Tilting at windmills?

Don Quixote famously ’tilted at windmills’ in the book by Miguel de Cervantes:

Just then they came in sight of thirty or forty windmills that rise from that plain. And no sooner did Don Quixote see them that he said to his squire, “Fortune is guiding our affairs better than we ourselves could have wished. Do you see over yonder, friend Sancho, thirty or forty hulking giants? I intend to do battle with them and slay them. With their spoils we shall begin to be rich for this is a righteous war and the removal of so foul a brood from off the face of the earth is a service God will bless.”

“What giants?” asked Sancho Panza.

“Those you see over there,” replied his master, “with their long arms. Some of them have arms well nigh two leagues in length.”

“Take care, sir,” cried Sancho. “Those over there are not giants but windmills. Those things that seem to be their arms are sails which, when they are whirled around by the wind, turn the millstone.”

In this context, ’tilting’ means jousting, and the complete phrase means ‘attacking imaginary enemies’.

Like Don Quixote, we’ve been fighting a good fight ourselves. But our target is real – and we’re beginning to win the battle.

As stated in our company slogan, we provide ‘personalised advice backed by science’. That means we don’t get swayed by external forces, what’s said in the media, or by pundits. And we don’t believe in costly ‘active management’ of funds.

For years, we’ve been banging on about the fees charged by asset managers to manage funds. Actively run funds cost on average 1.6% while passive funds can be as little as 0.20%. Costs matter, and there is no evidence that the increased costs provide investors with a better return.

Increasingly, we’re not alone in believing that science-based investing is the way to go.

Journalist and blogger, Robin Powell (also known as the The Evidence-based Investor) is on the same mission.

Even the Financial Conduct Authority (FCA) are unhappy, and are currently conducting an investigation into the asset management industry. They have said that:

  • Paying a high price for a fund does not guarantee good performance: it only raises the risk of poor net performance
  • Fund management firms do not automatically put the interest of their clients first
  • Some asset managers overcharge investors by selling expensive funds that promise stock-picking expertise but in reality mirror an index. This practice (known as ‘index hugging’ or ‘closet tracking’) is widely considered to be fraudulent mis-selling, nevertheless, the FCA estimates £109bn of investor money is sitting in these funds
  • Investors may not be achieving value for money
  • The asset management industry has profit margins of 36%

Lack of transparency in asset management fees is nothing new. Back in 2000, the FCA’s predecessor, the FSA, found that as much as 50% of costs were being hidden from investors.

The FCA discoveries may be brutal, but any actions they recommend will take time to come into force – and the asset management industry will no doubt resist any change.

New legislation comes into force on 3 January 2018 that will force fund managers to reveal the total cost of investing, including transaction costs. What’s more, they will have to show these charges in pounds as well as percentages. The FCA has also proposed an “all-in fee”, which is still in the consultation phase.

At least there is a worldwide movement towards evidence-based investing, and whole conferences are now devoted to the subject.

To mix metaphors, if we all continue to beat the same drum, there’s a good chance that those silly active management fee windmills will come tumbling down.

And all the lucky Plan 100 clients are ahead of the curve, because we have focused on scientific fund management ever since day one.

For more on this subject, you may like to revisit these articles:


Lance Baron

Certified Financial Planner (CFP) based in East Sussex, UK. We support people in Southeast England with more than £500K to invest by building a financial plan that will help them live the life they want… until age 100