When asked what he viewed as mankind's greatest invention, Albert Einstein reputedly replied, “Compound interest is the Eighth Wonder of the World. He who understands it, earns it; he who doesn't, pays it.” Compounding lays the cornerstone of good investing and can be separated into two sub-components: performance and fees. It’s a delicate balance. Like rearing a delicate flower, space must be provided for investment flair and talent to bloom, while set within a consistent and carefully controlled environment. Get this balance wrong and the small seedlings will do poorly; they may even die. Get it right and they will grow into fabulous forests and remarkable portfolios.
1. The power of compounding
Something we learned running hedge funds, and something we didn’t expect at all, was how often we kept running into some of the world’s most successful endowments, pension funds, and sovereign wealth funds; all beating similar paths through the financial undergrowth. So, we thought about why this was, and gradually realised that almost all these top performers shared four key attributes. Our aim is to harness these same attributes and make them available to you, the retail investor, at a price you can afford.
We often hear about wealth manager ‘mates’ entrusted to look after people’s money and to choose suitable funds for them. That’s a heck of a lot of trust! Because, according to S&P Dow Jones, over the past 10 years 87% of active European equity funds underperformed the S&P Europe 350 Index and 95% of US- funds underperformed the S&P 500. These results are bleak. Yet, European regulators find retail investors still struggle to obtain basic information regarding how much their pot has grown, their charges, and whether their expectations have been met.
IInvest £100,000 at 5% annually, and it will grow to £265,330 in 20-years. This represents a cumulative gain of 165%. Now deduct typical total investment fees of 2.83% per annum* and that same £100,000 will increase to just £153,627. Your final pot is almost half the value it would have reached in the absence of fees. Over an average 38-year working life, fees can reduce your final saving’s and pension pots by a staggering two-thirds, leaving you to live out your retirement on the remaining one third. That kind of maths astounded even Einstein! It is why, through innovation, investment, and operational efficiencies, Eriswell keeps full-service wealth management costs down to around 1.1%. This includes ongoing advice, portfolio management, trading platform, administration, safe custody, etc. Our rates are over 60% below the 2.83%* per annum market average.
2. Performance. It’s not good enough to aim, you have to hit it
* Industry standard UK combined fees for a £100,000 investment are 2.83% per annum. Decomposition as follows: 0.95% per annum Wealth Management/IFA advice; 1.25% p.a. active fund management fees (OCF + hidden transaction charges); and 0.63% per annum additional fees, including inter alia entry/exit fees, bid/offer spreads, and administrative charges. Sources: FCA, ESMA, Market estimates.
How standard fees of 2.83% p.a. destroy your savings over time
Control frameworks are your north star, a dependable point of reference which governs the evolution of your portfolio through time. This star must never dim as the results are rarely good. Control weaknesses come in many guises, but arguably the most worrying are the persistent failures which follow an organisation’s instinct to protect itself and its reputation above all else. To paraphrase Lincoln: effective control systems must be of the individual, by the individual, and work for the individual not their service providers. Eriswell’s control frameworks have been designed to meet this test.
4. Control Frameworks
3. Fees. More dangerous than any crash!
Chart 1: MARKET STANDARD FEES of 2.83%* p.a.
Chart 2: ERISWELL FEES of 1.10% p.a.
Hallmarks of a successful portfolio
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