Behind the Curtain #3: Sneaky Financial Creations #1

Financial regulators repeatedly warn of unfair practices in the retail investment space: high fees, price clustering, poor advice, low transparency, and what not. But nothing compares to real-life examples. In which vein, Eriswell has been offering complimentary portfolio Health Checks to retail investors since mid-July. And shining a light into some dark spaces has revealed a collection of parasitic financial creations sneaking around in the gloom. Supreme Court Justice Louis Brandeis famously remarked, “Sunlight is the best disinfectant”, and none of these creatures will survive the cold light of day. At least, that is the hope. A Parasitic or Contributive Structure? Names have been changed to protect people’s identities. STEP 1: About 25 years ago, Sarah started to invest in a pension offered by “Asset Manager A” (a large UK asset manager). STEP 2: Some years ago, “Asset Manager A” sold part of its pension business to “Asset Manager B” (another large UK asset manager) for a significant sum of money. Asset Manager B charges circa 0.7% to manage its newly acquired funds and discloses this fee to Sarah. No investment advice is included in this fee. STEP 3: To our surprise, we found that Asset Manager B doesn’t actually manage the funds it acquired! It passes its newly acquired pension assets straight back to Asset Manager A in the form of a ‘Master Pension Fund’, which charges 0.5% per annum for this service. So, Sarah is now paying 1.2% per annum in fees to 2 separate UK service providers of which only one is visible in her pension statement. Sarah neither receives investment advice from them, nor has a log-in to see what is going on. This limited-mandate/limited-visibility combination immediately rang alarm bells. But wait….. STEP 4: Asset Manager A’s Master Pension Fund does not directly manage Sarah’s money either! It sub-allocates to a number of funds -- also run by Asset Manager A -- each of which charges fees of around 0.1% per annum. That’s now about 1.3% per annum in total. And that’s not the end of it…….. STEP 5: Asset Manager A’s sub-funds are mostly passive-type funds. Yet they trade on bid/ask spreads (kept by Asset Manager A) of between 0.2% and 1.7%, significantly more than comparable publicly listed funds. We are as yet unable to quantify the total annual cost of such transactions. KEY TAKE OUT Asset Manager A has a clear conflict of interest here: it can increase its revenues and profits at a time of its choosing by churning the funds in which Sarah is invested. Its latitude to do this is enhanced by the fact that neither Asset Manager A nor B provides Sarah with investment advice, she has no log-in, and her statements do not appear to provide regular transaction reports. Through no fault of her own, we estimate Sarah has ended up paying circa 2.1% per annum for a service which should have cost around 0.6%. We estimate that excess fees of 1.5% per annum will erode 41% of Sarah’s pension over her working life. Abraham Lincoln might call this, a structure of the service providers, by the service providers, for the service providers. We call it a disgrace. Request your free Portfolio Health Check here: info@eriswell.com #Demand Full Transparency

Behind the Curtains of the Assert Management Industry #3

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| 14 September 2021

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Sneaky Financial Creation 1 # Demand Full Transparency Eriswell Capital Management