SIPP advice please

dunstonh

So why is SL not a good contract please?

Its not bad its just that there are so many that can beat it on cost and/or features. So why have an inferior product when you know there are better?

TERs/AMCs/OEIC, excuse my ignorance but these are not familiar terms (to me,anyway)

If you are planning to DIY then you need to start learning about them as they are very important. Especially when you start to build the investment portfolio for the pension.

zagfles

Dr_Feelgood wrote: »

TERs/AMCs/OEIC, excuse my ignorance but these are not familiar terms (to me,anyway)

AMC is "annual management charge". However this doesn't include all charges, so funds usually quote a TER (total expense ratio) which is usually a bit more. I think things like auditor's fees are included in TER but not AMC.

I'm not sure if pension funds need to declare a TER, I was under the impression they could "hide" charges more easily than unit trusts/OEICs.

Personally I'm more interested in fund performance net of charges, ie how much my investment has gone up or down after the charges are taken out, so that's what I look at (and I've just found out thanks to dunstonh that my AVC charges by cancelling units so I need to take that into account when looking at prices!).

OEICs are "open ended investment companies", similar to unit trusts.

The problem with any self investment where you choose what to invest in rather than through an advisor, is that the cost of advice is already built into the charges for the product. OEICs etc will have an initial charge and an annual charge some of which is earmarked to pay commission for the financial advisor. But if you don't want advice you still have to pay the charges. HL and others will refund some (but not all) of the charges eg HL tend to refund the initial charge but not the annual charge.

It's a stupid way of pricing IMO, it would much better if charges just paid the cost of running the fund rather than advice costs, and people who want advice just paid their advisor direct.

dunstonh

I'm not sure if pension funds need to declare a TER, I was under the impression they could "hide" charges more easily than unit trusts/OEICs.

Pension funds use the TER as the AMC. Hence why you dont see two mentioned. Plus, with pension contracts that use OEICs/UTs rather than pension funds, they should illustrate using the TER to ensure as close to like for like as possible.

It's a stupid way of pricing IMO, it would much better if charges just paid the cost of running the fund rather than advice costs, and people who want advice just paid their advisor direct.

What you see as advice cost is also distribution cost. If the "advice cost" was not on the fund then it would be replaced with a distribution cost instead. Just as it will be post 2012 when that cost has to be shown explicitly. So, taking HL, they will lose the 0.5% they currently keep on their SIPP. However, they will have to replace it with an explicit charge instead as they are not going to retail it for free. Especially if marketing rebates are outlawed at the same time.

zagfles

dunstonh wrote: »

What you see as advice cost is also distribution cost. If the "advice cost" was not on the fund then it would be replaced with a distribution cost instead. Just as it will be post 2012 when that cost has to be shown explicitly. So, taking HL, they will lose the 0.5% they currently keep on their SIPP. However, they will have to replace it with an explicit charge instead as they are not going to retail it for free. Especially if marketing rebates are outlawed at the same time.

Not sure what you mean by "distribution costs" - it's not like a lorry arrives to drop off your units! If you mean sending out cheques, statements etc surely that's fairly trivial and can be incorporated into the AMC.

dunstonh

Not sure what you mean by "distribution costs" - it's not like a lorry arrives to drop off your units! If you mean sending out cheques, statements etc surely that's fairly trivial and can be incorporated into the AMC.

If only it was that simple.

A distributor of regulated financial services has to have a compliance team in place (and expect FSA visits periodically) to cover the distribution of investments. They also have to pay the FSA, FOS and FSCS levies as a distributor. These levies are based on turnover. So, even where no advice is provided, then there can still be a significant cost to retail them. This is why IFAs are usually cheaper than buying direct as economies of scale can be factored in. It is also why some providers will not retail their funds/products direct to public. If they dont get a sufficient volume then the cost of self distribution can be more than they can make. Whereas 30,000 IFAs distributing the product gives them lower costs to offer it cheaper via IFAs.

For an industry that has no stock to offer as such, it has a very expensive distribution channel. Most of which is due to regulation and compliance.

zagfles

dunstonh wrote: »

If only it was that simple.

A distributor of regulated financial services has to have a compliance team in place (and expect FSA visits periodically) to cover the distribution of investments. They also have to pay the FSA, FOS and FSCS levies as a distributor. These levies are based on turnover. So, even where no advice is provided, then there can still be a significant cost to retail them. This is why IFAs are usually cheaper than buying direct as economies of scale can be factored in. It is also why some providers will not retail their funds/products direct to public. If they dont get a sufficient volume then the cost of self distribution can be more than they can make. Whereas 30,000 IFAs distributing the product gives them lower costs to offer it cheaper via IFAs.

For an industry that has no stock to offer as such, it has a very expensive distribution channel. Most of which is due to regulation and compliance.

Thanks - so basically compliance costs etc. But advice must make part of the "distribution" cost incorporated in the price.

For instance the likes of HL, as an IFA, can offer funds at a considerable discount on the "standard" price to those who don't require advice. For most funds they will refund all the initial charge, and, outside a SIPP, will typically refund half their trail commision (usually 0.25%). I think other "fund supermarket" type IFAs offer even bigger discounts.

Could an IFA offering advice really compete with that, for the same funds? Or could they only compete by offering other "cheaper" products instead?

dunstonh

Thanks - so basically compliance costs etc. But advice must make part of the "distribution" cost incorporated in the price.

Advice is actually only a relatively small cost.

For instance the likes of HL, as an IFA, can offer funds at a considerable discount on the "standard" price to those who don't require advice.

I would disagree with that. HL charge no initial fee but keep the 0.5% p.a. that would go to an IFA. Many IFAs would either use that to pay for future servicing or rebate it back into the pension if you didnt want servicing. What are HL doing for that 0.5%? They are effectively using it to cover sales costs which are not taken up front but paid over time. A fund of £100k with 0.5% trail pays HL £500. Ignoring growth, thats £2500 in 5 years. An IFA can charge around £500-£1000 to set up a pension. So, it only takes a £100k fund 1-2 years to be cheaper.

Could an IFA offering advice really compete with that, for the same funds?

Many IFAs will charge little or nothing up front and aim to service the pension by using the trail commission to pay for that servicing. Their business model is focused not on initial fees but servicing provision and servicing remuneration. So, in that respect, a servicing IFA can equal HLs charges and provide a service for it.

HL is a good option for an active investor but it is not as cheap as their marketing would make you think. If you compared it to a greedy/expensive IFA then it would be but if you compared it to a post RDR compliant fee charging IFA then there is little in it and the IFA could come in cheaper.

zagfles

dunstonh wrote: »

I would disagree with that. HL charge no initial fee but keep the 0.5% p.a. that would go to an IFA.

In a SIPP they do. But for an ISA they typically rebate half of it.

Many IFAs would either use that to pay for future servicing or rebate it back into the pension if you didnt want servicing. What are HL doing for that 0.5%?

Well, they are allowing me to "service" my own SIPP & ISA via their website. I make random variable contributions to my SIPP and invest in different funds every time, I suspect an advice-giving IFA would find that a nightmare and charge more than HL are

They are effectively using it to cover sales costs which are not taken up front but paid over time. A fund of £100k with 0.5% trail pays HL £500. Ignoring growth, thats £2500 in 5 years. An IFA can charge around £500-£1000 to set up a pension. So, it only takes a £100k fund 1-2 years to be cheaper.

When my fund gets to £100k I'll let you know

And I suspect the IFA will charge whenever you wanted to review your investment strategy, change your payments etc.

Many IFAs will charge little or nothing up front and aim to service the pension by using the trail commission to pay for that servicing. Their business model is focused not on initial fees but servicing provision and servicing remuneration. So, in that respect, a servicing IFA can equal HLs charges and provide a service for it.

HL is a good option for an active investor but it is not as cheap as their marketing would make you think. If you compared it to a greedy/expensive IFA then it would be but if you compared it to a post RDR compliant fee charging IFA then there is little in it and the IFA could come in cheaper.

One thing I do like about HL is all the information they provide via their magazine etc. They do tend to overdo the "junk" mail but I've been very glad of the articles and features, which have influenced my fund choice, and I've been very pleased with the performance of the funds I've selected on that basis.

dunstonh

In a SIPP they do. But for an ISA they typically rebate half of it.

It may be worth reviewing that. On a thread in the investments section it was discussed recently that more and more funds are only rebating 0.1% nowadays.

The interesting bit is going to come when natural trail is eliminated. What are they going to do then. That is the unknown.

Well, they are allowing me to "service" my own SIPP & ISA via their website. I make random variable contributions to my SIPP and invest in different funds every time, I suspect an advice-giving IFA would find that a nightmare and charge more than HL are

ad hoc payments via an IFA are far heavier on paperwork than DIY as we need to log the research and recommendation. For a servicing client with a decent sized portfolio it wouldnt be an issue but for a smaller size portfolio it would be a nightmare and not cost effective.

And I suspect the IFA will charge whenever you wanted to review your investment strategy, change your payments etc.

Not with servicing IFAs. Transactional IFAs would. The whole point of servicing is that you get this sort of thing so the trail is doing something of value.

One thing I do like about HL is all the information they provide via their magazine etc. They do tend to overdo the "junk" mail but I've been very glad of the articles and features, which have influenced my fund choice, and I've been very pleased with the performance of the funds I've selected on that basis.

Only thing to be wary of is that they are paid to promote funds. So, you often have to view some of their "recommendations" in the same light as you would consider a company like Aviva telling you about how good xyz fund is as well. On the DIY platform they do not have an IFA hat on. They have a product provider hat on.

Don't get me wrong. The HL platform is great for an active DIY investor. However, it can be a complete waste of money for a lazy investor picking portfolio funds or a random selection left to its own devices.

jamesd

I'd rather review their interim report and note that they made a hair under 0.8% on the total amount of money they have with them. More of that will be for the SIPP than the ISA because of the lack of rebates in the SIPP.