Insights

Reading the fee line: what one per cent does over twenty years

By the Kestrel Capital advisers7 min read

Most statements show the fee as a small percentage, and a small percentage is easy to read past. One per cent sounds like very little. Over twenty years, it is not.

The reason is compounding. A fee is not only the money taken out in a given year; it is also every pound of growth that money would have earned in all the years that follow. The cost of a fee therefore grows faster than the fee itself.

An illustration

Take £1,000,000 invested for twenty years at a steady 5% a year before costs. With no fee at all, it would grow to roughly £2.65 million. With a fee of 1% a year, the money compounds at about 4% instead and arrives at roughly £2.19 million.

The difference is around £460,000, and most of it is not fees you were ever invoiced for. It is growth that never happened, because the money that paid the fees was no longer invested.

This is arithmetic, not a forecast. No real portfolio returns the same amount every year, and markets can fall as well as rise. But the shape holds: the longer the horizon, the more the fee matters. You can try your own figures in the planner on our home page.

Where fees sit

A family's total cost is rarely one number. It can include an adviser's fee, a platform or custody charge, the ongoing charges of each fund, and the cost of buying and selling. Some are deducted quietly inside the funds and never appear as a line of their own.

Three questions for any statement

• What is the total I paid last year, in pounds, across every layer?
• Who received each part of it, and for what?
• Does anyone other than me pay my adviser for what I hold?

If those questions are hard to answer, that is itself an answer. We state our own fee as a percentage and in pounds, and we are paid by the families we advise and no one else, so that the fee line is something you can read rather than something you have to work out.

After the sale: why the first months should be quiet

By the Kestrel Capital advisers5 min read

Selling a business can turn years of work into a single sum in a single day. The temptation is to do something with it at once. We usually advise the opposite.

For most founders, the business was their savings, their routine and a large part of who they were. The sale changes all three in one go. Decisions made in that week are made by someone who is tired, relieved and, often, a little unsettled. None of that makes for good investing.

What changes overnight

Money that was locked inside a company is now cash in an account. It can be moved, spent or committed in minutes, and the phone starts ringing: funds, schemes, friends with ideas, and offers to invest in the next venture. Each may be well meant. Few need an answer this month.

What a quiet start looks like

• Hold the proceeds somewhere safe and simple while the dust settles.
• Let the tax position from the sale become clear before committing the money elsewhere.
• Make no decision that cannot be undone, unless it truly has to be made now.
• Write down what the money is for: the life you want next, the people you want to provide for, and anything you may want to build.

Then, a plan in writing

Once the purpose is clear, investing becomes a matter of matching the money to it: what must be safe, what can wait, what can take risk for a long time. The plan is written down, so it can be followed in a calm year and in a difficult one.

A few quiet months rarely cost much. A hurried first decision with a sum of this size can cost a great deal, and for a long time.

Drawing an income in retirement without running short

By the Kestrel Capital advisers8 min read

Saving for retirement is mostly about patience. Spending in retirement is harder, because the two questions that matter most — how long you will live, and what markets will do — cannot be known in advance.

The order of returns matters

Two retirees can earn the same average return over thirty years and end up in very different places. If the poor years come early, while withdrawals are being taken, more units must be sold at low prices to pay the same income, and those units are not there when markets recover. Pension funds know this risk well, because they pay members every month regardless of the market.

Plan for a long life, not an average one

An average life expectancy is the age that half of people outlive. A plan that runs out at the average leaves a one-in-two chance of running short. We plan for the long end of the range and treat anything left over as a margin of safety, or a gift to the next generation.

Keep the near years apart

Holding the next stretch of spending in cash or short-dated, low-risk assets means a market fall need not force a sale at the wrong moment. The rest of the money can stay invested for the decades it may need to last.

Draw in a sensible order

Pensions, investment accounts, savings and other income are taxed and inherited differently. The order in which they are drawn can change how long the money lasts and how much passes on. It is worth deciding that order deliberately, and revisiting it when the rules or your circumstances change.

Let the income flex a little

• Agree a level of income that covers what you need, and a separate amount for what you would like.
• In weak years, trim the second before touching the first.
• In strong years, take some of the gain into the cash reserve rather than raising spending at once.

None of this removes risk. It does turn retirement income from a hope into a plan, one that is written down, reviewed each year with your adviser, and adjusted rather than abandoned when markets are unkind.

Trusts, plainly: what they do and what they do not

By the Kestrel Capital advisers6 min read

Trusts have a reputation for being either a clever trick or an expensive puzzle. They are neither. They are an old and useful way of separating who owns something from who benefits from it.

The three parties

The settlor puts assets into the trust. The trustees hold and manage them, and have a legal duty to act in line with the trust's terms. The beneficiaries are the people the trust exists for. One person can sometimes play more than one part, but the roles stay distinct.

What a trust can do

• Provide for children or grandchildren before they are ready to manage money themselves.
• Protect a family member who is vulnerable, or whose circumstances may change.
• Set out, in writing, how and when wealth should pass from one generation to the next.
• In some cases, form part of a sensible plan for inheritance tax.

What a trust does not do

A trust does not let you give money away and keep it at the same time. Once assets are settled, they generally belong to the trust, not to you, and the trustees must act for the beneficiaries.

Nor is a trust free. Trustees have duties to keep records, file returns and review the investments, and there can be tax charges of their own. A trust set up purely to save tax, without a family reason behind it, often disappoints.

Where we fit

We help families decide what they want to happen before anyone drafts a deed. We then work alongside their solicitors, who draw up the trust, and their accountants, who deal with its tax, so that the plan and the paperwork agree. Where the trust holds investments, we manage them to its purpose and report to the trustees in plain terms.