Do You Need Financial Advice? When To Get It, When Not To Get It Discussion Area

dunstonh

so far the process has been free (so it can't be fee based)

Even on fee basis there is often a period of free consultation to see if the services are required.

if we continue we pay 1.25% of the portfolio capital as an ongoing yearly fee

Thats expensive unless its discretionary investment management.

plus a quarterly policy fee and an encashment fee for the first ten years.

That sounds more like product charges.

It all sounds very expensive to me but I am financially illiterate!

Its hard to compare as we dont know if you are buying a packaged product or using a discretionary investment manager. It sounds like it could be either.

SylviaC_2

Thankyou dunstonh - I meant it when I wrote 'financially illiterate' - what is discretionary investment management please!

dunstonh

SylviaC wrote: »

Thankyou dunstonh - I meant it when I wrote 'financially illiterate' - what is discretionary investment management please!

IFAs will advise on packaged products which use investment funds typically. Things like ISAs, unit trusts, investment bonds and pensions.

Discretionary investment managers (DIM) will manage a portfolio of direct investments (usually) such as shares, investment trusts, ETFs etc. They will buy and sell these without needing your authority or agreement (beyond an initial agreement to allow them to do it).

Packaged products can be on fee basis or commission (if using an IFA you can decide which). The remuneration tends to more or less follow industry averages although some can be more expensive than others and some products allow the adviser to set the remuneration.

DIM typically use products that do not pay a commission so they have to add in fees to compensate for that.

If the person you are seeing is a DIM then the fees are not too bad (Although you ought to be looking perhaps closer to 1% and ensure if any commission product is sold that the commission is rebated).

If the person you are seeing is an IFA then it would mean there are product charges. If those charges you mention were product charges then its not bad as the typical annual management charge is around 1.5%. If those charges are on top of the annual managment charge then you are being ripped off.

SylviaC_2

Again many thanks - for a really clear explanation which I could easily understand.

UnhappyHarry

Maybe we've been unlucky, but my wife (retired), and myself (retiring at the end of the year) don't seem to get such great service from IFAs.

About 7 years ago, we utilised an IFA on a commission basis. His recommendations (primarily Skandia MultiFunds) performed shockingly badly, and were a much poorer investment than our own self-picked funds, which we sold on his advice.

We've seen him only ONCE since the original meeting, and he has never suggested altering funds. I don't think that there's ben any contact since 2004, yet he still collects commission on the products sold.

I know that this is a relatively common grouse amongst investors, but we still see strong recommendations on this site that we should always employ an IFA for pension dealings, so we decided to start again and find a new IFA.

Basically, our situation is that my wife has a final salary scheme, so no involvement required there. Between us, we have savings of about £x, with insurances and endowments currently valued at about £x (we've decided to surender and sell these, as they're al maturing too late for our purposes). I have a company pension and a private pension with a combined present fund value of about £x.

I did some research and found an IFA specialising in retirement planning (also listed on "unbiased"), and over 2 meetings, lasting in total about 8 hours, he discussed our situation.

We had always made it clear that we wanted fee-based advice, and this is the fee structure which he suggested:

Pension: 3% Initial fee + 1/4% per quarter (£x + £x pa)

Investments: 3% Inital fee + 1/4% per quarter (£x + £x pa)

"Lifestyle": £x Initial fee + £x per month

Naturally, I've walked away from this, but I'd like some feedback on the above (particularly from some of the IFAs that contribute to this forum). Am I expecting too much?

How do we find an IFA giving good solid, dependable advice, without feeling that they're going to make more out of me, than I would out of them?

dunstonh

About 7 years ago, we utilised an IFA on a commission basis. His recommendations (primarily Skandia MultiFunds) performed shockingly badly, and were a much poorer investment than our own self-picked funds, which we sold on his advice.

That has nothing to do with the advice but the timing. You hit the tech stocks crash and american accountancy scandals which would have hit performance at that time.

We've seen him only ONCE since the original meeting, and he has never suggested altering funds. I don't think that there's ben any contact since 2004, yet he still collects commission on the products sold.

Did you employ him on a servicing basis or just a transactional basis? Is your investment value enough to justify a regular contact without a fee being paid?

We had always made it clear that we wanted fee-based advice, and this is the fee structure which he suggested:

Pension: 3% Initial fee + 1/4% per quarter (£2,400 + £800 pa)

Investments: 3% Inital fee + 1/4% per quarter (£4,350 + £1,450 pa)

"Lifestyle": £1275 Initial fee + £145 per month

Naturally, I've walked away from this, but I'd like some feedback on the above (particularly from some of the IFAs that contribute to this forum). Am I expecting too much?

That isnt a fee basis. That is commission basis. The FSA state that fee basis must not match commissions. It would breach TCF guidelines. Fees can can include a sliding scale but must be a monetary amount that is fixed. i.e. £1500 for job done or £150 an hour or 1% of amount invested with a minimum of £500 and a maximum of £1500.

It cannot be 3% because that is the typical maximum commission on investments. That is not fee basis. Indeed, it is quite a major breach of rules and the FSA would take issue with them on that on a visit (and the FSA has said it plans to visit at least 1/3rd of IFA firms in the next 2 years. So, good odds they will get caught).

How do we find an IFA giving good solid, dependable advice, without feeling that they're going to make more out of me, than I would out of them?

Avoid the national and regional large firms. They tend to operate on a salesforce basis. That isnt a good environment for advice. Plus, there is often less scope for discounting so they prefer commission basis. They also tend to have higher turnover in staff.

You can usually tell better quality by just listening or reading the recommendation and research. If there isnt any research provided then you should be on guard. If you ask for it and there is little or no research provided then walk away. You may not understand quality research in full but you should be able to identify if it is quality or not (i.e. why has this tax wrapper been chosen over another, why has this portfolio of funds been recommended etc, how the companies compare and why this one chosen etc). A good guide is how they have ascertained your risk profile. Have they asked questions that have made you think about your risk in more detail or have they more or less just said pick a number between one and five to indicate where you are on a risk scale. The latter is old fashioned and basic and a good sign of a basic adviser.

IFAs have the lowest complaints to the FOS. Just 4% last year yet they transact over half the business. So, I think you are just being unlucky. Most will do a perfectly good job. Some will be greedy though and I think that is what you have had there. Personally, I would have put a complaint in on that one as its a clear breach. Out of interest, do you still have the initial disclosure documents for that firm (key facts about our services)? That is the very first document given to you before anything is done and would have a section in there which details their fees.

UnhappyHarry

dunstonh,

Thanks for the detailed reply, and you at least give me some confidence that there might just be ethical IFAs out there somewhere...

However, I would appreciate your forbearance in some of my responses to your post, as I think my naivete may be showing.

That has nothing to do with the advice but the timing. You hit the tech stocks crash and american accountancy scandals which would have hit performance at that time.

I accept that, but I did monitor the performance after selling (Newton Income), and the comparison was striking. To give you some idea of how badly the Skandia funds have performed, I have invested £100 per month since Sep 01 (total £8,400). Today's value? £9,618.

Did you employ him on a servicing basis or just a transactional basis? Is your investment value enough to justify a regular contact without a fee being paid?

I quote from a letter written in July 2004 after complaining about the poor performance, "....and I do apologise furthermore for not contacting you on an annual basis to review your business." And he still hasn't.

That isnt a fee basis. That is commission basis.

Now I'm lost! I understood that there were two methods of paying:
1. Fee. I pay the IFA
2. Commission. The product suppliers e.g. Skandia pay the IFA
Surely if I pay, whether it's percentage based or not, it's still a fee? Could you humour me on this, and explain, please?

Avoid the national and regional large firms.

That's exactly what we did. IFA 1 worked from home, but as part of an established network. IFA 2 also worked from home, independently in a rural location in Highland Perthshire. He's listed on unbiased.co.uk and has an extensive website and professes to specialise in pension and retirement planning.

I don't know whether anyone has worked out the fees that we were quoted, but over 10 years (assuming his rates don't rise), we would have paid him just short of £48,000.

I hope that there are some IFAs out there reading this that feel as incensed as myself that people like this shouldn't be allowed to practice.

I repeat, "How do we find an IFA.....?" If anyone in the Perthshire or Stirling areas thinks that they can do an honest and reasonable job for us, just let me know. (Previous applicants, if they recognize themselves above, need not apply).

dunstonh

I accept that, but I did monitor the performance after selling (Newton Income), and the comparison was striking. To give you some idea of how badly the Skandia funds have performed, I have invested £100 per month since Sep 01 (total £8,400). Today's value? £9,618.

That doesnt make it bad. Monthly ones take ages to make real gains. They should be viewed in 10-15 years minimum. You could have made more, you could have made less. It really depends on where you are invested and if that is appropriate for your risk level. It is the underlying investments that are chosen that matters. Skandia is a fund supermarket so there are over 1000 funds to choose from. Its not great and I would expect more than that but without knowing the sector allocation it's difficult to comment. Use of Skandia is not the reason though.

Quote:
That isnt a fee basis. That is commission basis.

Now I'm lost! I understood that there were two methods of paying:
1. Fee. I pay the IFA
2. Commission. The product suppliers e.g. Skandia pay the IFA
Surely if I pay, whether it's percentage based or not, it's still a fee? Could you humour me on this, and explain, please?

You can pay an IFA by fee or by commission. On collective investments, the typical maximum commission is 3% plus 0.5% natural trail. So, if the adviser is charging 3% plus 0.5% then it equals the commission. That would be a breach under FSA guidelines.

The fee option has to be either a fixed monetary amount or an hourly rate. It cannot be percentage based. It also has to be paid for by cheque and not from the product provider. There is some allowance for percentage to be used if it signficantly undercuts the commission rate and has a cap on the amount. i.e. 1% with a minimum of £500 and maximum of £1500.

However, there is something the FSA calls "customer agreed remuneration" (CAR) where you agree the fee in advance and then use the commission to pay that fee. This is ideal on pensions for example where you effectively gain tax relief on the fee. It can also avoid any potential for VAT on the fee. This currently is not classed as a fee but the FSA would have no problem with any adviser using this if the amount matches the fee. (the proposals have it classed as a fee from next year).

That's exactly what we did. IFA 1 worked from home, but as part of an established network. IFA 2 also worked from home, independently in a rural location in Highland Perthshire. He's listed on unbiased.co.uk and has an extensive website and professes to specialise in pension and retirement planning.

unbiased.co.uk shows around 99% of all IFAs. The only check they do is to make sure they are on the FSA register. There are no quality checks.

I don't know whether anyone has worked out the fees that we were quoted, but over 10 years (assuming his rates don't rise), we would have paid him just short of £48,000.

Are you including provider charges in there or just his remuneration? However, based on your earlier post and my comments above, you are paying him commission, not fee basis. If he is a network member, I would be surprised to see his let network get away with that. If he is directly authorised then there is probably no-one to tell him that what he is doing is wrong.

I mentioned it higher up. What does his "about the cost of our services" document say in section 4 "how much might our services cost"? That is where the fee options must be disclosed. This document must be provided early on in the process. Ideally the first thing but there is no rule to say that. You can ask IFAs to supply these to you before you see them so you can compare charges. They can post, email or fax them to you if you wish.

UnhappyHarry

Its not great and I would expect more than that but without knowing the sector allocation it's difficult to comment. Use of Skandia is not the reason though.

I accept that, but not managing the portfolio would be a contributory factor. The 2004 letter actually stated that he wouldn't recommend switching funds, but I thought that was the whole point; monitor and fine-tune for maximum benefit. No changes at all in 7 years doesn't seem right. Out of interest, the funds were Fidelity American Spec Sits, Framlington Health, Henderson Global Tech and Invesco Perp Euro Equity. Maybe my calculations are flawed, but I think that if it had been banked in a Savings Account, it would be more than £10,000 now.

Are you including provider charges in there or just his remuneration?

By that do you mean any charges that he would have to pay to the provider? If so, I presume so, but I don't know what they would be. However, on the other side of the coin, Skandia pays a commission to IFAs, but they won't pay it to the client if they self-manage; it stays with Skandia. I asked IFA2 what happened to that commission, and he claimed that he didn't understand the question. I asked again if the commission would be rebated back to us (there's no sense in letting Skandia keep it), but he's never answered.

What does his "about the cost of our services" document say in section 4 "how much might our services cost"

I have a document entitled "Terms of Business Letter" which has a section titled "Disclosure of charges/fees" which doesn't give any detail, but says things such as "All charges/fees will be fully disclosed to you." etc.
I also have another document "Additional Services" giving prices for specific items such as Pension Review, Setting up new files etc., but no indication whether VAT is additional.

I know that every workman is worth his fee, but I find these costs quite ridiculously high, and it really puts me off trying to find another IFA. If I muddle through on my own, I may lose a few thousand, but I can't see that I would benefit by greater than my payments to an IFA, if these are typical.

Interestingly, and I may have this wrong, but my situation is that if I retire at the end of this year, I'll be aged 56, and with no income. I would have thought that my first course of action for FY2009/10, would be to put as much as possible into an ordinary high interest savings account, to get an interest income up to the level of my personal allowance i.e. before even looking at ISAs. If that's the correct course of action, why didn't IFA2 suggest it? Is it because IFAs don't benefit from bank accounts? Or maybe I've got it wrong. I had hoped that the professionals would have helped me, but my experience seems to suggest that there's too much self-interest.

PS I've just invested £20 in "Personal Finance & Investing for Dummies"......

the.duck_2

Hi

I am using a an FSA advisor to move three old private pension schemes into one.

He has recommended that I use Scottish Widows pension account.

The advisor will be chargeing 2% of £180,000 = £3600 to move my old pensions to the new one. He will also be charging me an annual fee of 0.4% (initially £720 then increasing inline with value of pension) to provide an annual review. Scottish Widows will also be charging me 0.45% for services.

Are these charges reasonable?

Any help would be greatefully received.

Thanks

Philip