Does the old adage ‘you get what you pay for’ really apply to investments, or is cost merely the scourge of investment returns? Andrew Tully, Technical Director at Canada Life discusses the long-term effect of charges on returns, the difference between low cost and good value, and what advisers can do to ensure better outcomes for their clients in retirement.
There’s nothing quite like a significant market crash to draw attention to the cost of investing. As clients continue to lick their wounds from what was a particularly bruising time back in March, we’re reminded that people nearing, or in, retirement will perhaps find recovering those losses more of a challenge than those in the accumulation phase of life - especially if they have started to withdraw an income. So, what can advisers do to help? Reviewing their investment costs might be a good place to start.
Charges undoubtedly matter
There’s no question that the cost of investing ultimately impacts the client’s outcome, especially when you consider the compounding effect. According to a study by Vanguard, where they assumed neutral growth so as not to obscure investment returns (either positive or negative), the compounding effect of a low-cost portfolio of 0.2%, meant the return was over 95% of the capital after 25 years, while a high-cost portfolio of 3%, eroded over 50% of the return[i]. Admittedly that doesn’t account for how the funds were invested, and the ultimate performance, but it illustrates the difference it can make over time.
Low charges versus good value
That said, like most things in life, there is a fine line between low cost and good value, and advisers should be careful not to lose sight of that. According to a report published by the Pension Policy Institute in September last year, they found that although charging levels and structures have an important role to play in determining outcomes, “charges need to be considered alongside other factors such as contribution levels, investment strategies, member communications and experience, the strength of governance oversight and the impact of having multiple pots.”
They argue that the ultimate outcome can be helped by finding value in, for example, consolidating pension pots, and combination charges (where an AMC is combined with either a flat fee or a contribution fee), rather than an AMC-only approach.
Ensuring there is a robust and clear governance process in place is also key. You might pay a little more for that, but you need to be sure that the funds you recommend behave the way they are supposed to behave in prevailing market conditions.
Finding savings and good value for decumulation clients
As the retirement market continues to evolve in line with increased demand and a changing demographic, so the choices and value for money has improved. You could, for example, consider low-cost ETF-based model portfolios, which seek to reduce cost while also reducing the risk of underperformance. To do this, they replicate the performance of a benchmark index by owning all, or most, of its constituents using passive funds and exchange-traded funds (ETFs).
Multi-asset, risk targeted funds are also on the increase, where advisers determine their client’s capacity for loss and then select a fund that most closely meets their needs. This approach is cheaper than providing a bespoke solution but instils confidence that the fund manager won’t make investment decisions that sit outside of your clients’ comfort zone.
The point is that there are options out there that represent good value and are designed for clients who don’t have the capacity to risk future returns through inflated charges.
The Canada Life Retirement Account
You will undoubtedly be dealing with anxious clients over the coming months. Apart from helping them to take a longer-term view of investments, now is the ideal time to address those concerns by managing costs. A hybrid approach to retirement income such as our Retirement Account is worth considering. It offers income guarantees and flexible income solutions all under one roof. Because the funds are in one place, the cost of this approach is more efficient than buying different products to do different jobs.
The Retirement Account from Canada Life is one such solution and is underpinned by a fully comprehensive and cost-effective fund selection (which includes model portfolios and market-leading passive funds) that can be changed at any time free of charge.
If you would like support in reviewing the impact of recent market volatility on your drawdown clients, please contact your Canada Life Account Manager.
[i] Source: Vanguard, Investment Costs ‘Ready Reckoner’, January 2020