How much return on wealth management can you expect?

You're having your money managed, and you want to know what it will earn. Fair enough. But the answer depends on more factors than you'd think, and not all of them are the market. By the end of this article you'll know which three levers really determine the final amount, and which of them are in your own hands.

Where does your return come from?

Your return comes from the asset classes in your portfolio. Equities and bonds behave very differently.

Equities carry a higher expected risk premium. The mechanism: you're a part-owner of companies, so you share in the profits and in the setbacks. That means bigger swings, up and down. Bonds are loans with an agreed rate of interest. The swings are smaller, and so is the expected return.

Over long periods equities deliver clearly more than bonds, but the road there is bumpy: a year with a gain of a quarter is followed by a year with a loss of a fifth. Bonds move more calmly, but over the same period they deliver roughly half as much. So how a manager splits your money between the two determines a large part of what you end up with.

Why do returns differ from one manager to another?

Two managers with the same split between equities and bonds rarely end up in the same place. That comes down to two things: the approach and the costs.

The approach. Some managers try to beat the market by picking stocks themselves or by moving in and out. Others track the market as closely as they can.

The costs. Costs come off every year, whether it was a good year or a bad one. They're the one part of your return that's fixed in advance.

What do costs do over thirty years?

The difference between 0.35 percent and 1.20 percent a year sounds small. Over a single year, it is. The mechanism is in the repetition: every year that difference comes off your capital, and on the part that's been taken away you build no return afterwards either.

An example. You pay in €250 a month for 30 years, so €90,000 in total. The gross return is 6 percent a year in both cases. At 0.35 percent in costs you end up with roughly €228,800. At 1.20 percent in costs, roughly €196,800. A difference of €32,000, or 14 percent of your final capital.

This is a calculation with fixed assumptions, not a forecast. The actual return may turn out higher or lower, and it can be negative. What the example shows is something else: of all the factors that determine your final amount, costs are the only one you know in advance.

How Vive does it

We invest in funds run by third parties, not in our own funds. That removes an important source of conflicts of interest. The funds are broadly diversified and passive where possible, and we assess them on costs, diversification and the quality of the manager, among other things.

We also work with a lifecycle. Put simply: we gradually wind down the risk in your portfolio as your end date comes closer. If your actual portfolio drifts too far from the strategic portfolio, we rebalance.

In the app, no amount is shown as a promise. You see scenarios, based on thousands of modelled outcomes: an optimistic, a realistic and a pessimistic one, plus the line of your own contributions. The pessimistic scenario is simply there alongside the others.

What this means for you

In the short term, this gives you little certainty. Your return over a single year is driven almost entirely by the market, and no one has any influence over that. It may be negative. Low costs don't make a bad year good.

Over the long term it flips. The market becomes an average and the costs become a running total. The very factor you can choose in advance is the one that makes the biggest difference after thirty years.

Finally

We can't guarantee any return. What is certain is what you pay and how you spread your risk. Focus on those two, and don't let the rest change your plan.

Want to see what Vive has achieved so far? Take a look at our returns page. Want to know how much you can pay in tax-efficiently? Use the annual margin calculator. Self-employed? Read more about pensions for entrepreneurs.

Investing involves risk. You may lose part of what you pay in. Past results are no guarantee of future performance.