ISA charges alert

whiteflag_3

The article which started this rumpus was focussing on the apparent fact that this product pays the advisor five years' worth of commission up front, repayable if the client stops the regular investments; I would be interested to see what our resident IFAs have to say about that. For the record, I think that it's disgraceful; it gives the advisor every incentive to keep his or her client in a possibly unsuitable product. This is not a swipe at IFAs

CC

Before I answer this can I put a question to you?

You are an IFA and a higher rate tax payer with £300 a month to save over a period of five years asks for your advice. MAin aim long term capital growth and prepared to accept some investment risk? ALready done mini cash iSAs no other investments other than some "free" shares.

What product would you recommmend?

cheerfulcat

Hi, whiteflag,

There's not enough information there to give a sensible answer but happy to attempt it if you flesh out my hypothetical client a bit more...I repeat that I am not swiping at IFAs btw.

dunstonh

The article which started this rumpus was focussing on the apparent fact that this product pays the advisor five years' worth of commission up front, repayable if the client stops the regular investments; I would be interested to see what our resident IFAs have to say about that. For the record, I think that it's disgraceful; it gives the advisor every incentive to keep his or her client in a possibly unsuitable product. This is not a swipe at IFAs :A

The article was a complete farce though. It was full of inaccurate information. As for the indemnified commission option, that is a legacy of the "old model" basis advisor and doesn't provide any benefit to the "new model" basis advisor. Indeed, Sterling and Zurich have recently been criticised in New Model Advisor newspaper for their position on this. However, regardless of whether it is right or wrong, the commission option chosen by the IFA does not impact on the charges to the policyholder.

You cannot compare a savings/deposit account with a stockmarket investment.

Exactly right. Which is why we have asked Ed to do so. Even though she continues to compare them.

An explicit charged contract gives a full breakdown of the charges. An implicit charged contract like a cash ISA or savings account does not give any indication of the charges or amounts made by the provider.

the fund provider and the IFA are taking a cut, without risk

Wrong. The fund provider is taking a cut to provide services and the IFA is taking a cut to provide advice. Advice is a risk based transaction with a lifetime liability now.

since the AMC is charged regardless of fund performance

Most of the discount providers only rebate the initial commission. They do not rebate the 0.5% trail commission paid yearly. So, they are taking that and have no "risk" based advice issues to be concerned with. Indeed, one could argue that they are taking more for what they provide compared to an advisor taking that plus a small initial commission.

As Ed has said before, this reduces the return over the long term by around 30%, thus losing a great part of the advantage of a risky investment.

The key issue is the error Ed makes in saying that the effect of charges over time, if invested at 7% are actual charges. Also, the other error is then comparing them to the initial investment and not the current value.

Is it better to have 4% and not know the charges or have 10% and paid 1.5% already in charges?

Having just done the calculations and compared a no charge investment @ 7% growth with a stockmarket one featuring dealing charges and stamp duty, and a standard fund charging 5% initial and 1.5% annual AMC, I am not surprised that DH is too ashamed to give the figures.

I am not ashamed. I have been too busy. However, I see little point in comparing the charges on two different investment product classes. A bike costs little to maintain so does that mean it is better than a car?

You can see why some of us prefer to cut out the middlemen.:mad:

You cannot compare the charging when you choose to invest in the higher risk single share options compared with funds where you exposure to a single company could be no more than 0.5% of your capitial in a fund managed on your behalf. It is a different way to invest, that is all. If you bought all the shares held in a diversified portfolio, it would cost you a whacking great amount in excess of the initial charge on the funds chosen.

cheerfulcat

The article was a complete farce though. It was full of inaccurate information.

Fair enough. As a non-IFA I'm not in a position to judge the inaccuracies or otherwise.

However, regardless of whether it is right or wrong, the commission option chosen by the IFA does not impact on the charges to the policyholder.

Possibly not. But it may well incline an IFA to keep a client in an unsuitable/underperforming product.

An explicit charged contract gives a full breakdown of the charges. An implicit charged contract like a cash ISA or savings account does not give any indication of the charges or amounts made by the provider[...]The fund provider is taking a cut to provide services and the IFA is taking a cut to provide advice. Advice is a risk based transaction with a lifetime liability now.

As I've noted before, the difference is in who takes the [investment] risk. In the case of a managed fund, it is the investor who takes all of the investment risk; the managers and the IFA are not risking their own money, they are merely enjoying part of the investor's reward-for-risk-taken or risk premium. In the case of a bank deposit account, it is the bank which takes the risks and quite rightly keeps all of the risk premium; this is not a charge as you have lent it the money at an agreed rate to do with as it sees fit. It is my contention, and I think Ed's too, that in investment products too much of the risk premium is swallowed up in charges. BTW, I hope you don't expect me to believe that investment houses don't make a profit from their charges...

The key issue is the error Ed makes in saying that the effect of charges over time, if invested at 7% are actual charges. Also, the other error is then comparing them to the initial investment and not the current value.

Opportunity cost has to be accounted for in some way, though I'm not sure how;I suppose it isn't an explicit charge but the effect is still undeniable.

whiteflag_3

cheerfulcat wrote:

Hi, whiteflag,

There's not enough information there to give a sensible answer but happy to attempt it if you flesh out my hypothetical client a bit more...I repeat that I am not swiping at IFAs btw.

Hi CC

What other info do you need?

EdInvestor

The Fidelity website is quite useful in terms of info about the efect of charges.

Here's what it says about the European fund:

Initial amount invested £1,000
Normal initial charge 3.50%
FundsNetwork™ direct initial charge 1.25%
You save 2.25%
Annual management charge 1.50%
Other annual expenses 0.24%
End year/ Investment to date/ Effect of deductions to date/ What you might get back at 6.0%
1 £1,000 £31 £1,020
3 £1,000 £75 £1,110
5 £1,000 £127 £1,210
10 £1,000 £305 £1,480

The last line in the table shows that over 10 years, the effect of total charges and expenses could amount to £305. Putting this another way, this would have the effect of bringing the illustrated investment growth rate down from 6.0% to 4.0% a year.

#Not a reduction that can be ignored.Amd this is AFTER a big discount on the initial charge :mad:

https://www.fidelity.co.uk

dunstonh

We are not still on about this are we?

Lets try and keep this simple.

option 1 - stay in cash ISAs, get your 4 to 5% and dont know what you are paying in charges (but dont care either).

option 2 - invest in areas which disclose the charges but give the potential to earn in double rate figures.

We don't live in China, we are not communists. Charges exist on everything we do. If you want someone to do something, you pay for it.

Focus on the actual charges, not the effect of charges. Otherwise you have no way to compare on a level playing field.

cheerfulcat

whiteflag wrote:

Hi CC

What other info do you need?

Hi, whiteflag ( nice to see you back )

I would need to know

• Male or female
• Age
• Dependents? If yes, is the client the main/only breadwinner?
• Employed or self employed?
• Planning to save into cash ISAs as well?
• Is there a cash cushion for emergencies?
• Mortgage? If yes, what sort?
• Planning any big expenses?
• Sufficient life cover, if there are dependents?
• Pension arrangements - are there any, is an employer contributing?
• Interested in investments or eyes-glaze-over job?
• Are the free shares of significant ( over £3k ) value?
• Married? Spouse non-, standard or higher rate tax payer?
• Net income

Regards

Cheerfulcat

whiteflag_3

cheerfulcat wrote:

Hi, whiteflag ( nice to see you back )

I would need to know

• Male or female- Male
  
• Age 35
• Dependents? If yes, is the client the main/only breadwinner? No
• Employed or self employed? Employed
• Planning to save into cash ISAs as well? DOing £3000 already every year
• Is there a cash cushion for emergencies? YES
• Mortgage? If yes, what sort? NONE
• Planning any big expenses? NO
• Sufficient life cover, if there are dependents?
• Pension arrangements - are there any, is an employer contributing? Final S
• Interested in investments or eyes-glaze-over job? To busy to get involved
• Are the free shares of significant ( over £3k ) value? 5K
• Married? Spouse non-, standard or higher rate tax payer?
• Net income 3K

Regards

Cheerfulcat

I await your response

cheerfulcat

whiteflag wrote:

I await your response

Okay, then

I would split the investment between an equity income fund and ETFs tracking Eastern Europe, European high-dividend stocks and the MSCI World Index. I would possibly add a commodities fund. The proportions to be £100 to the EI fund and £50 each into the others.

You've got me interested now; I think I'll construct a paper portfolio along those lines and keep an eye on it