S&S ISA: The Layman Investors Dilema

Academic

Given the low interest rates available for cash ISA's and the general opinion that now might be a good time to invest in light of the recent falls in the worldwide stock markets I thought I'd look into opening a S&S ISA for the first time.

There seem to be 3 ways to go:

(1) Through a bank or financial institution
(2) DIY
(3) Seek the professional advice of an IFA

I've read enough on the MSE site to know that (1) wouldn't be a particularly wise move due to the limitations of the tied market, etc. This leaves (2) & (3).

I suspect, like a lot of people, I don't have enough time or knowledge (and possibly dedication) to adequately do my own research and keep an eye on the performance of a properly diversified portfolio (assuming I could ever achieve such a thing). So, this makes option (2) a less palatable choice.

This leaves (3), my preferred option, as the final alternative. I had a look on Unbiased.co.uk and Findanadviser.org and found an IFA who was a Chartered Financial Planner (A.P.F.S.) specialising in investments. I made an appointment, filled out the risk questionnaire, was given reams of 'Keyfacts' documents and awaited a response.

I have now received their recommendations (25 funds) but this advice doesn't come free (and nor would I expect it to), but when you look at the charges you do begin to wonder if it is worth it (the IFA will get paid regardless of the performance of the funds). For instance, my investment (£3600) attracts a 3.5% initial commission charge, there is then a 1% annual management charge, Skandia (the ISA provider) charge a £50 per annum 'Investor charge', and finally there is a 0.75% 'switch commission' charge (chargeable every time funds are switched within the investment, either on the advice of the IFA or at my behest). According to the Keyfacts documentation "this has the same effect of reducing the investment growth from 7% a year to 2.8% a year". I did enquired as to the cost of their advice on a fee basis and was advised it would be in excess of £500, therefore not an option.

As I said above I don't expect the IFA to work for free and I am more than willing to pay for the advice but it does seem, albeit on the basis of my limited experience, that this is a lot of money for the small scale (layman) investor.

I suppose the point I'm trying to make is that good financial advice is difficult to come by for the small investor; it is potentially biased (in the case of tied advisers), it is beyond the knowledge/dedication of the layman investor (in the case of DIY), or it can seem to be costly (either via commission or fee) when using an IFA for small amounts. Is this the reason why the uptake of S&S ISA's is comparatively low ?

turbobob

It is a good point I think. Going the DIY route properly needs a fair bit of research. It really needs you to be interested in the subject and have the time and inclination to do it.

When ISA's were first introduced there was a push towards "CAT Standard" ISA's. CAT stood for charges, access and terms. I believe the thinking at the time was that the "average punter" would be able to go and choose a CAT Standard ISA in the knowledge that it would be OK.. There was a similar thinking with stakeholder pensions. However, they were, as far as I know, widely considered to be to be a failure and I think they've stopped using the term. It simply meant that products with a CAT standard were in passively managed or index tracking funds. It didn't really get the public investing or address the lack of understanding in this area.

dunstonh

I have now received their recommendations (25 funds) but this advice doesn't come free (and nor would I expect it to), but when you look at the charges you do begin to wonder if it is worth it

Its no surprise. You employed a chartered financial planner. They have the highest qualifications you can get and are in limited supply.

As I said above I don't expect the IFA to work for free and I am more than willing to pay for the advice but it does seem, albeit on the basis of my limited experience, that this is a lot of money for the small scale (layman) investor.

You are investing £3600 but employing someone that is more qualified and to be dealing with £3.6 million. Thats a bit overkill. Its a bit like going private on medical care, arranging nuses and doctors, hiring an operating theatre and then asking to get a splinter removed.

Small transactions on fee basis with top of the range advisers are always going to come out expensive.

That IFAs charges are more than double the average but he has higher qualifications. If you added a couple of noughts to your investment I would suspect the charges would be considerable lower.

To be honest, I wouldnt be suprised if he was pricing himself out of contention as small investors can be far more labour intensive than middle to large.

I suppose the point I'm trying to make is that good financial advice is difficult to come by for the small investor

No. Just dont expect to be using advisers of that higher qualification.

A contribution of £3600 is not in the target market of most IFAs unless its part of an overall portfolio or full handling of affairs.

jamesd

For comparison, DIY without advice at Hargreaves Lansdown would cost you 1.5% annual charge in the funds, nothing for the fund platform and maybe 0.25% to 0.5% for switches and the initial investment cost, often nothing.

Those charges still aren't unduly bad considering the potential gains from investments.

For a professional manager you're not doing too badly on price given the amount of money involved. It'll make a bit more sense if you're planning to do this for many years. If you like the manager and think the investment selection is OK, then I suggest going for it as part of a long term plan.

Then see what you would pick at Hargreaves Lansdown yourself.

Three years from now, compare the two and see who comes out best. You won't have spent much money by that point and if the service is delivering better results than doing it yourself you'll have reason to continue.

Lokolo

I think if there was more information out there it would be a lot easier. To get any decent information about investments you have to pay (or bug Dunston a lot on here but even he doesn't give you a straight answer unless he has to lol).

Thing with Dunstons thing about a splinter, is yeh its an ok example, but its pretty easy to figure out how to get rid of it, and when you want to get things more complicated you can then go and see someone. Thing with investments theres not that much information freely available which is easy enough to understand.

I've been investing for 10 months and still don't have a perfect clue as to what I am doing. I've got half the splinter how but not sure how to pull it out completely

And unfortunately IFAs are rather greedy in their income, theres not loads out there, with demand high and supply lowish they can have higher charges. But if you want the expertise, you gotta pay for it.

dunstonh

And unfortunately IFAs are rather greedy in their income, theres not loads out there, with demand high and supply lowish they can have higher charges. But if you want the expertise, you gotta pay for it.

If you take a look at the figures published by the FSA where they monitor and commissions taken every 6 months you will see that the average initial commission is just 1.8%. On a transaction of £3600, if you got average that would be £64.80.

There will of course be greedy advisers charging lots but that happens everywhere. You get good prices and bad. If you dont like the price you go somewhere else.

I still think that £3600 investing and going to a chartered financial planner is massive overkill and was never going to be cost effective. Even an IFA at diploma level or certificate level is going to be hard pushed to be cost effective with £3600.

£3600 really falls into DIY or tied agent levels.

Academic

dunstonh wrote: »

£3600 really falls into DIY or tied agent levels.

I don't dispute what you're saying but this was my general point (setting aside my personal choice of IFA) that the layman investor starting out with a S&S ISA is essentially precluded from obtaining good, independent financial advice.

I regularly read pages of opinion on this forum informing people to seek advice from qualified IFA's, but is there a sub-text which essentially reads "but only if you have enough money to make it worth their while" ?

I'm not naive enough to believe that IFA's should work for free or at a level that just isn't cost effective for them, nor is this a particular criticism of IFA's in general, but where does this leave the small-scale investor if they cannot get independent advice ? Doesn't it essentially force them into the hands of tied advisers and leave them open to a potentially negative experience ? Or force them into the DIY route with a steep learning curve which could be costly to them in terms of beginners mistakes ?

I'm not sure what the solution to this issue is, but I am sure that a lot of people are probably precluded from the world of investment opportunities.

With regard to the advice I've received from the highly qualified IFA I saw, I'm probably going to go with them even though the initial costs seem high. I'd like to think that in the medium to long-term the benefit of good financial advice will outweigh the costs of the other approaches.

jem16

Academic wrote: »

With regard to the advice I've received from the highly qualified IFA I saw, I'm probably going to go with them even though the initial costs seem high. I'd like to think that in the medium to long-term the benefit of good financial advice will outweigh the costs of the other approaches.

Why not also see a couple of investment specialist IFAs who are not chartered financial planners and see what they can offer you?

Lokolo

jem16 wrote: »

Why not also see a couple of investment specialist IFAs who are not chartered financial planners and see what they can offer you?

Because the amount he wants to invest they're going to still put high charges. Dunston said 1.8% is the average, for his £3600 would be £64.80. Can you really see any IFA putting the slightest bit of effort into the work for just £65? A lot of IFAs have come from working as a tied advisor so are already on a resonable salary so the £65 just isn't going to make their day.

Dunston, am I right in assuming you have CFP?

jem16

Lokolo wrote: »

Because the amount he wants to invest they're going to still put high charges. Dunston said 1.8% is the average, for his £3600 would be £64.80. Can you really see any IFA putting the slightest bit of effort into the work for just £65? A lot of IFAs have come from working as a tied advisor so are already on a resonable salary so the £65 just isn't going to make their day.

I wasn't expecting the IFA to take just 1.8% but to take the normal 3%. However the normal trail is 0.5% and not 1%. Funds supermarkets like Cofunds and Fidelity which most IFAs use have no annual management fee and switches usually at 0.25%. So savings are possible over the first quote.

It's worth asking although there may be no takes for such a small amount.

dunstonh

Because the amount he wants to invest they're going to still put high charges. Dunston said 1.8% is the average, for his £3600 would be £64.80. Can you really see any IFA putting the slightest bit of effort into the work for just £65? A lot of IFAs have come from working as a tied advisor so are already on a resonable salary so the £65 just isn't going to make their day.

Its unlikely you would get 1.8% on £3600. But even if they stuck the typical maximum of 3% plus natural trail, thats £108. I would just do 3 funds of £1200. It would be an easy transaction. However, I wouldnt offer my standard terms of 1% plus trail as it isnt cost effective for me to do so.

An IFA that has a family relationship (e.g. handles the business of the family) will not baulk at doing small stuff. Also, where the IFA does other things for you, again you transact because its part of the overall package.

Dunston, am I right in assuming you have CFP?

I dont but it is an aim. Problem is that in the areas that I deal with it is massive overkill. At the moment, certificate is the required minimum. Diploma will be from 2012. CFP is degree level and there is no plans to make that the required level at the moment. It will probably come one day though. The fear is that forcing degree will remove advice from the majority of the population. Most IFAs have certificate and a few modules towards diploma (the ones they focus on within their business).

I wasn't expecting the IFA to take just 1.8% but to take the normal 3%. However the normal trail is 0.5% and not 1%. Funds supermarkets like Cofunds and Fidelity which most IFAs use have no annual management fee and switches usually at 0.25%. So savings are possible over the first quote.

In my opinion (and of course that is all it is on this forum), Cofunds or Fidelity would be the obvious choice for this size investment. Its cheaper than Skandia for small transactions. However, Skandia has recently improved its terms (following the merger of Selestia and the Selestia platform now being used). Skandia can now be quite cheap for larger transactions but they have a members charge of £50 per year. On £3600 that means you lose 1.38% there. If you have your pensions with Skandia (on the Selestia platform) with your ISAs and unit trusts then its still just £50. So, £200k in Skandia is 0.025%. Much less of a hit. Couple that with the default no charge switching (although this CFP is making a charge as well as increasing the annual fee) Skandia can be cost effective. Just not with £3600.

To be honest, with £3600 you are better off going to HL and DIY by picking three funds that average out to match your risk profile.