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IFA Advice - Commission based?

I'm writing this on behalf of someone else who has approx £120,000 to invest (I wish it were me!).

They've met an IFA, who's offered their services for an initial fee of 1.5%, and then an ongoing fee of 1% per annum. There would be no "additional" initial fee on any new money invested after the initial lump sum (though future investments are unlikely/likely to be small).

These charges will include biannual reviews, with rebalancing recommendations, along with sorting out CGT issues (and moving any gains into an ISA at the end of each tax year etc) - handled by the fund supermarket.

Do these charges seem fair? The IFA (Cert PFS) works for himself, rather than for a large firm.

I get the impression he would prefer commission (and understand why). However, providing he performs better than cash deposits in banks would, I don't see too much of an issue with this (he is providing a professional service afterall, and so should expect to be payed for it).

There are lots of people who seem to insist that fees based advice is better though, which has left a nagging in the back of their my. Is the adviser less likely to be as interested in a client who pays via fees rather than via cashback.

Would love to here peoples opinions (especially from any IFAs on here)?
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Comments

  • Aegis
    Aegis Posts: 5,695 Forumite
    Part of the Furniture 1,000 Posts Name Dropper
    jonny2510 wrote: »
    I'm writing this on behalf of someone else who has approx £120,000 to invest (I wish it were me!).

    They've met an IFA, who's offered their services for an initial fee of 1.5%, and then an ongoing fee of 1% per annum. There would be no "additional" initial fee on any new money invested after the initial lump sum (though future investments are unlikely/likely to be small).

    These charges will include biannual reviews, with rebalancing recommendations, along with sorting out CGT issues (and moving any gains into an ISA at the end of each tax year etc) - handled by the fund supermarket.

    Do these charges seem fair? The IFA (Cert PFS) works for himself, rather than for a large firm.

    I get the impression he would prefer commission (and understand why). However, providing he performs better than cash deposits in banks would, I don't see too much of an issue with this (he is providing a professional service afterall, and so should expect to be payed for it).

    There are lots of people who seem to insist that fees based advice is better though, which has left a nagging in the back of their my. Is the adviser less likely to be as interested in a client who pays via fees rather than via cashback.

    Would love to here peoples opinions (especially from any IFAs on here)?
    What leaps out at me is not so much the fees, which are relatively high, at least on the ongoing fees (typically the natural trail is all that's taken, which is usually 0.5%), but the fact that they are being charged by someone who only has the entry level qualification. This close to the implementation of the academic requirement (Diploma level and above) I'd expect someone seriously wanting to carry on their business to have upgraded from a certificate already. Truth be told, I would have expected true professionals to have chosen to exceed the minimum standard voluntarily before the requirements were even put into place, especially if the IFA in question is a one-man operation. It's worth finding out how close to Diploma this IFA is and whether he intends to carry on practising in 2013.

    For the amount in question it might well be worth asking around for a fee option. At £1,200 per year starting figure, you should be able to get a fair few quotes offering to do the same work on a reduced basis, though bear in mind that they may charge by the hour, which has the potential to excess the commission option if a review comes around which requires a lot of work.
    I am a Chartered Financial Planner
    Anything I say on the forum is for discussion purposes only and should not be construed as personal financial advice. It is vitally important to do your own research before acting on information gathered from any users on this forum.
  • qpop
    qpop Posts: 555 Forumite
    IMHO that sounds disproportionately expensive, and as Aegis points out they have a poor qualification.

    Head to http://www.findanadviser.org/find-an-adviser.aspx (on their behalf?) and look for a chartered adviser. For an adviser to be chartered they need to have practiced for at least 5 years, and be qualified to advanced diploma level.
    I am an IFA, but nothing I say on this forum constitutes financial advice. Always draw your own conclusions and always do your own research.
  • dunstonh
    dunstonh Posts: 118,000 Forumite
    Part of the Furniture 10,000 Posts Name Dropper Combo Breaker
    The initial is low. The annual is high. However, increasingly, you are finding smaller investment values being charged more for annual servicing due to the requirements that will soon exist. The threshold for where it changes from 1% to 0.5% varies with firms but £100k is often the range.
    I get the impression he would prefer commission (and understand why).

    The typical commission is 3% plus 0.5% a year. So, whilst there would be an initial gain, it would be less p.a.

    The FSA used to review commissions taken on collectives and the average was 1.8% initial with 0.5% p.a. (so you can benchmark)
    These charges will include biannual reviews, with rebalancing recommendations, along with sorting out CGT issues (and moving any gains into an ISA at the end of each tax year etc) - handled by the fund supermarket.

    That is good. However, bi-annual is not necessary with just £120k. Once a year is fine. If you get it once a year and down to 0.5% p.a. then its good.

    As for using a chartered adviser, that would be overkill with £120k and almost certainly more expensive and no guarantee of anything better (indeed, over the years, some of the biggest complaints I have had to submit have been against chartered advisers. It appears that some seem to think they have to complicate things just to try and prove their qualifications). Not against chartered as anyone getting higher qualifications is a good thing. However, for the mainstream consumer, there is nothing to be gained from it. Aegis is spot on in asking about where he is with his diploma and if he intends to carry on post RDR (2013). No point employing an adviser on servicing basis if he isnt going to be there in a couple of years.

    If the bed&ISA is being done with no charge (which is normal with servicing as that covers it) then that is good. Some greedy ones charge for that again. So, that is worth checking.
    I am an Independent Financial Adviser (IFA). The comments I make are just my opinion and are for discussion purposes only. They are not financial advice and you should not treat them as such. If you feel an area discussed may be relevant to you, then please seek advice from an Independent Financial Adviser local to you.
  • darkpool
    darkpool Posts: 1,671 Forumite
    just remember the 1% fee is not the only annual fee, if your friend invests in Unit Trusts they will have a Total Expense Ratio of roughly 1.6%, they will likely have additional dealing costs of circa 1.5%. Adding up to annual fees of 4%.

    I wouldn't pay 5 grand a year to manage a 120k portfolio. Your friend should read a few books on investment, in all honesty running a portfolio that size isn't particularly hard.
  • Ark_Welder
    Ark_Welder Posts: 1,878 Forumite
    darkpool wrote: »
    just remember the 1% fee is not the only annual fee, if your friend invests in Unit Trusts they will have a Total Expense Ratio of roughly 1.6%, they will likely have additional dealing costs of circa 1.5%. Adding up to annual fees of 4%.

    Not necessarily. Not all managed funds have these charges - not even the dealing costs, and some of these charges can be rebated.
    Living for tomorrow might mean that you survive the day after.
    It is always different this time. The only thing that is the same is the outcome.
    Portfolios are like personalities - one that is balanced is usually preferable.



  • Rollinghome
    Rollinghome Posts: 2,711 Forumite
    Part of the Furniture 1,000 Posts Name Dropper
    As Mr Darkpool has pointed out, would-be investors need to be aware of how paying out for layer upon layer to the hangers-on who want to look after their money can damage their wealth. The total real return on equities has historically been around 5% pa (though much less in more recent times) and high costs can soon wipe that out.

    Most people tend to over-estimate both the difficulty of investing and the ability of "advisers" - most of whom will come from sales backgrounds and have very little knowledge of any investments that don't pay sales commission.

    They could do well to read Warren Buffet's parable of the Gotrocks and Helpers in his letter to shareholders under "How to Minimise Your Wealth". http://money.cnn.com/2006/03/05/news/newsmakers/buffett_fortune/index.htm
  • Ark_Welder
    Ark_Welder Posts: 1,878 Forumite
    Another point for people to remember when investing is to not get over-confident in their own abilities either.

    +++

    So which one is Warren Buffet? Approximately 30% of Berkshire Hathaway's capitalisation is down to holding other listed securities as investments: Glaxo and Tesco, for example.
    Living for tomorrow might mean that you survive the day after.
    It is always different this time. The only thing that is the same is the outcome.
    Portfolios are like personalities - one that is balanced is usually preferable.



  • Rollinghome
    Rollinghome Posts: 2,711 Forumite
    Part of the Furniture 1,000 Posts Name Dropper
    Ark_Welder wrote: »
    Another point for people to remember when investing is to not get over-confident in their own abilities either.
    By simple definition, it's not good to get 'over-' anything I'd have thought.
    Ark_Welder wrote: »
    So which one is Warren Buffet? Approximately 30% of Berkshire Hathaway's capitalisation is down to holding other listed securities as investments: Glaxo and Tesco, for example.
    You decide, and when you have then consider how that has any bearing on the point he makes.
  • Ark_Welder
    Ark_Welder Posts: 1,878 Forumite
    You decide, and when you have then consider how that has any bearing on the point he makes.

    Well, it does look like maintaining a market capitalisation via active investment management rather than returning cash to shareholders for them to invest themselves. Presumably, a higher market cap justifies higher management fees.
    Living for tomorrow might mean that you survive the day after.
    It is always different this time. The only thing that is the same is the outcome.
    Portfolios are like personalities - one that is balanced is usually preferable.



  • dunstonh
    dunstonh Posts: 118,000 Forumite
    Part of the Furniture 10,000 Posts Name Dropper Combo Breaker
    Warren Buffett does one thing but says another. He looks for value. He tells US based retail investors to go with low cost.
    I am an Independent Financial Adviser (IFA). The comments I make are just my opinion and are for discussion purposes only. They are not financial advice and you should not treat them as such. If you feel an area discussed may be relevant to you, then please seek advice from an Independent Financial Adviser local to you.
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