July 2017: This post was first published in 2014 but I’ve updated it to make the calculation clearer…and the message remains as important as ever!
I’m going to turn down a new job tomorrow.
People keep telling me that I’ll need to get another job…for mental stimulation even if not for the money. There may be some truth in that, but this particular job is not right for me.
Its not because I can’t do the job. Its a wealth management role that I reckon I could do in my sleep.
It’s not because it would mean grinding out 9 to 5+ in an office; you choose your own hours and work from home or at clients.
And its not because of the money. Once you have built a client list, the money is almost embarrassingly good. Apparently, the average person doing this role spends 2 months a year on foreign holidays. This is a clue it’s a “stealing candy from kids” scenario.
Its not because I’m lazy either. I spent many years as a workaholic and these tendencies remain. When I was in my early 20s, I used to tell myself that I’d ease back after my net worth reached £X. That was a long time ago and I just kept on going past a series of money milestones – like a marathon with no finishing line at 26 miles. If anything, the temptations to work hard have gotten greater over time.
The reason I’m turning it down is that it means selling expensive investment products to people who don’t need them.
This conflicts with my core beliefs and values, which are:
1. I want to help other people (as well as myself) get rich
2. I’d never advise people to buy products that I wouldn’t buy myself.
3. Everyone can learn enough to make their own choices and manage their own investments. This means keeping things simple.
4. The (active) fund management industry offers products which are expensive and underperform low cost index trackers.
5. Reducing costs is an important part of delivering better investment returns.
Now that I’m financially independent, I have no need to make money in a way that conflicts with these beliefs.
The selection process for the role has involved a number of interviews and given me a window into the crazy economics of the wealth management industry.
Here is all you need to know. This wealth management firm provides a service for which clients pay, on average, 2.4% per year of their funds under management (split roughly 50:50 between the wealth manager and the fund managers). So a client with a pension pot of £1m is paying £24,000 in one year in total fees.
Am I alone in thinking that, from the client’s perspective, this is fucking insane…? If we wanted, our family (of 5) could live on less than £24,000 per year. For everything.
Now 2.4% per year may sound like an innocuous little number but you need to think about this compared to your likely investment returns. If the market delivers 4.8% per year (real) then you are paying away a staggering 50% of your returns in fees. So you bear 100% of the downside risk and the managers take 50% of your expected upside. On what planet is that fair?
If the value of your portfolio falls or just grows by less than 2.4%, you will pay more than 100% of your returns to intermediaries. If you, as the client, think that your interests are aligned with the managers, think again.
This is bizarre when you realise you can easily put together a simple portfolio of Vanguard tracker funds for 0.15% per year. That’s a saving of more than 90%!!!
Investing is different from other parts of life. Usually, the more you pay, the more you get. So if you pay more for a house, you tend to get more house (e.g. bigger, better location). But when investing, you get what you don’t pay for.
The Escape Artist is Right and will show his workings. Below is a spreadsheet that I prepared for a friend. He is an intelligent and hard working professional aged about 40 with approx. £750,000 in an actively mismanaged portfolio paying 2.4% per year of costs.
The value of switching to low cost tracker funds for this guy is just under £3 million over 40 years. No, that is not a typo.
If you have an easier way to make £3 million, please email me and, if its legit, I’ll share it with the readers. I won’t hold my breath.
His response was something like:
Yeah, interesting – good point – I really should make that change, but work is quite busy at the moment.
This is a bit like seeing a cheque for £3m made out to you lying on the pavement and walking by because stopping might make you late for a check up at the dentist.
The Escape Artist says:
Pick up the cheque and take it to the bank NOW…do not pass Go, do not eat or do anything else until you have done this.
I have spoken to colleagues, friends and family about this recently. A few points became clear during those conversations:
1. People typically have no idea how much they are actually paying in fees. One person guessed “a couple of hundred pounds” when it was actually approx. twenty thousand pounds (£20,000) per year. So they were out by a factor of about 100x.
2. The reason people don’t wise up on fees is that they are effectively hidden. The client is never asked to write a cheque or hand over cash. Units are deducted silently, remorselessly, almost invisibly. We don’t miss what we never had. Yes, the terms are disclosed in small print and the funds comply with the letter of the law. But the actual £ amount of total fees deducted is never shown and can only be estimated.
3. Many people are a bit embarrassed talking about money, so they don’t compare notes (and fees) with friends. The Escape Artist has no such hang-up.
4. Even when you show the victims the numbers and explain that they are being raped, they often do nothing. Private client funds under management are “sticky” and are a wonderful source of recurring annuity style revenues. Wonderful for the financial advisers / fund managers. For the the customers? Not so much.
5. People value face to face contact with their financial adviser. There is a huge emotional comfort blanket in having someone to talk to and to share the responsibility with. This leads to (misplaced) loyalty…even when the adviser is grossly over-charging them.
Bizarrely, even when I have shown people that their “adviser” (they are really just salesmen not advisers) is effectively screwing them, the victim usually says something like:
Yes, but they are nice and I like them.
This is like paying a sociopath with a tie £20,000 a year to turn up to your house to be nice to you. While you are in the kitchen making him a cup of tea, he then steals your wallet and kicks your kitten. Not cool.
These same people would tell you that prostitution is morally wrong. From an ethical perspective, I’m not sure the 2 are that different.
The crazy thing about all this is that its just as easy to invest your own money (including your pension) as it is to run an online bank account. So if your capable of doing that, you’re capable of choosing a platform and a simple Vanguard tracker fund. Even if you know nothing about investing.
Back to the job. One thing I have learnt recently is that when you align your principles, morals and actions you become happier (as well as way more productive). So the wealth management job must be ditched. I won’t lie – the prospect of decent money and flexible hours is tempting – but I think I can do better from a moral perspective. I may be giving up easy money but, hey, I probably won’t starve.
This makes me think there’s a genuine need for face-to-face financial tuition to teach people what they need to know (rather than selling them expensive shit on commission).
Imagine having a cross between a personal fitness trainer and a Frasier style (“I’m listening”) therapist…but for your financial health. This type of financial coaching could give people need the skills and confidence they need to manage their own investments and stop getting their financial sweets stolen from them by playground bullies.
Here comes the science bit….how to avoid losing £3m of YOUR money: