Do-it-yourself investing in the Czech Republic uses plans that are now illegal in the UK
Aisa International Continues Our Ban Hidden Charges Campaign, focusing on DIY investing costs.
Investment advisers are often seen as just middlemen that are there to take a commission, and that buying investments directly is always cheaper.
We would challenge that idea using real life examples here in the Czech Republic to show how working through properly qualified, regulated firms may assist you to obtain the best deals, that are often better than DIY investing costs.
Before we explain further, let’s look at what happened in the past.
Equitable Life
Equitable Life was an example of the sales angle that avoiding the ‘middleman’ and going “direct” to the investment provider saved money and generated greater growth. At its peak in the 1990s, Equitable had 1.5 million policyholders with funds worth £26 billion under management. The DIY investing target market was professionals, typically lawyers and accountants.
Both myself and James Caldwell were independent advisers at the time and we were often challenged by “professionals” and “journalists” as to why anyone should believe us. After all, Equitable’s main sales pitch was that they did not pay commission to financial advisers. Essentially investors invested directly and avoided independent advice with the supposed associated costs.
I am not going to focus on the reasons for the collapse of this company in 2000, suffice it to say that in 1997 I worked with a pension specialist that put in a complaint to the UK regulator at the time with concerns about the guarantees the firm was offering and the unsustainability of them, alongside the high salaries of their staff.
Coincidentally, James Caldwell (our current CEO who I did not meet till 2013) was putting in similar complaints to the same regulator and publicly challenged Equitable directors through newspaper articles as to their continued viability.
Four months before their collapse Equitable Life sent a threatening legal letter to James asking him to stop highlighting his concerns that ultimately were the reason the company collapsed.
I separately recall a situation a few months before the collapse. I was visiting a lawyer in Manchester who wanted advice on some large pension contributions. At a follow-up call, he told me he had decided to go with Equitable Life’s products. I informed him of my concerns about the viability of the company and the fact that the initial charge (something we will come back to later) was 5% whilst I had offered to reduce this to 2.5% with my recommendation.
He ignored me and a few months later his funds were suspended. It took many years to unscramble the mess at great cost to him and all Equitable investors.
Who gets the 5%?
I said then, and I say to you readers now, ‘Who is getting this 5%?’
The answer was the same in the past and is the same in the Czech Republic right now. There are both direct sales firms, direct platforms and salesman taking this same 5% cost as a “secret” payment.
Do NOT be fooled!
As with Equitable Life over 20 years ago in the UK (which now bans this practice), the idea of cutting out the middleman leads investors to actually pay much higher fees!
What is not explained is that funds come with different charges that allow firms to select the charging structure which they will earn from the client. The client has no idea that they can get the same funds for a far lower cost.
Imagine, identical fund performance, identical fund managers, identical setup and the only difference is:
The Cost Benefits of Using an Investment Adviser
Example of Firm A (Direct) vs Firm B (Aisa)
If we consider the investment of 100,000 EUR
Firm A
Initial Cost 100,000 x 5%= 5,000 EUR
Ongoing fee 1.5% pa = 1,500 EUR
Total cost in Yr 1 = 6,500 EUR*
Firm B
Recent example of a client (where a fee is paid to the adviser) and a passive portfolio is recommended.
Initial Cost – agreed fee to adviser = 1,500 (no commission taken from the initial investment)
Ongoing Fee to adviser (0.7%) = 700 EUR
Ongoing Fund Fees (0.2%) = 200 EUR
Total cost in Yr 1 = 2,400 EUR*
The client has spent 4, 100 EUR MORE in the first year alone. As these funds are identical, other than the charging structure, the real impact over 5 years is huge.
*(approx. as this depends on the value of the fund during the year)
No client should accept this – our Ban Hidden Charges Campaign
This practice and these hidden charges called Bid/Offer spreads are banned in the UK. We campaign to ban it in the Czech Republic as you, the clients, should not be subject to these charges.
Summary
There are online apps and platforms (and direct sales teams) that supposedly offer very low fees for DIY investing but do not explain the hidden charges of Bid/Offer spreads and this damages clients’ returns and investment immediately.
Further, not only do they actually cost more but a decent financial planner will provide financial planning advice that goes hand in hand with using the services of a professional qualified investment adviser, and maybe at a lower overall cost.
