Are these IFA fees reasonable?

eldy123 · 6 February 2008 at 12:31AM

Im also seeing a specialist investment IFA. He proposes either Skandia or Transact.

If I move to Transact he gets 3% of any transfer or contribution going in. So transfering my £30,500 pension he gets £915. Is this too much for my pension value? There is a fee for pension reviews (comes up to £48) and fee for investment advice is £150 but If I transfer pension to Transact he will waive the fees and yearly investment advice and pension management is free. Apparently with Transact there will be discounts on the initial and on-going fees of the funds that are invested in and some more choices in funds when compared to skandia.

There is a charge of £150 yearly for my occupational pension for investment advice. Having looked at the fund choices myself (the IFA hasn't seen it yet)
it seems that I can only spread my money amongst 8 tracker funds that are spread geographically (i.e.japan,uk,european, us, pacific rim). Is it worth paying the IFA for investment advice on this? I guess it must be pretty easy to allocate percentages on tracker funds?

jamesd · 6 February 2008 at 1:56AM

AlexGreen, it's easy to understand your idea: you're arguing that it's effectively impossible to get better performance than a tracker/ETF over the long term, so all that matters is costs.

And that's a bogus argument here, even for the FTSE100 that's best researched (assuming you'll include large equity income funds in FTSE 100). It's not a bogus argument in the large US market, though, and that's the audience Warren Buffett was addressing. There are definitely merits to considering ETF use in the US large cap market. The US tax position also favors ETFs and buy and hold strategies because you're taxed on capital gains of sales within a fund at the time the manager sells, unlike in the UK where you're taxed only when you sell the fund and get CGT allowance to reduce the effect. Trading costs and poor market timing are also factors alright.

The study of funds has the usual systematic flaw of such studies: it's studying the funds, not their management teams. And the management team is where the skill lies. To get decent results you'd need to be tracking managers and funds and not sticking with the original pick but changing based on performance through the years and manager changes. I'd be very interested in any studies without this flaw!

Better to use something other than 75% in your arguments because it's too easy to criticise them if you use 75%: you're effectively suggesting it's bad to be in the bottom 75% and then recommending something that pretty much guarantees being in that bottom 75%.

One way not to be in that 75% is to eliminate any fund or manager with a long record of being in the bottom 75%. It's not perfect but you do at least eliminate most of the junk (and the ETFs/trackers as well).

You might usefully try an experiment I did a while ago: look at five years past UK global growth funds and see how the top ten performed over the following years. What I found is why I'm disagreeing with you: picking one of the top ten funds meant that you were likely to end up in the top half, often the top ten, in subsequent years, with the main exceptions being when a manager changed. No intelligence or hindsight used here: it was simply a dumb test with one year's relative performance being used to attempt to predict future relative performance.

When it comes to who is investing in ETFs, the consumer/professional and market splits would be interesting. Lots of pitching of ETFs to consumers but I expect pros to try to do better if it's possible in the market in which they are buying. Except that if you're a pension fund manager, you're probably more likely to be fired for underperforming than consistently being only a little worse than an index, so maybe a guarantee of not being much worse is a good pitch for that market?

AlexGreen_2 · 6 February 2008 at 1:29PM

James

I take your points and as I said earlier the argument is really about whether people believe in active or passive management. You tend to be in one of the two camps ,and nobody can persuade you otherwise.

The trouble I've always had though with picking 'great funds' is that we're dealing in probably the most competitive industry in the world - everyone wants 'over-performance' but it's very very hard to actually achieve it over multiple years.

So the idea that one can use Bestinvest or similar websites, pick the 'best' funds/managers of the past and then watch over-performance roll in, is in my view slightly naive (JAMES - I am not suggesting that you are 'naive', rather this is a collective statement). Surely if it was that easy (for the man in the street) it would be possible to train a monkey to be a great investor (in funds).

Doing detailed research into a fund, its managers and investment style etc is no different to doing detailed research on an individual company, its past performance, current management, overall strategy etc. Again, if it was that easy to pick winners.........

If one does do a lot of research (and knows what they're actually doing) then how hard is it to pick a great fund or stock? Perhaps not that hard, let's say 2-1 odds. But try and pick 10-20 funds or stocks that are constant out-performers and the odds start running into the 1,000s if not the 10,000s against anyone actually doing it – Again, if the odds weren’t that high we’d all be earning 3%+ over the benchmarks.

(By the way, any readers that can do this effective research, has a provable multi-year track record and aren’t making millions a year is wasting his/her talent. Not many people can do it, so the ones that can are literally worth their weight in gold.)

Also, what I think that many don't realise is that long term investors using SIPPs don't need great performance to end up with a really nice pension pot. Offer me 8% guaranteed a year on my SIPP and I'll bite your hand off. 8% compounded over 20+ years (assuming a decent amount of money paid into the SIPP) will offer anyone a fantastic pension pot when retired. But many don’t sit down with a pen and paper and play around with the simple maths. Instead, they want the best returns possible and as ever trying to seek those out will always come with added risk attached (always exceptions to the rule, but sadly not many).

So let me match the overall growth of the global economy, neither doing better, nor worse, run my fund on around 0.5% annual charges and use the cost savings to re-invest over the years and compound everything up. Plus, doing it this way is very easy and takes no time.

So while others are fretting about possibly investing in this fund or sector I'm just plodding along like a tortoise to everyone else's hare.

As I've said before, successful long term (and that's the key phrase here 'long term') doesn't have to be hard (just logical) or even time consuming.

PS. What Buffett is getting at is again not the tax-implications or whether US investors are inward looking or not. He's suggesting that most investors get sub-standard returns because ultimately they flip/flop in the markets, trying to over-achieve, chasing 'hot' trends and markets, believing they have the skill (and it's an extremly rare skill) to successfully 'time' the market etc.

But in my view if the majority of retail traders had followed his advice starting in say 1982 (start of the great bull market) and invested £100k in FTSE All Share index funds 80% of them would have far better results than the people who also started with £100k in 1982 and tried to do better than the market, ie timing, research, the right sector allocation etc. No doubt some years this strategy would have worked wonders, but 1 or 2 years performance is not the key, it’s about 20+ years.

The trouble is with the above argument is that virtually no one will ever admit to ‘doing badly’ in the markets. But as a long time stockbroker I found that many clients could easily talk about ‘success’, what was needed, how it ‘could’ be achieved etc but if you looked at how their accounts actually performed overtime it was a very different picture…………

jamesd · 7 February 2008 at 6:52AM

AlexGreen, sounds as though you're arguing that if the fund market was efficient there's be no opportunities to exploit. If so, I'd agree with you. Seems pretty clear that it isn't an efficient market, though, because there are people who consistently out-perform. Lots of constraints: work pension schemes limiting choice for example. And lots of people who just don't look at performance but treat a pension as a black box they can't change.

I doubt that I'll be a great fund investor but I have a pretty low target to beat: all I need to do to be good is beat those who never look at their pension investments and sit in poor performers forever or those who think that overpaying on a mortgage at 5% or using savings account for 30 years is a great return. A higher target is to see how I do compared to say dunstonh or Jupter's fund of funds team: they should be able to do better than I do, for the same risk level. And if I don't think I do reasonably compared to dunstonh or Jupiter or Warren Buffett, I should let them manage things for me... if I'm rational and if I expect them to continue to do it.

Nobody actually needs to succeed in picking 10 or 20 outperformers. All they need to do is pick enough of them to outperform ETFs or trackers overall. And if they can't find a fund and manager that can do that on a sector they should go for the tracker or ETF in that sector - I'm considering doing exactly that in one.

For people who don't want to take the time, and don't want to pay someone to do it for them, what you're writing about has definite merits.

freddy124 · 8 February 2008 at 11:34PM

Just thought I'd round this thread up.
We saw another IFA who wanted similar fees but insisted that we couldn't put £15k each into a pension as we were only paid £5k/year each. He was adamant that dividends did not count (despite being £104k last year).
He even phoned me the next day to confirm it when I suggested he might be wrong and should check.
So, for over a grand in fees he didn't even understand pensions wrt Ltd companies :mad: .

Anyway, back to 1st IFA and sign on dotted line (he wouldn't negotiate the fee).

I guess we'll look at it all again next year.

Are these IFA fees reasonable?

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