IFA Fees - benchmarks

Jon_W wrote: »

As for going DIY I am not really sure how to do that. I've opened a cash ISA before the end of the financial year (to transfer to a LISA and/or S & S ISA) and that's as far as I've got.

You're too poor to be able to afford an IFA. So am I, and I have a fair bit more than you in my ISA, so it isn't personal.

First you need to ask yourself what you want your money to do for you. Is it to give you more in retirement, is it to splurge on a round-the-world trip, is it to give your children an unfair advantage on everyone else. Etc etc

That gives you some idea of the time horizon. There are twin forces in the economy trying to kill the value of your money. One, inflation, is insidious and chips away at the value of your cash over years, it starts to significantly hurt you over the >5 year time horizon.

The other force acts upon stock-market investments that historically can preserve value over the long time period, but makes big short-term variations in the value. Unfortunately that makes people who have bought shares panic and sell when the price falls 50%. What they should do is rush in and buy more at that time, and if they can't do that, at the very least not sell. It's hard to do the first time, gets easier after you have survived the first time - if you do. That sort of hissy fit comes along every five to ten years but it unpredictable. So far it's always come good if you just sweat it out.

As a rough approximation, less than five years, stay away from the stock market. More than five years, then the effect of inflation starts to kill you.

Since you don't really have enough money to afford (or even get interest from) an IFA you will have to learn yourself. The theory is not hard, though the practice takes self-discipline. Start with this fellow

http://monevator.com/category/investing/passive-investing-investing/

The whole site is good, but that's a good place to start. There is more to the subject than just cash and stock market investments, but they get you most of the way there.

Presumably you are not carrying any debt, possibly other than a mortgage at a low interest rate.

The problem with an IFA is that the real return (after inflation) on diversified stocks is about 4-5%. Go pay an IFA 1% pa and you are eating an elective 20% income tax. You have to really believe either that you will hurt yourself more than that by buying high and selling low - perfectly possible and a lot of people do that through panicking in market downturns - or that the IFA has an edge of more than his fees. IFAs probably do more good on stopping people self-harming by investing above their risk tolerance rather than having an edge over the average market return - after all, in the latter case why the hell aren't they making themselves rich.

You can learn this stuff. You just need to want to hard enough. If you have debt the easy win is to pay that off first. If you are saving for retirement, pensions are usually the way, because of the tax breaks. Read the pensions part of this site for why.

How can I check if an advisor is a qualified IFA?
I looked up someone on the Financial Services Register and it says
This is an individual (and some firms) that can perform some tasks in an authorised firm. These individuals and firms are known as 'approved persons' and the tasks as 'controlled functions'.
This suggests to me that the person is not a qualified IFA. Is that correct?

Jon_W wrote: »

@ermine - the aim is to provide for later life and retirement whilst keeping some of my investments liquid in case of emergencies, via a mix of ISAs and SIPPs.

You have to work out the split between these somewhat mutually exclusive goals. For retirement it also depends on how old you are

For emergencies people seem to favour three to six month's spending, although I favour more. Depends how good you feel about your job and prospects of getting another as to how big your emergency fund should be. You tend to slowly lose to inflation carrying an emergency fund, but all insurance has its price.

There will be about £60k. I am aware that the markets are subject to volatility and risk but I am in this for the long haul so want to put the £ into passive funds and just leave it there.

Hopefully for your retirement savings rather than emergency fund? Emergencies tend to be correlated with market downturns, so the having your EF in the market isn't a great idea.

It's easy to say you are chilled with risk but an IFA will try and bottom out how you really are with that, using a test like this one. Not everyone who says they are chilled turns out to be so under pressure, that sort of thing can inform you. People tend to overestimate their ability to regard setbacks with equanimity.

I am also not sure I can go this alone as I don't know the mix of tax wrappers, let alone which bonds funds and equities funds that will move me towards my (nebulous) goal.?

You can bottom out your goal before going to an IFA (or going DIY). Until you know what you would like to do, you can't get there and wouldn't be using an IFA's time effectively if you went that way.

Make a call on the split of emergency fund to retirement savings. For retirement as a rule of thumb take a safe withdrawal rate of ~4% p.a. so you need capital of ~25 times your desired annual retirement income (added to your state pension and any existing pensions) so if you took 50k of your amount you'd get roughly 2k of extra taxable income from that. If you invested it all at the start, for a working life of 30 years and got 4% real return on average you could hope to increase your capital by 2.5 to 3 times at the end of the period. Use a compound interest calculator to see why. That assumes you won't add any more to the pension for those 30 years, which would be a vaguely nutty thing to do. You get a tax bump up putting into a pension because the tax you paid can be reclaim by the SIPP, but you can only contribute up to your gross annual salary, so you might need to spend a couple of years getting it into a SIPP.

How can I check if an advisor is a qualified IFA?

Check the FCA register and they should have control function CF30.

The FCA register doesnt differentiate between tied/restricted and independent but all have to have CF30.

One thing I will make clear before I meet the IFA is to ensure he does not go chasing higher returns by chopping and changing to increase the management fee due. (Though on such a small fund he will have much more lucrative portfolios he can do this with.)

Most IFAs do not hold discretionary powers. So, they cannot do that anyway. They require your permission to fund switch or rebalance. It makes no difference to an IFA if the fund charge is 0.x% or 0.y%. An IFA doesnt have any interest in increasing fund charges.

Plus, the work level is high. I have been working on a portfolio rebalance this morning calculating switches to use the CGT allowance and bed & ISA and bed & pension. I will still be working on it tonight. An IFA is not going to switch nilly willy as it is far too much work.

Also, an interesting point for you, this portfolio has a mixture of passive and managed and in one sector we utilised a passive fund and a managed fund at the same time. The passive fund is up 83.6% and the managed fund is up 162.5% (after charges). The portfolio has beaten the closest matched VLS as as well (net of charges). So, remember charges are important but secondary.