Managing Director, Worldwide Financial Planning, Writes:
Some of you my well remember my column six months back regarding ‘mirror’ investment funds. Whilst it caused a massive stir at the time it is continuing to create further debate in the financial services industry as it would appear that many had not fully grasped its impact on the investor.
It is well worth you analysing your own investments to see if you are impacted as the annual cost to you could be, from my calculations, up to 11% per year.
The main issue lies with investments into an investment bond and certain pensions. They are typically marketed as having low or no entry charges, but that is totally contrived, and the charges are taken anyway, as you will see in my most recent study below.
So what is a mirror fund?
A normal investment would be directly into a fund such as Fidelity special situations, or Jupiter income trust for example. Some life and pension companies offer you access to some of these funds within their products. You might believe you are investing directly into Fidelity but in fact you are investing into the life company’s version of it.
Whilst a real mirror gives an exact reflection of what is in front of it, a mirror fund does not. So how will you recognise if you have one or not? Well simply you will see an initial in front of the fund, so an investment into an Axa investment bond may say Axa SL Fidelity special situations. Or more simply put if you haven’t invested directly with Fidelity you are probably buying a mirror (mutated version).
Mirrored funds are often seen to be sold as having cheap access to a top fund. Fidelity special sits for example is available as a mirror fund in many investment bonds. In some instances it is being made available at 1% per year and sold as such. Consider that Fidelity don’t do discounts, so alarm bells should really be ringing at this point.
I suspect if you asked the average person if they thought there was any difference between the actual fund and the mirror fund they had just purchased, they would have an expectation they were exactly the same thing. Unfortunately they would have been badly misled.
Let’s look a little closer at the actual performances.
I had a look at the performance of fidelity special sits within Canada life, Friends Provident, Scottish Mutual and AIG over three years. AIG had returned a healthy 50.2% over the period. (1) Naturally we would expect Fidelity special sits to return exactly the same. Well you would wouldn’t you. Prepare yourself. A customer who invested directly with Fidelity would be over 33% better off than if had they invested with AIG. That’s 33% better over just three years. (1)
Over five years, the numbers are really quite startling. Scottish Mutual returned a lovely 127.45%, AIG a pretty 111.6%, but once again the customer who used the financial adviser to end up with one of these middlemen would have been disadvantaged. (1)
An investment with Fidelity special sits directly would have returned 164.67%! That’s a staggering 10% per year charge for having dealt with a financial adviser. (1) Some customers may well think that’s expensive for what they are getting. Perhaps.
I would recommend you study any pension or investments you have and ascertain if you are indeed invested in a mirror fund or not. It’s well worth remembering that an investment bond is also tax disadvantageous for most people given the fact that tax is taken at source as it grows, and is not reclaimable by non tax payers. This is on top of the inefficiencies above.
Whilst many will try and distract you with charges and fee savings of 0.5% per year, the issue with mirror funds above, as you can see, can be twenty two times worse. Remember their profits rely on a certain amount of apathy so speak to your Independent Financial Adviser immediately.
If you want to check if you hold a mirror fund call Worldwide free on 0800 0112825, e-mail info@wwfp.net or take a look at our investment section on our website.
(1) Source lipper hindsight
Worldwide Financial Planning Ltd are authorised and regulated by the Financial Services Authority. ‘The FSA does not regulate Credit Cards, Will
Writing and some forms of mortgage and Inheritance Tax Planning.
Information given is for general guidance only, and specific advice should be taken before acting on any suggestions made.
All information is based on our understanding of current tax practices, which are subject to change.
The value of shares and investments can go down as well as up.
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