some money advice is like biting an apple which is an orange insideIf you are saving for retirement or to build a nest egg for your family, beware that in some cases VAT will wipe out of a fifth of your wealth at a stroke.

That’s because more and more independent financial advisers are outsourcing the management of their clients’ portfolios to professional third parties called discretionary fund managers, or DFMs, in an effort to chase extra growth in today’s generally low-yield investment markets.

DFMs have been described as “highly specialised financial gurus” with “the expertise to read market changes and the confidence to take detailed decisions about investment placement”.

But such expertise – assuming it exists – can come at a high price for private investors with limited funds.  Which is why we at the Whitehall Partnership will not entrust any of our clients’ money to DFMs.

That’s because we, as independent financial advisers looking after the interests of company owner-managers and other high net worth individuals, agree with the critics who accuse DFMs of concealing high fees that severely reduce returns on investments, so leaving savers worse off than they otherwise would have been.

These include service charges for investment management and administering a portfolio, handling fees to cover stamp duty and brokerage costs whenever stocks and shares are bought or sold, and fees for the custody, or safekeeping, of assets.

A small number of discretionary fund managers also charge extra simply for meeting performance targets.

As if that wasn’t bad enough, those annual fees, which could amount to as much as three per cent of a portfolio’s value, are subject to VAT (although there are some exemptions) which in turn adds a further 20 per cent to the bills individuals have to pay.

Any hopes that HM Revenue & Customs may be minded to ease the tax burden have been quashed by a recent ruling by the European Court of Justice stating that all investment management services would remain subject to VAT.

It is estimated that this tax yields about £500 million a year in revenue, a sum our cash-strapped Treasury would be unlikely to give up.  And any hopes that it might were quashed when the European Court of Justice ruled that all investment management services would remain subject to VAT.

We at the Whitehall Partnership believe that VAT is just the thin end of the wedge for investors who are struggling to make their capital grow through expensive money advice.

Financial advisers who outsource the management of their clients’ funds also build in their own costs, thus reducing returns even more.

Such fees may be hidden from clients, but advisers can pocket them year after year by doing little or nothing to earn them.

The signs are that since the Retail Distribution Review stopped independent financial advisers charging commission for money advice, which means their services now have to be entirely fee-based, fee structures may have become more onerous and less transparent.

Excessive fees are the cancer that is destroying investment returns and we are at war with them.

The Whitehall Partnership is able to provide advice as well as implement, maintain and service investment strategies, while supplying clients with regular updates on the progress of their investments, in such a way that VAT is avoided.

Studies have shown that annual charges can amount to between 2.5 per cent and three per cent a year. The fees our clients are charged, including all management and trading costs, are likely to be half that.

That means more money stays in the portfolio to boost long term growth instead of being eaten away by high fees.

 

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