2% of the total value of your investment) that is paid regardless of whether or not your portfolio does well. In return, they pledge to deliver big returns on your money. However, this isn’t always the case and even when your portfolio is doing well, you might find that your profits are eroded away by unexpected charges.

Ever since 2014, the Retail Distribution Review (RDR) has forced investment managers to be much more transparent about their fee structures, so you can easily shop around a few different firms and compare the cost of each one. When doing this, make sure you also look into the track record of each manager — there might be a reason why one is much cheaper than the others.

  • Go directly to the fund manager 

The top investors in the world usually run their own multi-billion-pound funds — hedge funds, mutual funds, or private equity funds. With a few exceptions, these funds are open to the public, and by investing alongside thousands of others, you can keep the fees down without losing access to your chosen fund manager.

Fund managers are becoming increasingly open to accepting retail money, so it’s worth contacting them directly to ask how you can invest. Alternatively, do your homework and find out the name of the funds which your chosen manager runs. A wide range of funds are now accessible through a stocks and shares ISA, so you could save even more money by investing through the tax wrapper.

  • Be your own portfolio manager

This might sound scary, but it’s never been easier to be your own portfolio manager. Once upon a time, professional managers had unique access to financial data, but most of this is now publicly available as long as you know where to look. Every fund manager releases a Fund Fact Sheet, which breaks down the exposure and movements in the fund on a monthly or quarterly basis. If you are invested in stocks and shares, you can find detailed company information on the relevant stock market website, or by reading the company’s annual reports.

Once you’ve decided where you want to invest, you can use tax-free wrappers such as ISAs or SIPPs to avoid paying capital gains tax on your returns. By investing through exchange traded funds (ETFs) and other tracker funds, you can keep all your administration costs close to zero too.

  • Seek robo-advice

Algorithms have always been used to track market movements and predict future performance. But where once they were calculated on spreadsheets, now they are processed through complex codes on distant servers. Automation has led to huge advances in portfolio management — ETFs, for instance, only exist because of it. Robo-advice is the natural next step.

Robo-advisors are essentially just financial advisors minus the human interlacement, who rely on algorithms and mathematical rules to help individuals to build and maintain their own portfolios based on their individual goals and risk tolerance. Robo-advice has been hailed as a way to bring high-end financial advice to the masses, as it is cheaper and more accessible than any other kind of professional financial advice.

Over the past few years, it has become hugely popular, and the value of the assets under management by robo-advisors is expected to hit $2 trillion by 2020.

As a relatively new instrument, there is not much of a track record yet, so it may not be for everyone. However, all signs point to robo-advice being the go-to portfolio management tool of the future, making high fees a thing of the past.


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