Checking IFA advice before investing

Friday

Hi,

Been lurking and reading for ages. Lots of very helpful and knowledgable people here.

I have recently closed my manufacturing business for various reasons the main one of which was competition from China. I owned half the business and we stopped whilst still (just) profitable.

I'm 51 and have my share of the business monies to invest and provide me with an income. The accountants for the business have a tie in with a large IFA firm and the advisor reccomends Investment Bonds.

How can i check this advice? Should I just look in the yellow pages and phone a IFA to see if i can buy an hour or two of his time to review it?

I have searched here on Investment Bonds and read through some long threads so the advice *may* be sensible but I'd like to check before putting most of my life saving in.

dunstonh

The problem is that Investment Bonds may or may not be suitable. They do tend to be oversold which has raised doubts in the minds of the regulars here as to whether they are all suitable.

ISAs are always top. So, £7 for you (and 7k for wife/partner if applic). Then after that, you have a split depending on circumstances.

Bonds are better for higher rate tax payers who will be basic rate (or lower) in the next 20 years. Those who utilise their CGT allowance or dont want the hassle of doing so. They can have higher or lower charges depending on how much commission the advisor is taking. Some bond providers can actually beat the same unit trust funds on charges, even with a fair whack of commission taken by the advisor. A new model advisor (low cost IFAs) would find bonds very well priced on larger amounts.

The alternative options, such as unit trusts/OEICs tend to be better for basic rate taxpayers or lower, when the amount isnt really going to have any impact on CGT or any income affecting age allowances (not applicable for you).

You can look up an IFA on https://www.unbiased.co.uk and do a postcode search and find one near you. Thats the UK database of IFAs. Alternatively, you can private message one of the IFAs on here to give it the once over for you.

If its a large amount, you should take note of the way the commission is being paid or the fee involved. Old model basis advisors can take upto 7.5% commission on these. New model basis advisors usually take 1% initial commission resulting in a hefty rebate going into your plan. Plus advice on tax wrappers has no bias with new model advisors as its 1% regardless of the tax wrapper. My experience is that Accountant linked IFAs are very expensive unless its a very very large holding.

Robert_Sterling

dunstonh wrote:

ISAs are always top. So, £7 for you (and 7k for wife/partner if applic).

The £7 for you looks a bit mean.



This is not financial advice.

dunstonh

who pinched the "K".

Friday

Thanks for the replies.

I read about NMA in the other threads I looked at. I think this one counts as old model with a rebate.

Part of his sales pitch was how large the advice firm was and how companies give them the best comission rates and he can rebate some back. On the Pru commission statement it says 16.9k commission with 6.4k of 'sacrifice' added on to amount invested (350k) - so 10.5k to the advice firm. I was a higher rate tax payer, have no CGT allowance unused and now have only investment (currently savings) income.

I can give more info about me here if you feel inclined to comment but I was testing the water to see if taking a proposal from one IFA to another for appraisal was the best idea.

dunstonh

Part of his sales pitch was how large the advice firm was and how companies give them the best comission rates and he can rebate some back. On the Pru commission statement it says 16.9k commission with 6.4k of 'sacrifice' added on to amount invested (350k) - so 10.5k to the advice firm. I was a higher rate tax payer, have no CGT allowance unused and now have only investment (currently savings) income.

A new model advisor would take no more than £3500 giving you an bigger rebate. Indeed, with a £350k investment you would probably see a cap on it lower than £3500. You would get a rebate around the £13k to 16k mark compared with 6.4k they are offering. Plus the adviser doing it on new model basis is paid on performance.

Even the smallest IFAs can get the top rates. Thats what membership of networks or network services provides. In this case, it appears they are getting 6.65% commission on a pru bond. 6.95% is the current commission rate available (just checked). They obviously are not getting as much as they think. It also suggests that they are taking only initial commission and no trail (commission is usually x% plus 0.5% p.a. However advisors can sacrifice the 0.5% p.a. to get an increased amount up front). This means no ongoing servicing and they arent paid on performance. Typical "old model" basis.

Certainly a bond would be likely for some of the funds with what you have said. However, you are paying well over the odds for it and the provider is not currently the lowest charged (coming out 8th on a quick and dirty check I did a moment ago) and the fund range isnt the best either. Its certainly by no means the worst and 8th out 70 odd available isnt bad. They do have a couple of unique funds which could be the reason for use.

Based on that, I recommend you go to another IFA. Ideally find a low cost "new model" advisor and save yourself at least £10,000. Also get them to run over the research on why Pru would be chosen. Also, I would question why at least some of your investment has not been ISA'd and why some hasnt gone into Unit Trust/OEIC.

Friday

Very helpful thanks. I will phone an advisor from that web link.

Should I expect to pay for his advice? My first step would be to confront the guy at AWD wealth management (there named them!) and see how he responds. So there is no guarantee of business for the second opinion guy.

The Pru was not his only reccommendation he proposes money into Standard Life and NU Investment Bonds as well.

At least when the money was in my business I knew what I was doing! It is quite scary when you have to rely on others to do the right thing with everything you have worked for.

Chrismaths

With that amount of money, an offshore bond would probably be more suitable to you. That way you would pay no tax on investments in the bond, and you still get all the benefits of 5% capital withdrawal tax free, and top-slicing relief, plus the additional benefits of gross roll-up.

Offshore bonds used to be regarded as expensive, but on that amount of money, you can get in for less than 1% (which you can spread over a 5 or 8 years), and ongoing cost is around £90 per quarter - plus whatever your IFA loads on for the advice. I'm an investment manager, and we charge nothing on the bond (as we charge a managment fee for the investments in the bond - not free, just included ) - you may be able to get something similar - or use someone like dunstonh (a NMA) and assuming they have good relationships with providers, they could get similar terms.

HTH, Chris

Friday

Learning this new language of investing is all part of the challenge too. I had the guy explain top slicing and tax status on bonds 3 times but still had to research google links for the penny to drop (i think!) . Now if we were talking engineering terms I'd know where I was

I'm not going to be getting any new money so my risk attitude is on the cautious side and 'offshore' sounds scary.

I am under the impression I would get ongoing advice and reviews from AWD so I didn't expect them to be the cheapest option...but it looks like they may be quite expensive.

NMAs - is that ones on the unbiased.co.uk site that state will work for 'fees only' ?

Chrismaths

Each point in turn:

Offshore doesn't equal risky - only the wrapper is offshore. I run a significant amount of money in offshore bonds. What happens is the client sends the provider a cheque for (say) £200k, then the provider send me (as investment manager), £200k less costs for me to invest - in onshore or offshore investments. The risk comes from the funds that are selected, not from the wrapper.

The only way to find out currently if an IFA is a NMA is to ask them how much they will charge on their recommendation. Every IFA has to offer a fee option to retain their independent status - that alone means nothing. If the IFA says we'll take commission of 1% or less on your investment, and an ongoing servicing commission of 0.5% or less, then you've got an NMA. If they say they'll take more than this (or more often don't answer the question directly - saying the cost of the investment is wrapped up in the bond or some such) then you're dealing with an old-model salesman.

HTH, Chris

dunstonh

I'm not going to be getting any new money so my risk attitude is on the cautious side and 'offshore' sounds scary.

As Chris quite correctly points out. The product wrapper is just that. Its what you invest inside of that wrapper that matters. You have investment wrappers like ISAs, Pensions, Unit Trust/OEICs, Investment Trusts, Investment Bonds etc which can all invest in the same or similar areas. The main difference is how they are treated for tax.

First you look at how and where you want to invest, then you look at the tax wrapper afterwards that is most appropriate. Often it can be a combination. ie. £7000 in ISA, £30000 in unit trust and rest in bond.

I am under the impression I would get ongoing advice and reviews from AWD so I didn't expect them to be the cheapest option...but it looks like they may be quite expensive.

They are massively expensive and the commission rates they are talking about suggest they are taking full upfront commission (albeit with a small rebate) rather than lower upfront with ongoing 0.5%p.a. If no money is being paid to them annually, do you think they will service it?

£16,900 commission plus £6400 rebate = 6.65% initial commision. Pru's maximum initial when 0.5% trail (annual) is paid is 4.5%-4.75%. Hence my assumption they are doing full initial with no ongoing servicing commission.

NMAs - is that ones on the unbiased.co.uk site that state will work for 'fees only' ?

Again Chris beat me to it. The NMA is a business model rather than a type of qualification or recognised industry type of advisor. I dont know the figures but there are enough of us to support our own weekly publication and NMAs do seem to be quite vocal in the financial press. However, if I was to guess, I would put around 10% of advisors on NMA basis but growing all the time.

Looking at cost, £350,000 would pay around 7% initial commission with 0% annual or 3-5% initial with 0.5% annual. The advisor gets to choose which of those two options they want. It makes absolutely no difference to the charges on your investment.

However, the advisor can also choose how much of that commission they want to keep and how much gets rebated. Old model advisors tend to go with upfront only commission but maybe rebate a little (the situation you are in). New model advisors keep 1% of the commission and always take 0.5% trail for servicing.

The adviser you have seen is being paid £16,900 after rebating £6,400 to you.

A new model adviser would be paid £3,500 commission (although some may cap that to be lower) and will rebate £14,000 to you.

So, a new model adviser would make you £7600 better off for exactly the same product. Plus the NMA is being paid annually on performance of the investment whereas the old model gets paid up front regardless of what the performance is.

Other advantages are, say 7 years down the road, xyz company comes out with a new product that gives you better terms. NMA can move you to it either free of any initial commision or more usually a very small admin cost. Old Model will take the commission again.