A very large sum - where do I start?

prudryden

Dun -
I'm surprised at your comparison of what is now called "New Model Advisor" vs. "Old Model Advisor".

Both have been around since investing began.

Flynn_2

EdInvestor wrote:

There's no need to feel guilty about it.

Good to hear someone with that view Ed. I remember even one of the stockbrokers I saw giving me a look as if he thought I was a bank robber.

Thanks for the explanation Dunston. Can I ask you a few supplementaries?

How do you judge the track record of an IFA as you could, for example, a fund of funds UT? Do they generally have the same research resources as a FoF manager?

And how do you test whether an IFA's advice is based purely on the clients best interests rather than their own? Would it be right to assume with an "NMA" there will be a reluctance to recommend any investment that doesn't offer them ongoing remuneration such as ITs or some low cost tracker funds and in fact any investment that doesn't have an advisor remuneration structure similar to a UT? Aside from trackers are there differences between any UTs in the ongoing remuneration that makes some more profitable for the IFA?

dunstonh

How do you judge the track record of an IFA as you could, for example, a fund of funds UT? Do they generally have the same research resources as a FoF manager?

Its hard to judge one until you are using one. A lot of it is down to the quality of the research and reports you get. For example, IFAs (if they have run the right software) can output all sorts of investment data.

A popular one with new investors is to show how the sector allocated portfolio has performed historically both with chosen funds and sector average (on that same spread) and against certain other benchmarks which can include FoFs if you wish. Past performance no guide for the future but it does allow to compare different scenarios. For example, you could compare the sector allocated spread with only sector average returns against an equity high income spread (closest match to a HYP).

And how do you test whether an IFA's advice is based purely on the clients best interests rather than their own?

NMA advisers get their income on performance of the investment. Your interests and their interests are the same. Old model is all upfront. They have no buy in to the performance of your investment.

Would it be right to assume with an "NMA" there will be a reluctance to recommend any investment that doesn't offer them ongoing remuneration such as ITs or some low cost tracker funds and in fact any investment that doesn't have an advisor remuneration structure similar to a UT?

Virtually all funds offer trail commission. Even some trackers. However, some funds dont but in a portfolio of £600k (assuming it was all invested) you wouldnt be looking at just a handful of funds but rather a lot. I just completed a new portfolio for £230,000 this week and that had 34 funds utilised.

If you really want to invest in a say a FTSE100 tracker or FTSE All share tracker which hasnt managed to exceed sector average in the last 13 years then you shouldnt bother getting advice. If you are going to invest to save money then you are going about it the wrong way. You invest to make money.

One option is to have all trail commission rebated and agree a fixed 0.5% charge against the investment. I wouldnt but its possible if you do feel that it would be better to have a straight line payment (considering that the fixed interest and property sectors tend to pay 0.15/0.35% and most portfolios would contain some of those).

Another is to pay a fixed retainer. Although there is no incentive on the investment front and I think it does help to have the IFA and your interests linked.

Aside from trackers are there differences between any UTs in the ongoing remuneration that makes some more profitable for the IFA?

Property and fixed interest generally have lower trail commission.

One thing to note is that many NMAs have a cap on the inital commission as well. So, it wouldnt be 1% with no cap.

prudryden

Dun -
That is a very good sales pitch. One that has been used for hundred's of years since someone had the idea of managing other people's assets. There are a number of flaws in your comparison of fee based or performance based advisors and advisors who charge a commission for their services. There are many pros and cons for each.
I am in the position of being able to do both depending on the choice of the client, after he hears the advantages and disadvantages. Perhaps, we can have a good chat/discussion about it on another forum some day. This is the OP's forum so not here and probably not of interest to him.

Chrismaths

The "new model advisor" or NMA (the industry does love acronyms) is a hugely positive step forward for the retail financial services industry - it serves to align the monetary interests of the IFA with those of the client, something that has been all too lacking historically - probably due to many advisers coming from a background of being a life company salesman or bank salesman. It's (ever so gradually) moving from being a sales-led industry to being a service based industry, which is good for all concerned. This is also happening at a fund manager level. Fund management companies are on the whole run by marketing men who are remunerated on how many units they can sell - but we are starting to see more fund manager owned and run "boutique" investment houses.

And how do you test whether an IFA's advice is based purely on the clients best interests rather than their own? Would it be right to assume with an "NMA" there will be a reluctance to recommend any investment that doesn't offer them ongoing remuneration such as ITs or some low cost tracker funds and in fact any investment that doesn't have an advisor remuneration structure similar to a UT? Aside from trackers are there differences between any UTs in the ongoing remuneration that makes some more profitable for the IFA?

This is where the difference between an IFA and an investment manager comes in. My business model as an investment manager has nothing to do with commission - we charge a fee based on funds under management, and any commissions we do receive are rebated to the client. So that means that as well as unit trusts, we also use cash, investment trusts, ETFs, direct shares, direct fixed interest, institutional funds, medium term notes/structured products, CFDs, and all sorts of other fun stuff as appropriate. That doesn't guarantee you returns (on a risk-adjusted basis) over and above what an IFA-advised portfolio could provide, but it gives us the best chance. Dh and I haven't compared portfolios yet though so I don't know

The other difference between an IFA and an investment manager, is that an IFA will advise you on your portfolio, and arrange the transactions for you, but you give the instructions. This is good if you want some input into the decisions made. An investment manager can do that (although I don't), but on the whole will act on a discretionary basis, meaning that they do everything for you without requiring your authorisation for every transaction (a bit like a fund manager). Investment management will cost more than an NMA, as it's a bit more involved.

As pru says, there are pros and cons of each service, it's up to you what sort of service (or none - although that mattress might become uncomfortable) you want. Best of luck.

prudryden

Flynn - You got to be on a winner here. Chris has now joined Dun and Ed - the best of the best on these forums. Who's missing?

Chris -For my own information. How do "NMA" differ from advisors of bygone years who created a portfolio of investments for another person and was paid ongoing renumeration for monitoring that portfolio? And what makes them more alligned to the interest of the client than you.

brixandmorta

Flynn wrote:

To keep it very simple my/our savings are in a horrible mess.

We've got funds of around £600,000, not including pension fund, jointly owned with my wife and over the last 7 years or so just it hasn't been managed because we've had other priorities. A huge chunk is in cash and I'm also totally out of touch.

What should be our first step?

I just can't understand why you have not at least invested in either stocks / shares / property etc, all really simple stuff to do particuarly with that kind a budget

I agree with a previous post, why not off load some money now, there are loads of very needy charities as I write this, and why the sudden concern for your moneys welfare when as you have said you won't rely on it for your retirement days, see it helping people now, rather than when you are gone and hoping it gets put to good use!!!:rolleyes:

dunstonh

Any adviser or investment manager that is receiving ongoing remuneration is going to want to give the best to the client. Otherwise the client can just re-register their holdings with another adviser and they will get the remuneration instead.

Remember that trail commission isnt that old. Its only recently that whole businesses are being built around trail rather than initial. Some have gone half and half in the past but the move to focus on trail only as the business model is relatively new.

How do "NMA" differ from advisors of bygone years who created a portfolio of investments for another person and was paid ongoing renumeration for monitoring that portfolio?

How many IFAs from bygone years did that? I think polarisation in 1988 killed off a lot of that and whilst you had the traditional IFA offering great service and skilled advice, it was being overtaken in numbers by salesforce advisers and tied agents or newer IFAs with that tied adviser background working with that same mentality. A number of IFA tied salesforces recruited bank advisers or the old insurance man on the basis that if they did a bond with the bank they would be paid 2% but as an IFA they would be paid 7%. You get the worst type of adviser when they think like that.

Also, if you spend 20 years as a tied agent not being able to give proper investment advice and you only had a with profits fund available, what is your skill at real investment advice going to be like (at least in the early years).

Another thing is that NMA basis is typically being operated by the younger advisers. When you consider that the average IFA is in their 50s, they arent going to be too keen on setting up business that may take many years to kick in with a decent amount. Most are going to want it now.

As CM says, IFAs will make recommendations and put them in front of you to decide. Investment managers will take make those decisions and carry them out without needing you to say yes. An IFA cannot transact on the behalf of the client.

Chrismaths

Chris -For my own information. How do "NMA" differ from advisors of bygone years who created a portfolio of investments for another person and was paid ongoing renumeration for monitoring that portfolio? And what makes them more alligned to the interest of the client than you.

In addition to what dh said, you only really need to look at the difference between the initial commission available on products compared to the ongoing "servicing commission". On a unit trust, you can get up to 5.5% upfront, compared to 0.5% ongoing. So you need 11 times the funds under advice compared to one sale to generate the same level of income. It gets even more pronounced when you include investment bonds - we had one company offer us 8.5% upfront on an offshore investment bond! Stupid salesman clearly didn't understand our business, but that's another matter. When you go NMA, recurring (servicing) revenue becomes a greater proportion of your income than sales led commissions, so your incentives change.

That's not to say there weren't/aren't decent old style IFAs out there (there are), but if you take away the incentive to sell sell sell, then people are less inclined to do it.

I'm not sure what you mean about "more aligned than [me]" - I never said that an NMA had his interests more aligned with clients than I did. In fact I would argue that due to being paid by fee I have no incentive other than to make money for my clients to increase that management fee. I don't really see myself of part of the NMA vs old model debate, I'm outside it (I manage money for IFAs, I don't compete with them) - I'm really just commentating on the industry.

prudryden

Thanks Dun -

I think I got it. NMAs are called that to distinquish them from other IFA's who exclusively deal in UTS or "bonds" (not corporate/sovereign bonds) or who are tied to one product. I believe my confusion was that I though they were being compared to other types of Investment Advisors/Managers, such as those like Chris or registered representatives with Merrill Lynch, Goldman Sachs etc. who are not tied agents but have access to the whole of market.
The NMA is estentially buying funds at NAV, rebating the trailers, but getting paid by an annual fee based on the assets in the portfolio. In return, you monitor the portfolio for performance and restructure when necessary at no additional cost to the client.
Am I getting there? When you say its new, its new for the ways the older IFAS used to work;