IFA versus bank financial advisers

Laurence_WMF

In Martin's article about Financial Advisers, he emphasises 'Never, ever, ever use a bank manager'. Recently though, I have had initial consultations with a credited Independent Financial Adviser, and with an Adviser at the Co-op Bank. Of course the latter only advises investments in Co-op Unit Trusts, yet is it not an advantage that he doesn't charge a fee, and aren't the Co-op Trusts themselves managed by people with at least as much market expertise as the Independendent Financial Adviser?

To put it another way, are the management fees charged within the Co-op Unit Trust schemes the equivalent of the Independent Adviser's fees, or an equivalent to mangement fees that I would still have to pay with an independent adviser, on top of the independent adviser's own fees?

Thanks a lot,
Laurence WMF

dunstonh

yet is it not an advantage that he doesn't charge a fee, and aren't the Co-op Trusts themselves managed by people with at least as much market expertise as the Independendent Financial Adviser?

The CIS sales rep can only retail CIS products. The IFA can retail from the whole of market including CIS products (if they really wanted to). The CIS sales rep doesnt charge an explicit fee as its hidden within the product charges.

So, the CIS European Growth fund has a 5% initial charge if bought via CIS. That 5% is there to cover the cost of advice. So, you are paying for the CIS sales rep.

£100k in that fund costs you £5000 if bought from CIS.
an IFA probably wouldnt use that fund by choice but ignoring that,you would expect a maximum commission figure of around £3000 (as CIS funds are available at discounts to IFAs with an initial charge of 3% on max commission)
an IFA on discounted terms or fee basis would be closer to around £1000-2000
The FSA published an average for collectives based on data collected from real applications and found that 1.8% was the average (£1800 on this example)

So, even an IFA working on maximum commission basis would be cheaper than the CIS. Get one on agreed remuneration/fee basis and its even better.

To put it another way, are the management fees charged within the Co-op Unit Trust schemes the equivalent of the Independent Adviser's fees, or an equivalent to mangement fees that I would still have to pay with an independent adviser, on top of the independent adviser's own fees?

If you went to an IFA on commission basis (the same as the CIS sales rep) then, at worst, it would be the cheaper. If you want to an IFA on fee basis then it would be more expensive for smaller amounts but cheaper for larger amounts (i.e. where the fee is more expensive/cheaper than the commission).

Remember that where you pay a fee for an IFA, the commission is rebated and/or offset against the fee. its not in addition as many tied sales reps will try and make out.

Loughton_Monkey

The way I look at it is this. Whenever you take "advice" from someone in a professional sense, you are using up someone's time. He or she has to earn a living. So logically you are paying for it somewhere or other.

In theory, and IFA will provide you with 'advice' taking in all available products/companies and point to and arrange a valid solution, wherever it is to be found.

A Bank Financial Adviser will advise, in theory, the best solution for you that the bank has to offer.

I say "in theory" because there is probably good and bad in both. An IFA working on a commission basis mat well have a tendancy to suggest the higher commission paying solutions, so always go "Fees Based". Even then (to be cynical) IFA's tend to have their own 'favourites' and it is not unknown for them to channel volumes of business to certain providers knowing this will qualify them for 'goodies' such as sponsered golfing days, racing events etc.

A bank advisor will almost certainly be on some sort of 'commission' - probably not specific and direct, but maybe by a 'performance related' bonus not unconnected to the type of business he has sold. In other words, a "truly independant" advice might scream that you should put £5,100 into a cash ISA - because that's your risk profile. I'm not sure a bank FA would always advise that.

With either animal, I am highly suspicious about using them for "Fund Choice". What I am getting at is that given an individual's financial position, aspiration, goals, etc. let's assume that there is a generally agreed 'solution' which is to buy a Personal Pension and to start a maxi Stocks and Shares ISA. Company A has an excellent service and low charges for a pension. Company B has similar for an ISA. But with equal charging funds (let's say 1% management fee). Who is to say whether you would be better in 'UK Smaller Companies' rather than 'Natural Resources'. Or 'Emerging Europe Equity' rather than 'South American Equity'? Or 25% in each? or 50% across two of them? Or split across 10 different funds....?

I guess either IFA or FA could give you all manner of Past Performance figures, Asset distributions, etc. But does he know any better about what will do best over the next 12 months/5 years than (a) Financial Journalists (b) The intelligent man down the pub (c) Punditry from Asset Management Companies..... ?

Personally I'm not so sure. It's like saying "I'm going to prison for 10 years. I want to put my entire wealth into savings account(s) that will provide the maximum return over that period. Tell me which bank and which account will achieve that." As they say, 'there's no answer to that!'

Linton

Loughton_Monkey wrote: »

.......
With either animal, I am highly suspicious about using them for "Fund Choice". What I am getting at is that given an individual's financial position, aspiration, goals, etc. let's assume that there is a generally agreed 'solution' which is to buy a Personal Pension and to start a maxi Stocks and Shares ISA. Company A has an excellent service and low charges for a pension. Company B has similar for an ISA. But with equal charging funds (let's say 1% management fee). Who is to say whether you would be better in 'UK Smaller Companies' rather than 'Natural Resources'. Or 'Emerging Europe Equity' rather than 'South American Equity'? Or 25% in each? or 50% across two of them? Or split across 10 different funds....?

I guess either IFA or FA could give you all manner of Past Performance figures, Asset distributions, etc. But does he know any better about what will do best over the next 12 months/5 years than (a) Financial Journalists (b) The intelligent man down the pub (c) Punditry from Asset Management Companies..... ?

If you are saying that it is wrong to expect an IFA (or an FA) to fund-pick the next guaranteed winner I would agree with you completely.

But that is not what you should use an IFA for. The important skills are those required to construct a diversified set of investments and a management plan that meets the customer's risk profile. This is not what you normally get from the city pages nor from the bloke down the pub who I would suggest focus on "tips".

It's this side of investing that is far more likely than trying to pick the winners to generate the maximum return for an acceptable risk. Once you've sorted out the investment strategy, which specific funds you chose is in my view very much a secondary matter.

Rollinghome

Suppose one superficial comparison could be with restaurants. You can a fairly decent meal at a reasonable price at one of the high street chains. The very best meals are likely to be at smaller independent restaurants but the worst meals with cockroaches in your coffee could be at independent restaurants too.

(An example of someone ripped off with massive fees by an IFA here: https://forums.moneysavingexpert.com/discussion/2820200 )

I don’t know how Co-op reps are paid but no matter how honest they are you’re still likely to have the problem that they have only a limited range of products to offer.

Moral is that no matter who you use never lose sight of the fact that their job is to sell. Salesmen invariably prefer to call themselves "advisers", "consultants" or "representatives": never salesmen. Where an IFA is paid commission by the product providers they are paying him to sell their products; they don't pay him all that money to give free advice. Many IFAs will be on a minimal basic wage with the rest on commission. Likewise the bank adviser is employed by the bank to sell and will probably earn a bonus. That’s their job. That’s not to say they don’t want happy customers who’ll come back again.

As with anything you buy, whether a car or financial products, you need to have some understanding of what the product offer and the costs and avoid overly relying on the advice of salesmen – especially when they’re selling on commission.

Several very balanced articles on this site by Justin Modray (who’s a former IFA who you might know from TV or radio) about how financial advisers are paid and the pitfalls: http://candidmoney.com/articles/article126.aspx:

"Companies providing financial advice tend to fall into two camps. The first employs advisers, usually on a basic salary with bonuses dependent on hitting sales targets. The second provides support and marketing for self-employed advisers, taking a cut of the adviser’s earnings in the process.

As I’ll explain below, neither is entirely satisfactory from a customer’s point of view...."

Laurence_WMF

All of these replies are very helpful. The trouble you've all taken and the detail and sharp thinking in your advice exceeded my expectations!

Laurence

Loughton_Monkey

Linton wrote: »

If you are saying that it is wrong to expect an IFA (or an FA) to fund-pick the next guaranteed winner I would agree with you completely.

But that is not what you should use an IFA for. The important skills are those required to construct a diversified set of investments and a management plan that meets the customer's risk profile. This is not what you normally get from the city pages nor from the bloke down the pub who I would suggest focus on "tips".

It's this side of investing that is far more likely than trying to pick the winners to generate the maximum return for an acceptable risk. Once you've sorted out the investment strategy, which specific funds you chose is in my view very much a secondary matter.

I tried to acknowledge that in the "asset distribution etc.....". Any sensible IFA (if exist) is not going to load a high risk fund on a cautious guy nearing retirement etc. But I'm just reflecting the fact that if you take any "given" scenario, like £10K needing to go into a relatively risky fund, but one capable of pulling 50% annual growth out of the bag in a good year, I still don't think any IFA could safely say that JPM New Europe was going to be better than Neptune Greater Russia or CF Octopus Absolute.....