Checking IFA advice before investing

Chrismaths

NMA is just a fancy way of saying 'interests more aligned with those of client'. An NMA doesn't get paid by making a recommendation, waiting for the indemnity commission be earned (5-7) years, then churning you into a new bond. He makes money by earning his 0.5% per year - by servicing you and your investments on an ongoing basis. He makes more money if your investments go up, and less if they go down. It just MakesSense(tm).

Chrismaths

Sorry sounding like an NMA love-in here.

One thing I'd like to say however, and I'm talking my own book here obviously, is that once you get into the realms of money you are talking about, you can get a different (and I'd say better, but I'm biased obviously) service from an investment manager. The differences are that you get less financial advice from an IM, but the range of investments and (again bias) expertise you get is far greater.

Even an NMA is often unable to offer you access to investment trusts, direct equities, EISs (enterprise investment schemes), VCTs, QIFs (qualified investor schemes), etc etc, that can provide a more diversified (and therefore hopefully less risky) and tax-efficient portfolio. In addition, an investment manager is likely to get access to institutional terms (read cheap) and institutional products not available to to the retail arena.

But again I'm biased

EdInvestor

If I was an experienced investor then a DIY approach would be the way to go but I don't find financial matters interesting (essential yes, interesting no)....

You're not alone, Friday.However when you sit down and work out how much you're paying to have someone take the tedious task of managing your money off your desk, then it suddenly gets a lot more interesting, one finds.

Did you know for instance that the stakeholder pension charge of 1.5% a year will actually eat up a quarter of the entire pension fund over 25 years? It's one of the things that makes personal pensions such bad value for basic rate taxpayers.By the time the charges do their work, there's basically no tax relief left.

Let me make a specific additional point to you about investment bonds.

The 5% that you can withdraw every year comes from your capital.It is not income ( like interest) that you earn on the fund. That's why it's tax free, it's from your capital.

So unless your fund earns 5% a year, every year after charges then your capital will be depleted.

It's important that you take this aspect on board.Many people are caught out by this, they think the 5% is the income the fund has earned, like interest from their bank account. It isn't.

dunstonh

However when you sit down and work out how much you're paying to have someone take the tedious task of managing your money off your desk, then it suddenly gets a lot more interesting, one finds.

Cost difference between you doing it yourself and using a NMA is 1%. That 1% can be easily made up by a half decent advisor placing you in the best investment options saving you more than 1% had you done it yourself. Indeed, with the amounts involved here, it could be possible for the adviser to negotiate better terms than what is available "off the shelf".

Did you know for instance that the stakeholder pension charge of 1.5% a year will actually eat up a quarter of the entire pension fund over 25 years? It's one of the things that makes personal pensions such bad value for basic rate taxpayers.By the time the charges do their work, there's basically no tax relief left.

Thats a massive over simplification of what you are getting for your money. You are investing with fund managers and fund houses that all have to be paid. For that, they will be looking for returns that far exceed what you get on savings accounts where you dont see the charges. Charges still exist on savings accounts but you dont see them as you get given the rate of interest. You dont know if the bank is making 3% or 4% before paying you. With investment funds, you know you that the fund manager is making a 1.25% (in your example) regardless of whether it grows by 10%, 40% or 100%.

Let me make a specific additional point to you about investment bonds.

The 5% that you can withdraw every year comes from your capital.It is not income ( like interest) that you earn on the fund. That's why it's tax free, it's from your capital.

So unless your fund earns 5% a year, every year after chargesthen your capital will be depleted.

That is the whole point of them. The 5% is treated as withdrawal of capital and is therefore not liable to income tax. That is why they work so well for people needing to reduce/avoid personal income tax.

I also dont understand why you think withdrawing more than it makes, forcing the capital to go down is unique to investment bonds. Examples:

1 - You have 100k in the bank, it makes £4k over the year in interest and you draw out 5k. You have drawn more than it makes
2 - You have an equity ISA of £50k and it makes 10k and you draw out 15k. You have drawn out more than it makes.
3 - You have a unit trust of £20k, it makes £3k and you draw out 5k. you have drawn out more than it makes.

So, if the bond makes 10k and you draw 15k, then you are drawing out more than it makes. No different to anything else.

Ed believes that people should do their own research and thinks that financial services is easy. Some of the time it is. However, Ed is a good example of when knowing a little can be more dangerous than knowing nothing. As a new poster Friday, you wouldnt be aware that every time bonds are mentioned, Ed virtually repeats the above word for word. The responses from the professionals correcting her get ignored time and again and I apologise for this but I do get frustrated with the continuous mis-information that gets posted despite corrections that have been made many times before.

Investment bonds can be very cheap, they can be very expensive. It depends on where you buy them. They are a retail product and it is no different to buying a PC from PC World and paying over the top for it or buying one from someone else much cheaper. Investment bonds are no different than unit trusts or ISAs in that respect as well.

As a business person, Friday appears to understand the logic that nothing is free but its a case of getting value for money. My car is due for service on Thursday, I could do it myself and save money. However, I cant do it myself, I dont want to do it myself and therefore I am willing to pay someone to do it.

EdInvestor

I don't think I really need to apologise for providing a link to the official tables of charges prepared by the regulator to inform consumers, do I? If you think they're wrong, why don't you complain to the FSA?

Nor do I apologise for explaining that 1% - sounds like nothing, doesn't it? - actually turns into more like 20-25% over the period you save into a pension.And that this process is accelerated with an investment bond, because the charges are usually higher.

I've spent quite a lot of time trying to help distressed elderly folk deal with the fact that their savings invested in With profit investment bonds were dwindling before their very eyes, when they thought all they were doing was withdrawing income that their capital was earning.

So I'm afraid I'm not going to apologise for explaining what's going on there either, sorry.

I have no objection to people employing advisors and investing in whatever financial products they like. But IMHO they should be provided with info so they know how much they are paying for the service and the product.

Very often we find this doesn't happen because the info is presented in a very confusing way.If I can shed a little light on this area, so that people are better equipped to ask the right questions and get value for money, then I'll be quite happy.

,

Chrismaths

Hear Hear. (to dunstonh)

My car is due for service on Thursday, I could do it myself and save money. However, I cant do it myself, I dont want to do it myself and therefore I am willing to pay someone to do it.

I could do it myself, as I learned to do it when I was a student and my time wasn't particularly valuable. Now my time is precious to me, and the cost of paying someone else to do a boring and time consuming job, better than I can do it, is well worth it.

Ed, remember what you call people who know the price of everything and the value of nothing.

Chrismaths

Ed, doctors prescribed thalidomide - people taking it thought they were taking it for morning sickness. IFAs have made some significant screw ups over the course of the last 20-30 years, no one doubts that. But a great number have also provided sound financial advice that has saved (and earned) their clients significant amounts of money.

I'd have thought that a crusader such as yourself would welcome NMAs with open arms - it's the industry looking at itself and trying to improve itself.

The FSA don't listen to complaints about themselves. All they understand is sales-based big business (and that very poorly). The tables are bull, dunstonh and I have shown you they are bull, and yet you keep pointing people to them. By all means, if the basis on which someone has been recommended a bond is the same as the FSA assume (ie full commission, no negotiated discount) then they are accurate. But that simply doesn't apply to what we're talking about!

What's cheaper, Investment A that charges 0.1%, or Investment B that charges 2% plus a 20% performance fee? Why investment A of course.

What's better value, if investment A produces 5% after charges, and investment B produces 15% after charges? Why investment B of course.

It's the same argument as Ferrari vs Rover.

dunstonh

I've spent quite a lot of time trying to help distressed elderly folk deal with the fact that their savings invested in With profit investment bonds were dwindling before their very eyes, when they thought all they were doing was withdrawing income that their capital was earning.

So, you are basing your knowledge on one particular investment fund (of the thousands out there) and blaming the product wrapper for it. Most of these of course would have been legacy bonds when bond charges were higher.

Nor do I apologise for explaining that 1% - sounds like nothing, doesn't it? - actually turns into more like 20-25% over the period you save into a pension.And that this process is accelerated with an investment bond, because the charges are usually higher.

So what if it does?

Stick £100k in a bank and get 4%. 20 years later after getting your 4%, how much has the bank earned from you? You dont know because the charge is not explicit.

Stick £100k in investments and you average 10%. 20 years later, you may have paid 25% in explict charges but you are still getting 6% p.a. more than the bank, where you have paid nothing (or so you think).

There is no investment product that is free.

And thats before we look at tax implications.

I don't think I really need to apologise for providing a link to the official tables of charges prepared by the regulator to inform consumers, do I? If you think they're wrong, why don't you complain to the FSA?

You are linking them out of context. Friday has already said he is getting around 30% rebate from his first adviser. The FSA tables assume 100% is kept by the adviser.

EdInvestor

That is the whole point of them. The 5% is treated as withdrawal of capital and is therefore not liable to income tax.

*Sigh*

If you hold a share - let's for argument say it's Lloyds Bank, which pays a dividend of around 6.2% currently- you will pay no tax on this dividend income if you are on basic rate.Nil,nada. 6.2% income into your bank account tax free, no effect on the capital.

Dividend income is tax free to basic rate taxpayers.

In addition, after you've bought the share, if you keep it in account with no annual fee, or hold it as a share certificate, it will cost you nothing to hold the share.Nil. No charges.

No other tax or fee is payable for holding shares.

What about capital gains?

You might have to pay this if you sell. But you have an allowance of 9,000 a year, pretty high.Anyway, you're interested in the income right? Selling will be rare.

Just a thought.

EdInvestor

Just to say that I have nothing against NMAs, quite the reverse.But we have yet to see a poster on the site who has actually had any dealings with one.

They are so far as scarce as hen's teeth, it seems.

The FSA tables will always be relevant in giving people a context in which they can see what they're being charged by comparison.In particular it's useful to have it spelled out exactly what 1% really amounts to over the years.