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Should I commute my pension?
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# 1
shrimpfarmer
Old 16-08-2007, 9:29 AM
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Default Should I commute my pension?

Hi everyone. I am in a dilema and would love to hear your views. I am about to be medically retired from my job and I have to decide within the next few days to either take a full pension until I die or commute upto a quarter of it and thus turn it into a tax free lump sum that I can invest.

Yesterday my wife and I had the pleasure of an 'independent' financial advisor telling us that of course I should commute as I am beating the tax man. He wants to take the lot and put it into an investment bond for me. I have yet to see his written report but one thing I can already see is they want to charge me a fortune for doing this.

Now I am very lucky in that I am debt free in our own home without a mortgage and as we dont have any children I do not need the money for anything at this time.

If I commuted the maximum I could get 163,000 tax free and then a pension of circa 32,500 a year.

If I take the full pension I would get a pension of 43,300 per year which is index linked.

Things running through my mind are;

If I take the lump sum my wife would have it if anything nasty happened to me. However I dont have any life threatening illness and my parents lived to a ripe old age.

We could draw on that lump sum if I ever needed the cash.

However, I would have to spend time managing the money. I hate paying commission on anything.

Inflation could reduce the value of the capital etc etc.

I must confess I feel rather frozen with this decision.

Shrimpy
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# 2
dunstonh
Old 16-08-2007, 10:16 AM
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Quote:
I have yet to see his written report but one thing I can already see is they want to charge me a fortune for doing this.
Many investment bonds do not have the commission explicitly charged so you are incorrect.

Quote:
If I commuted the maximum I could get 163,000 tax free and then a pension of circa 32,500 a year.

If I take the full pension I would get a pension of 43,300 per year which is index linked.
That explains the advice. Lump sum taken keeps you a basic rate taxpayer and the investment bond can be used for income/growth/both and benefit from top slicing relief to keep you a basic rate taxpayer.

Quote:
However, I would have to spend time managing the money. I hate paying commission on anything.
Do you live in a straw hut in the middle of a field? One assumes you buy food? There you pay a charges. One assumes you have bank accounts. There you have charges (even on savings accounts but they are implicit). Everything you ever buy has commission/charges.

The advice, based on the limited info you have posted, seems fair and valid and will save you a lot of tax. The charges are going to be far lower than the tax saved. However, if you prefer to pay higher tax and not benefit from it because you dont want to pay a professional for doing their job, then of course that is your choice.
I am a Financial Adviser. Comments are for discussion purposes only. They are not financial advice. Different people have different needs and what is right for one person may not be for another. If you feel an area discussed may be relevant to you, then please seek advice from a Financial Adviser local to you.
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# 3
EdInvestor
Old 16-08-2007, 11:37 AM
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It's obvious you should commute for tax reasons alone.

If you take the lower pension and remain a basic rate taxpoayer it will be better to invest the money directly ( and via you and your wife's ISAs) than to use an investment bond.

It's not that difficult to invest directly, there are plenty of tools available on the web.Start with a discount broker such as www.h-l.co.uk which will rebate charges on funds (unlike what usually happens with the bond).

Decide how much you want to keep in cash.National Savings Index linlked certs are a good home as they are tax free and have a goodish rate. You can put in 30k a year each, so that would get rid of 60k straightaway. Would you want half the total money in cash? If your wife is a non taxpayer, do make sure yo use her allowances for other cash savings.

That leaves 80k to invest in assets which can provide an income, but also grow to beat inflation long term.

I would suggest you put 60k in a selection of "equity income" funds ( a lower risk type of equity fund which invests in dividend paying household name big company type shares) and the other 20k in commercial property funds ( the ones that own buildings, not shares).

If you are a basic rate taxpayer your dividends arrive with a tax credit which takes care of the tax on them, and if you want to raise some cash, you can sell profitable shares up to the capital gains allowance of 9.2k a year tax free. So no tax liability there.

Fill up your two maxi ISAs at 7k a year, putting the property funds in first, so that income is tax protected.Then add the equity funds.

Quite easy really. Not IMHO necessary to pay large sums of money to someone to do it for you and waste your profits on unnecessary taxes and fees.
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# 4
dunstonh
Old 16-08-2007, 12:08 PM
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Quote:

It's not that difficult to invest directly, there are plenty of tools available on the web.Start with a discount broker such as www.h-l.co.uk which will rebate charges on funds (unlike what usually happens with the bond).
An IFA can earn commission on a bond and still have lower charges than HL. The FSA published averages on commissions would improve that even further.


Quote:
I would suggest you put 60k in a selection of "equity income" funds ( a lower risk type of equity fund which invests in dividend paying household name big company type shares) and the other 20k in commercial property funds ( the ones that own buildings, not shares).
And what do you know about the OPs risk profile that the rest of us do not? I can see no reference to attitude to investment risk anywhere in his post.

Quote:
Quite easy really. Not IMHO necessary to pay large sums of money to someone to do it for you and waste your profits on unnecessary taxes and fees.
How naive you are. HL are getting the commission on the investment in this case. The annual trail commission they get is probably higher than the commission that is payable to the IFA on the bond.

Plus, the bond can have lower charges than the investments with HL.

So, the reverse arguement can be "Not IMHO necessary to pay large sums of money to someone who is not giving advice and requiring you to do it yourself and waste your profits on unnecessary taxes and fees which would not be present with the IFA doing it".
I am a Financial Adviser. Comments are for discussion purposes only. They are not financial advice. Different people have different needs and what is right for one person may not be for another. If you feel an area discussed may be relevant to you, then please seek advice from a Financial Adviser local to you.
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# 5
shrimpfarmer
Old 16-08-2007, 1:25 PM
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Quote:
Originally Posted by dunstonh View Post
Many investment bonds do not have the commission explicitly charged so you are incorrect.



That explains the advice. Lump sum taken keeps you a basic rate taxpayer and the investment bond can be used for income/growth/both and benefit from top slicing relief to keep you a basic rate taxpayer.



Do you live in a straw hut in the middle of a field? One assumes you buy food? There you pay a charges. One assumes you have bank accounts. There you have charges (even on savings accounts but they are implicit). Everything you ever buy has commission/charges.

The advice, based on the limited info you have posted, seems fair and valid and will save you a lot of tax. The charges are going to be far lower than the tax saved. However, if you prefer to pay higher tax and not benefit from it because you dont want to pay a professional for doing their job, then of course that is your choice.
No I didnt express myself well there. I understand that people have to make a living. The charges have not been stated yet. He told me I can either let them accept commission or pay an hourly fee of 250. The adviser was recommended by a staff association and is reguarly used.

Reading the paperwork he left me it states the charges could be a maximum of 6.6% of the sum invested up front and 0.5% of the value of the bond each year. Hence I felt uncomfortable at a potential 10758 up front fee. I accept it may be lower when I see the proposal.
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# 6
shrimpfarmer
Old 16-08-2007, 1:30 PM
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Quote:
Originally Posted by EdInvestor View Post
It's obvious you should commute for tax reasons alone.

If you take the lower pension and remain a basic rate taxpoayer it will be better to invest the money directly ( and via you and your wife's ISAs) than to use an investment bond.

It's not that difficult to invest directly, there are plenty of tools available on the web.Start with a discount broker such as www.h-l.co.uk which will rebate charges on funds (unlike what usually happens with the bond).

Decide how much you want to keep in cash.National Savings Index linlked certs are a good home as they are tax free and have a goodish rate. You can put in 30k a year each, so that would get rid of 60k straightaway. Would you want half the total money in cash? If your wife is a non taxpayer, do make sure yo use her allowances for other cash savings.

That leaves 80k to invest in assets which can provide an income, but also grow to beat inflation long term.

I would suggest you put 60k in a selection of "equity income" funds ( a lower risk type of equity fund which invests in dividend paying household name big company type shares) and the other 20k in commercial property funds ( the ones that own buildings, not shares).

If you are a basic rate taxpayer your dividends arrive with a tax credit which takes care of the tax on them, and if you want to raise some cash, you can sell profitable shares up to the capital gains allowance of 9.2k a year tax free. So no tax liability there.

Fill up your two maxi ISAs at 7k a year, putting the property funds in first, so that income is tax protected.Then add the equity funds.

Quite easy really. Not IMHO necessary to pay large sums of money to someone to do it for you and waste your profits on unnecessary taxes and fees.
Thanks for that advice. I have plenty of time on my hands so no problem with doing the leg work myself plus its something to do on a rainy day. Plus having found this place I can always ask questions.

My wife works but may be made redundant in the next 12 months so there will be plenty of opportunity to use her tax allowances as well as mine.

Thanks again.
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# 7
shrimpfarmer
Old 16-08-2007, 1:33 PM
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Just to make it clearer my attitude to risk is very low, my wife and I would not like to see our investments fall in value and would be content to beat the performance of high street banks if thats possible.
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# 8
dunstonh
Old 16-08-2007, 2:09 PM
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Quote:
Reading the paperwork he left me it states the charges could be a maximum of 6.6% of the sum invested up front and 0.5% of the value of the bond each year. Hence I felt uncomfortable at a potential 10758 up front fee. I accept it may be lower when I see the proposal.
You are not reading it correctly. Remember commission and charges are not the same thing.

Also, there are not many providers out there that pay 6.6% and 0.5% p.a. I can think of very many on maximum commission basis that will go to 5% plus 0.5%. However, you have to look at that commission against other advisers. Whilst I work on NMA basis which is 1% plus 0.5% you have to remember that 1.8% plus 0.5% is the typical average (published by the FSA and updated every 6 months). So, 6.6% plus 0.5% suggests your adviser is taking above the typical maximum.

As I said above, commission is not a fee. It is recouped through the annual management charges. If a reduced commission is taken, then the annual management charges are lower.

However, there is another issue to remember. Different IFAs get different commissions without any impact on the charges to the client. For example. Norwich Union default commission on their bond is 2.5% plus 0.5% p.a. I can get it at 5% plus 0.5% p.a. I know another IFA that gets it at 4.5% plus 0.5% p.a.

So, you may have two IFAs, one could be getting 5% and discounting 2% and taking 3% and another getting 2.5% and not discounting. The second IFA is getting paid a lower commission but the terms of the contract will be worse than the one taking the higher commission.

If you wanted a washing machine would you look at the price you have to pay or would you look at the profit margin of the retailer?

Do not mix up commission and charges. Look only at charges as they are the only thing you pay.

Quote:
Just to make it clearer my attitude to risk is very low, my wife and I would not like to see our investments fall in value and would be content to beat the performance of high street banks if thats possible.
You can forget any investments then. The problem you are going to have is that the interest will be lower over the long run and your capital will be eroded by inflation (assuming you take the interest as income). 160k in 10 years would be worth around 112k due to inflation.

You would be better being more realistic with your expectations. That doesnt mean jumping in at the deep end and going gung ho. Just taking appropriate levels of risk.

Low risk investments also typically favour investment bonds rather than unit trusts. Mainly due to lower charges and no CGT not being payable on income within bonds making the differences betwen unit trust and income much closer.
I am a Financial Adviser. Comments are for discussion purposes only. They are not financial advice. Different people have different needs and what is right for one person may not be for another. If you feel an area discussed may be relevant to you, then please seek advice from a Financial Adviser local to you.
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# 9
EdInvestor
Old 16-08-2007, 3:37 PM
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The FSA publishes useful tables on the effect of charges on your returns from various providers' products.Investment bond charges tend to be right up there, especially upfront ones:

http://www.fsa.gov.uk/tables

You might get a better deal on charges with a larger sum to invest.But you'll still pay 20% tax on gains, be subject to exit penalties for early withdrawal and have your so-called "income" actually paid out of your capital, which can be very dangerous when markets are going downhill.[Do you need an advisor and a special product so as to pay yourself "tax free" money from your capital? Err,perhaps not?)

The most important aspect anyway is what your money will be invested in.A bond is only a wrapper, like an endowment.The underlying funds are much more important.We've heard nothing about fund choice, asset allocation, risk factors etc.Has the advisor mentioned these issues?


Some better advice from dunstonh on this issue over on this thread

It's really very apparent - we have thread after thread on it - that the minute anyone walks into an advisor's office with a lump sum to invest, s/he is instantly offered an investment bond. Be warned.

Last edited by EdInvestor; 16-08-2007 at 4:09 PM.
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# 10
dunstonh
Old 16-08-2007, 4:19 PM
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Here we go again.

Quote:
The FSA publishes useful tables on the effect of charges on your returns from various providers' products.Investment bond charges tend to be right up there, especially upfront ones:
Investment bonds are best priced for 100k plus. The FSA tables dont price at 100k. Plus they are based on 100% commission taken. We know from FSA published figures that on average IFAs take 54% of the available commission.

Quote:
But you'll still pay 20% tax on gains,
Wrong. (or at minimum partially correct on some funds but totally wrong on others).

Quote:
be subject to exit penalties for early withdrawal
If you choose one that has an exit penalty, then that is correct. You don't have to choose one that does. Most people do though because the provider will pay an upfront allocation and it is common sense to have a step down penalty on early withdrawals above the allowance amount. i.e. £160k could get 108% initial allocation on it. If you were a provider would you give 108% allocation with no tie in period?

Quote:
and have your so-called "income" actually paid out of your capital
Again, only partially correct because you can take either natural income or a fixed regular withdrawal. You can do the same on ISAs, unit trusts etc. The very same investments Ed has recommended earlier in this thread. So why does Ed highlight that as a problem unique to investment bonds when her own investment option offers the same withdrawal options?

Even if you take fixed regular withdrawal, it isn't an issue. Its no different to have an account where you go to the cashpoint and draw out a fixed amount each month. You are drawing the capital there but it is replenished with interest.

Quote:
which can be very dangerous when markets are going downhill
Not if you are not fully invested in those areas. What about when they are going up?

You were telling the OP to invest in unit trusts. So don't they invest in exactly identical areas?

Quote:
.[Do you need an advisor and a special product so as to pay yourself "tax free" money from your capital? Err,perhaps not?)
Do you need someone on a forum that has repeatedly posted inaccurate and misleading data and information on the investment bonds on multiple threads including telling someone not to take a bond because an IFA will earn from it and suggesting unit trusts with HL instead because an IFA wont earn from those. This is despite HL being IFAs themselves and in that particular case the poster facing an IHT bill of upto £200k if she followed Eds advice and not that of the adviser.

As a new poster, you wont know this but Ed is very anti IFA. Even when an IFA presents the best option, she will tell you not to do it.

Ed is presenting an alternative to you which could be best (we don't know your circumstances enough to judge) but I doubt it. The investment bond could easily be the best option. The lower charges give it a start. The reduction in maintenance (i.e not having to sell and rebuy units each year and incur costs in doing so and then declaring it on your tax return), top slicing relief and ability to switch funds as much as you like without generating a CGT liability are all positives which may make it the best option.

Quote:
Some better advice from dunstonh on this issue over on this thread
This person is clearly not suited to an investment bond. She doesn't fit the criteria.

Quote:
It's really very apparent - we have thread after thread on it - that the minute anyone walks into an advisor's office with a lump sum to invest, s/he is instantly offered an investment bond. Be warned.
That thread you linked has the person buying an investment bond based on a mailshot. Not advice. What is really very apparent is - we have thread after thread on it -that the minute anyone posts on this forum about investment bonds you give them duff advice based on misinformation and downright lies because you don't like advisers. Be warned.

A thread where Ed gives her useful misinformation.
http://forums.moneysavingexpert.com/....html?t=522452
it gets interesting from post #9 but the earlier bits may be useful to you as well.
I am a Financial Adviser. Comments are for discussion purposes only. They are not financial advice. Different people have different needs and what is right for one person may not be for another. If you feel an area discussed may be relevant to you, then please seek advice from a Financial Adviser local to you.

Last edited by dunstonh; 16-08-2007 at 4:27 PM.
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# 11
EdInvestor
Old 16-08-2007, 5:49 PM
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It's not that I am anti-IFA.Dunstonh is a special kind of "New model" IFA who has a modern attitude to charges - and also a good grasp of investment issues.

Most IFAs do not follow this charging model and many of them appear to have very little more knowledge about investment than the more intelligent members of the public.Advisors also have an appalling record on the misselling front.Investment bonds are the second worse product after endowments for misselling complaints.

Investment is not rocket science. Plenty of people do it themselves - that's why the likes of Hargreaves Lansdown have done so well, and why SIPPs (self invested pensions) are so popular.

There are always some people who just can't wrap their minds about financial issues and need a good IFA. But there are plenty of people who if given a straightforward plan, can easily do this themselves - and may even find learning about investment to be an enjoyable pastime in retirement.

This is a moneysaving website.I make no apology for explaining to people ways they can save money and increase their wealth by being a more hands-on investor.
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# 12
shrimpfarmer
Old 16-08-2007, 6:09 PM
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Mmmmmm boggling
Replies keep mentioning the limited info I have posted. Whats needed?

Wife earns 24,500 pa
We have no debts
No dependents
Own our house
I am 49, she is 48
She has a job full time
I will be medically retired

Thanks for the replies folks
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# 13
jem16
Old 16-08-2007, 6:59 PM
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Quote:
Originally Posted by EdInvestor View Post

This is a moneysaving website.I make no apology for explaining to people ways they can save money and increase their wealth by being a more hands-on investor.
Being a hands-on investor is one thing.

Giving people misinformation about investment bonds, as you often do, does not save them money. It usually costs them money - in some cases a lot of money.
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# 14
dunstonh
Old 16-08-2007, 7:11 PM
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Quote:
It's not that I am anti-IFA.Dunstonh is a special kind of "New model" IFA who has a modern attitude to charges - and also a good grasp of investment issues.
Thank you. However Ed, anti IFA is how you come across when you post.

Quote:
Most IFAs do not follow this charging model and many of them appear to have very little more knowledge about investment than the more intelligent members of the public.
Cannot disagree with that. It is estimated that around 2/3rds of IFAs are more like mortgage advisers than investment advisers. They refuse to give up the investment authorisation for the odd investment case that comes their way.

This issue is being addressed by the FSA but wont be in place for a few more years yet. To give balance though, I go to meetings and seminars where I feel like a dumbo to some of the IFAs in the room. There are a large number of highly qualified advisers out there who are very skilled at their job.

You are less likely to find the most qualified and experienced advisers working for someone else and certainly not in a salesforce. Salesforce would include firms linked to unions etc. The commission rebating is likely to be non existent or very limited with these as well as a number of people take their cut. Including the union, trade association or professional body.

Quote:
Advisors also have an appalling record on the misselling front
Most of which comes from salesforces. Nearly 2/3rds of complaints come from just 12 companies (source FOS). Over 80% of advisers authorised today have never had a complaint (source FOS). 2/3rds of complaints are rejected. (source FOS). That suggests a failure to understand which could actually be an advisers fault but can also be a lack of interest taken by the individual in what is being said to them. I have certainly come across people who want to be told what they should do but not interested in the why.

Endowments and pensions were the big issues historically. Many of the troubles with these were caused by the Govt saying one thing and then changing its mind and moving the goalposts later. Long term fixed contracts like those are a !!!!!! as you can find yourself stuck in them unlike more modern easy to move around investments.

Quote:
Investment bonds are the second worse product after endowments for misselling complaints.
Investment bonds had under 5000 complaints at the last FOS report. That is out of over 700,000 complaints received. The title investment bond covers a wide range of "versions" of this product. It would include with profit bonds, SCARPs, guaranteed equity bonds and single premium unit linked bonds. If you look at the number of complaints with ISAs and PEPs, it is possible there were more on those than unit linked investment bonds.

The unit linked investment bond is no different to unit trusts with the exception of taxation and charging structure.

I am sure there are bonds mis-sold mainly as the technical knowledge on the taxation isnt there with a good many but it is wrong to rule out a product because some are not capable of researching and using it in the correct manner.

Quote:
This is a moneysaving website.I make no apology for explaining to people ways they can save money and increase their wealth by being a more hands-on investor.
Money saving doesnt mean going DIY on everything. Sorting out the mess some people get themselves into costs more than getting it right first time.

Advice doesnt need to be expensive. If an IFA can come in with the advice product that fits the requirement cheaper than a non-advice product that doesnt fit exactly then its money well spent.

Quote:
Replies keep mentioning the limited info I have posted. Whats needed?
We cannot give advice on the forums. The area you are looking at is regulated so we can only discuss and comment. We can give concepts and ideas but we wont know enough to know whats best. We dont know your long term plans, your assets, liabilities, other savings and investments.

Taking the lump sum is fairly obvious in this case. What you do with the lump is more complicated. Some of that may not involve best financial advice technically but more like best advice to suit you and how you work and think. The best advice today may not be the best advice in 5 years or 10 years. Certainly, when your state pension kicks in, the investment bond will almost certainly be the best option due to top slicing relief (from a tax wrapper point of view). At the moment, you could be borderline between unit trust and investment bond and the differences may be so neglible that it really does matter. However, the UT option does involve more work.

It is quite possible that a combination is a good option. Enough in unit trusts to bed and ISA each tax year and use CGT allowance at the same time with the rest in investment bond to make sure you dont enter higher rate tax banding.
I am a Financial Adviser. Comments are for discussion purposes only. They are not financial advice. Different people have different needs and what is right for one person may not be for another. If you feel an area discussed may be relevant to you, then please seek advice from a Financial Adviser local to you.

Last edited by dunstonh; 16-08-2007 at 7:19 PM.
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# 15
Garnet_Gem
Old 16-08-2007, 7:56 PM
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I would commute your pension and take the lump sum. You've worked for a long time to earn your money in retirement so try and enjoy some of it. Life's way too short!
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# 16
shrimpfarmer
Old 17-08-2007, 8:31 AM
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Ok, sounds like I need to get more than one quote then, particuarly regarding the comment about the best IFA's not working in big firms such as those used by unions.

So, how does someone find the best IFA?
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# 17
dunstonh
Old 17-08-2007, 10:21 AM
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Quote:
So, how does someone find the best IFA?
Avoid the salesforces is the first thing. A salesforce environment doesnt fit with quality advice. i.e. top 20 get a free holiday to Egypt or top 20% get a better company car allowance. Bottom 10% get put on action plans which could lead to the sack for poor sales figures. The pressure to sell doesnt go with advice.

All the best IFAs I know are the owners/partners/directors. All the average skilled IFAs I know are employees or attached to firms (there will obviously be exceptions). Example of two local firms to me. firm 1 with employed IFAs takes 70% of the commission they earn if the client comes into the shop and 30% if the adviser generates it themselves. firm 2 linked to a regional accountant requires the adviser to earn £100k of income per year to be paid £35k a year. So, there is limited scope for discounting for starters and a good adviser isnt going to want to share their earnings and doesnt need to.

At this moment in time, the term IFA covers a wide range of skillsa and specialities. This is going to change but for the moment it is a pain. An IFA that spends 95% of their time doing mortgages can give advice on investments. Now the quality of that investment advice is likely to be of a lower standard than one that spends 95% of their time on investments (just as the investment one wouldnt be as good on mortgages). So, when talking about investments, you want an investment IFA.

To help find out if the IFA is good at investing or not, you would ask them about how they would invest the money. What investment strategy they use, do they rebalance the portfolio, number of funds used is often a good one (on your amount 10 funds would be the sort of spread). Single fund investing on amounts of that side indicates poor knowledge.
I am a Financial Adviser. Comments are for discussion purposes only. They are not financial advice. Different people have different needs and what is right for one person may not be for another. If you feel an area discussed may be relevant to you, then please seek advice from a Financial Adviser local to you.

Last edited by dunstonh; 17-08-2007 at 10:25 AM.
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