Next week thousands of people will have to square up with the Revenue as the tax deadline for the self-employed looms.
This period is a boon for advisers as all sorts of self-employed workers try to minimise this year’s tax bill by setting aside income for future pensions.
To grab some of this lucrative action, financial advisers – from the small one-man-and-his-dog brokers to the large investment banking arms of our financial giants – have been in snake-oil mood, promising vast riches and wealth through a variety of products, funds, stocks and bonds.
Who are these “expert” professionals and what do they charge for looking after your shekels?
Well, the first thing of note is that the financial industry is paying itself handsomely for handling your money. Go to any expensive restaurant in Dublin at lunchtime, get any business class flight out of Dublin airport, check into any five-star hotel anywhere in the world and you will see them.
The young men in smart suits and swanky ties, who work in the financial services industry and pore over biased company research on red-eye flights, are busily spending your money. And my God, do they spend.
As a poacher-turned-gamekeeper, I have a bit of knowledge of this game. Back in the London of the early 1990s when I first worked in the industry, I was amazed at my own starting salary in comparison to my friends.
On top of this were bonuses that ran into multiples of the average industrial wage. This was before the premium class flights, five-star exclusive hotels, open-ended credit cards and huge expense accounts.
Who paid for all this? You did. The investor, the pension holder and the life assurance policy holder forked out millions of pounds daily to keep these people in clover. That was back in the bull market and yet today in Ireland, we have fund managers still taking fees for losing their clients’ money.
Warren Buffett, the world’s finest investor, calls the excessive fees in the financial industry the “croupier’s take”, likening the investment markets to a casino.
The croupier takes from the client on three levels. First, the brokers need to be paid. Second, the fund manager takes his cut and third, listed companies have to be managed.
Let’s assume that the stock market will return 5 per cent a year on average over the next decade. How much of that 5 per cent will the average investor see?
Five per cent per year may well be too optimistic, but this is the figure many commentators appear to expect on average per annum.
Last January, the Iseq index traded around the 5,300 mark, while today it is at 5,637 – and therefore the market is up about 5.9 per cent so far.
On average, managed funds charge a 0.5 per cent annual fee for administration and the like.
Quite what administration there is in a tracker or passively managed fund, I can’t figure out. Surely, one letter a year and a bit of basic housekeeping does not cost 0.5 per cent of the principal, but there you go.
In addition, there is the commission from trading stocks on top of the spread between bid and offer price, which is trousered by the brokers in the industry.
On average this is about 1 to 1.5 per cent of the transaction. Already, the investor is down to a little less than 3.5 per cent of the likely 5 per cent increase in stock prices.
Before you can be sure of your 3.5 per cent return, what about the up-front costs?
If you take out a retail fund today, you are likely to pay a signing-on fee. This varies from 3 to 6 per cent, but is typically about 5 per cent.
Given that we are all advised to stay in for the long haul, it is fair to suggest 1 per cent per year. The state also gets in on the act here with a 1 per cent stamp duty charged on each transaction. Therefore, the punter is down to 1.5 per cent return.
Remember that the rate of inflation is running at around 4 per cent.
Finally, what about the managers of the listed companies themselves? They need their shekels too, typically by way of stock options. Although Irish executives may not be involved in this racket quite as much as their US counterparts, they take their cut.
Following the advice of financial market experts, US senior executives trouser 20 per cent of the increase in stock price by way of cut-price preferential options, according to Standard & Poor’s.
So there goes one dollar in every five for the investor.
Given the huge fees that corporate advisers generate for mergers and tactical financial advice, the industry reckons that about half a per cent of any upside in a deal goes straight to the investment banker.
That’s another 1.5 per cent taken off the pension holder’s return. Amazingly, the investor is left with nothing or next to nothing, based on the prediction that stock markets will rise by 5 per cent per year, as is the base case for most funds.
There is also a self-reinforcing problem here. The smaller the return, the less cash will go into the market, forcing the return down again. Given the fee structure, investors will be getting negative returns for some time to come.
Obviously, we can tweak the numbers here and there a bit. However, the message is clear. Investing in a defined contribution pension in the stock market is not worth it because the financial industry takes all the upside to pay itself handsomely for doing sweet Fanny Adams.
I suppose someone has to pay for all those Reuters screens, boardrooms and lovely views from the IFSC over Howth, Dublin Bay and the Dublin Mountains.
And, in the absence of a significant bull market in stocks, the punter is getting shafted.
Even in a bull market, which is highly unlikely to come about again for quite some time, the croupier takes an excessive cut.
The bloated financial services industry needs a reality check. We pay its bills. The industry operates as a middleman, channelling national savings from your pay slip to selected companies via the stock market. When you cut through all the glossy research, fancy boardrooms and marble foyers, that’s all it is: a handler of savings.
There is no alchemy.
Yet as an industry it is one of the greatest recipients of state subsidies through the tax breaks that go with pensions. It is, therefore, the 21st century industrial equivalent of Irish Steel – a large sheltered, bloated industry existing and profiting from tax breaks.
This raises the question: where is the industry going? Ryanair is a good model.
There is now a great opportunity for a Ryanair-type outfit to come in and grab the industry by the scruff of the neck, offering the lowest prices, best deals and a decent basic product.
Until then, beware the snake-oil salesmen, their benchmarks, complicated charts and relative-value spiels.