In our previous post, we discussed the four main asset classes that your fund managers are likely to consider when they invest your money. You’ll agree that most of us cannot necessarily access these asset classes directly as the capital required may be outside of our budget, or the implications of direct ownership may be quite complicated.
For example, most of us cannot afford to start buying properties (houses/shops/offices) as investments in order to generate rental income from them. We may not have enough investment capital, or the cost of the transaction (transfer duties, lawyer’s costs, etc.) may be very high.
Luckily, the unit trust industry gives us access to a whole range of asset classes that would previously not have been accessible to individual investors. By extension, Linked Investment Service Providers or “LISPs” also expand the variety of products available to us. Before you can go ahead with an investment, it is important for you to understand the difference between the three components of your investment, namely:
- Your LISP;
- Your product; and
- Your fund(s).
A simple analogy might make the relationship between them a bit easier to understand.
If we look at the automobile industry, there are many different makes of cars – Audi, BMW, Toyota etc. You may select a particular vehicle manufacturer due to your perception of the brand’s value for money and service efficiency. Similarly, your choice of LISP often depends on your perception of the company’s reputation and the ease of doing business with them. Your service provider serves as the administrator of your investment. They are your point of contact for any queries and transactions that you may have.
Important things to consider here will be any applicable administration charges, ease of access to information about your investment, the knowledge and service levels of the staff, the variety of funds and products available to you.
Once you have chosen your service provider (or your vehicle manufacturer in our analogy), you need to decide on the model. Do you want a stately Audi A6 or a zippy Audi A1? In the investment world, this would be the product that aligns with your investment goals. You can use a Retirement Annuity to set aside your retirement nest egg, or you could use a five year endowment as a savings plan to provide for a specific goal, like university fees.
Each product will have its own terms and conditions with regards to how you contribute to the investment, when you can access your funds, your tax treatment, and much more. Some products have special features like the ability to make a loan against your investment, or favourable tax deductions. Understanding the features of your product is very important as it is usually prescribed by legislation – this means you may not always be able to make changes at a later stage if you find that you have chosen the wrong product!
Lastly, you need to decide how fast you want to go. This is where we get to the four asset classes previously discussed. The use of a unit trust will give you access to all of them in a mix that is just right for your investment goals. The selection of underlying unit trust fund will determine the speed at which you can expect your investment to grow, and therefore also the style and risk profile of your investment. Similar to a 1300cc motor vehicle, a unit trust invested in mostly cash will get you to your investment destination eventually, but you have to accept that you may be left behind by the faster cars on the road and that you will probably need more time to get there than you may have thought. Conversely, a 3l turbo engine could get you there in a flash, but your risk of having an accident (a short-term market correction) needs to be managed by taking additional precautions like wearing a seat belt, having insurance, mapping your route before you leave and making sure you stay on track. Properly understanding the asset mix within your underlying unit trust is the only way in which you can ensure that your investment (your car) suits your investment goals (your lifestyle).
Unlike the automobile industry, the investment world is a bit more willing to collaborate. You do not have to use the same company for all three aspects of your investment. While you would never find a BMW engine inside the body of a Ferrari, mixing and matching providers in the investment industry is the norm, rather than the exception.
So if you would like to invest with Stringfellow Investment Specialists – the 2014 Raging Bull Award Winner – you can access our funds in almost any investment product by making use of either Glacier or Momentum as your LISP. Give us a ring and we will help you to pick the combination of service providers and products, to match your individual financial goals.