Beware the bid offer spread!

Friday, 12 February 2016

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IFA led Independent financial advice, Wetherby, Leeds

There is a nasty trap awaiting unwary buyers of investment funds like OEICs and pension funds. It is called the bid-offer spread and it can swallow 5% or more of your money instantly without you even realising it. It can squash your long term investment returns from over 100% to 0%. It is one of the last remaining rip-offs in the world of investment management and it should be stamped out.

Investment companies have to be fairly up-front about the annual and initial charges they deduct from your funds these days. While these are still far too high in many cases, at least they are pretty transparent. However, the bid-offer spread is often much harder to spot.

The offer price is the price at which you can buy units in a fund. The bid price is the price at which you can sell units in that same fund. The difference is called the bid-offer spread (or the buy-sell spread). If that spread is 5% then for every £1,000 you invest, only £950 goes into your fund, the rest goes into the pockets of the fund manager.

Why should there be any difference between the bid and offer price, you may well ask? Well, investment companies like to say that it covers their dealing costs, and this perhaps can excuse a small spread, but many funds have a spread of 5% or more, and that starts to look more like a rip-off.

Any decent fund platform, like those we place our clients with, offer thousands of funds with no spread at all. However, there are some high profile managers who seem a little more keen on them. For example, pretty much every fund offered by one leading provider carries a 5.25% bid-offer spread. While they shout about having “no initial charges”, this spread is effectively a 5.25% initial charge. I don’t know about you, but if I invest £10,000 into a fund I want £10,000 to go into that fund, not £9,475. And it’s even worse than that, because every time you switch from one fund to another, you pay another spread.

As a result, if you invest £10,000 and switch funds once per year then over a twenty year period, assuming 5% investment growth pa, you will have paid £10,000 in bid-offer spreads, crushing your total investment return from 165% to 0% and leaving you with £10,000 rather than £26,500.

That money should be in your pension or investment portfolio, not a fund manager’s bank account. If you suspect you might be subsidising someone else’s Porsche, let us know. We always offer a free review of your current investments, including what you are paying for them.

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