Has my financial advisor given me bad advice?

masonic wrote: »

The fact it has soft closed makes me wonder if I should continue holding it. The fact it has grown so large will make it difficult to exploit opportunities going forward.

You're not the first to have said that - there's an argument that many of the 'leaders' in which it tries to invest might already be considered fully valued by the markets (given EM generally have had a mixed time of it in the last couple of years, giving a flight to quality stocks), and any shift of focus is hard to do when you have so much money to deploy.

However the soft closing means that it should get smaller as people who exit will not be replaced at the same rate with new money. And if you look at the track record against some other funds it is pretty good.

If you had been in the fund for the last 3 years you would have well outperformed the IMA GEM average (like others focussing on large companies or dividend payers it outperformed significantly in the face of some big drops in 2011). And if you had first bought in, say, 8 months ago today (a month or so after it had soft closed), the fund performance has exceeded the IMA benchmark by over a percent so you are over a quarter of the way to making back your entrance fees. Focussing purely on the last 3 months it has underperformed by IMA as the rest catches up, so I suppose you can prove anything by cherrypicking data. Whether a strategy of holding EM leaders vs dividend payers vs value plays vs smaller growth stocks will serve you best going forwards is a bit of an unknown.

To the OP, you mentioned the IFA invested your money into the fund. Did he literally invest of his own volition like a discretionary manager or did he first show you all the costs and characteristics of the fund before you decided to take the advice and invest? I am guessing your arrangement is the latter if he is merely an advisor - so are you saying this initial charge was omitted from the summary he prepared? If so you would have a valid complaint as the fees were publicised by FS and the platforms in advance of the soft closure actually happening in September and it is his duty to tell you what he is advising you to buy.

I'm guessing you were already in the fund pre- the soft closure (which is how you had access to keep investing and pay the fees for doing so) and you're just looking at the effect on some additional contributions made over the last year? So maybe not a massive effect in actual pounds.

It is not necessarily a bad fund to be in that has stopped being suitable for you , it is just effectively more expensive, with a 4% one-off charge on the multi-year investment, making other rival funds a lot more competitive. It might still be the best in the sector by 1% a year over the next decade and then it will have been more than worth it. But generally the law of averages doesn't work that way and such a chunky one-time fee on every pound contributed is best avoided. What did he say in his defence when you raised the issue?

You mention he is suggesting you bed and ISA to make use of this year's new allowance. The two obvious things to do here would be:

a) Once you have sold out a portion of the unwrapped investment and moved the cash into the ISA, just buy back another EM fund with similar characteristics that broadly meets your needs and passes the adviser's due diligence but does not have a penalty fee. He can probably find one. Then the 4% is avoided.

b) Assuming this is not your only fund you will have a portfolio of assets unwrapped that you are trying to move into the ISA wrapper under the popular 'bed & ISA' concept. So if you were going to sell ~£3k out of five funds including the FS one, you could instead sell ~£4k of each of the other four funds and keep the FS one unwrapped, avoiding the fee for rebuying it.

By doing that you are still achieving the goal of protecting the same amount of capital and income stream from tax, you have just changed the mix of what is in the wrapped pot versus the unwrapped pot. This might mean that the unwrapped FS fund holding is building up a bigger capital gain but the flipside is that greater unwrapped gains have been crystallised on the other funds and moved over, so this may just be a wash in terms of tax efficiency. At some point down the line if the FS fund drops in size by a billion they might well remove the restrictions.

OK so you are looking at two charges - 4% unwrapped and then 4% same again to move it into a wrapper.

The first is a sunk cost. You would rather not have paid it and probably the advisor would prefer you didn't have to pay it, but you did. Whether you hold the fund for 1 year or 20 years you are not going to get it back from First State, and it doesn't come into decisionmaking from now on.

If the advisor said it had a cost of X and you didn't see it and said 'fine', or you did see it and still said 'fine', you will struggle to get him to accept your complaint, *unless* he said at the time of presenting the recommendations to disregard all charges because you were exempt from them via his introduction. That might have been what he thought, in which case he has been sloppy, but if it wasn't the basis on which you received and took his advice it is not something you can legitimately do much about. So, IMHO, you don't really have a case against him even though your later questioning probably exposed the fact that he wasn't as smart as he thought he was.

I can't help thinking that after you exposed his error/misunderstanding, his advice to continue with the Bed and ISA is a way of brushing it under the carpet as if his initial oversight is not a big deal and the decision is totally unaffected, rather than him solidly reassessing and considering exactly what other funds are available on the Skandia platform which may meet your needs without losing a 4% slice up front.

As I mentioned in the other post, it is possible that it is still the best choice for the exact portfolio he is trying to create for you. After all, if it continues to outperform rivals by 20% over the next decade it is a no brainer to accept the fee. But prospective performance is guesswork really - you just need to consider if the strategy is what you are looking for. However if its ongoing management fees were broadly similar to competitors, and its performance was a bit better, but now its fee structure takes a large slice that non-closed funds don't, it loses a lot of competitiveness. I am not convinced the decision is miraculously the same.

As the first 4% is already sunk, you shouldn't be thinking "dammit I just paid 4% and now I've got to pay another 4% !!". The first one is unfortunate, but just forget about it. You just need to decide if the one 4% you are now facing, ought to be paid. I would ask him why it is that this fund is so much better than all other potential choices as to be expected to make back the 4% in the next decade or so while keeping the same risk profile.

Then the second question if he really does think the fund is worth more money than its rivals is, wouldn't it be more efficient to bed and ISA more of something else in your unwrapped portfolio and defer the ISA-ing of this one, keeping it unwrapped and avoiding buying-back-in fees? Maybe he thinks you are going to need to pay it in the end because at some point you will end up wrapping it to avoid the prospective CGT on this asset getting too wild when you make a big disposal to rebalance. But rather than speculate why he's doing something that seems counter-intuitive, it would make sense to just come out and ask him what could be done to avoid it given you don't like the idea of paying entry fees to something you've already entered.