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Financial services lie No. 3 – “unit trusts can grow your savings”

We seem to have fallen (fatally?) in love with unit trusts. Between 2000 and 2008, we were putting an average of £10bn a year into unit trusts. Since 2009, this has rocketed to an amazing £23bn a year. Christmas has truly arrived for unit trusts salespeople and managers.

The reason why there has been a tsunami of our savings into unit trusts is more than obvious. With our pathetic Government’s Funding For Lending scheme (see yesterday’s post) the banks don’t need savers’ money and so are paying below-inflation interest on savings. This has forced many normally risk-averse savers to (probably reluctantly) move their money from deposit accounts into unit trusts. A sad shock awaits them.

Let me ask you two simple questions about unit trusts:

1. If you put your money in a unit trust that achieves a wonderful 30% growth over 5 years, (6% a year) will you end up with more money or less money than if you had left it in a 5-year deposit account paying a miserable 3% a year (15% over 5 years)?

2. If your unit trust grows by an impressive 32% over 5 years, will you get back more or less money than you had originally invested?

Not too tough? Hopefully most readers realise that the answer to Question 1 is that the 3% a year bank account is better than the 6% a year unit trust and the answer to Question 2 is that even if your unit trust grows by 32% over 5 years, you’ll get back less money than you invested.

Why does supposedly good unit trust performance give such poor results for savers? Because of the massive charges, fees and commissions taken by those who sell them to us and manage our money.

Let’s do some simple maths: when you invest into a unit trust, you lose 5% of your money in an initial fee (I know you can avoid this by buying through a funds supermarket, but 75% of all savers’ money into unit trusts goes through financial advisers and they don’t mention funds supermarkets to their clients as they’d lose their commission if they did)

And when you eventually sell your unit trust, you lose another 5% as the price you sell is always about 5% lower than the price people buy. So that’s 10% of your money gone just buying and selling your units.

Then we have the annual charges. You’ll probably be told that a unit trust has an Annual Management Charge (AMC) of say 1.2% or 1.3%. Doesn’t sound too bad? If the person pushing the unit trust is a bit more honest, they might admit that the Total Expense Ratio (TER – the AMC plus a few other costs) is say 1.6% or 1.7%. Now you might think that something with the word ‘total’ in it means that’s all you’ll be paying. Wrong. The TER doesn’t include dealing costs – the costs of the fund manager buying and selling shares through their favourite (high-priced) broker (and then getting kickbacks from that broker for pushing business their way) which can add another 0.5% a year.

So, in all, over 5 years, you’re paying over 20% in charges – £10,000 on a £50,000 investment. Going back to Question 1, this means that if your unit trust grows by 30%, you only get 10% – less than a bank account paying a pathetic 3% a year (15%)

Then we have to remember inflation. If inflation is running at 2.7% a year (it’s actually probably nearer 5%) then that’s another 13.5% your unit trust would have to grow. So, over 5 years, your unit trust would have to go up by 33.5%, just for you to get your money back – few unit trusts will ever consistently achieve that! So, answer to Question 2 – if your unit trust grows by a seemingly impressive 32% over 5 years, you actually lose money taking account of inflation.

Sorry about all the numbers, but hopefully they show that for us savers unit trusts are a losers’ game. For the unit trusts salespeople, financial advisers and trust managers they’re a gold mine bringing in £1.15bn in upfront charges and another £16bn a year in on-going charges. Yippeee!

If you want to put money in the stock market, then just buy the shares of a few well-known (blue chip) companies yourself reinvesting the dividends in buying more shares in the same companies. Over a 5-year period, you’ll probably beat most unit trust managers by about 20% or more. They don’t need your money – so don’t give it to them. Leave that to suckers who don’t understand the simple maths I’ve shown here.

(A message for the reader who contacted me about contributing to this website. I’ve tried to email you twice, but the email address you gave doesn’t work)

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