A very large sum - where do I start?

prudryden

Chris -
That bit about "more alligned than you" meant that you have as much interest in your clients portfolio performance as an NMA. I was asking Dun why he thought it didn't. But now I know he was referring to the old style IFAS in his part of the industry and was an irrelevant question.

But, I must admit, I sometimes question whether a client who pays an annual management fee actually gets the service that he is paying for.( NOT YOU GUYS). Ii is all too easy to relax knowing that the fees are coming in and as long as you have a huge mix of different sectors that the portfolio will be stable for a very long time. However, bad bear markets aren't too selective - so that is a risk.

EdInvestor

I'm afraid that there doesn't yet seem to be much in the way of alignment between the interest of the investor and the advisor.

Most funds still charge 1.5% annual fee, regadless of performance.

The only difference in total charges seems to be related to how much the fund manager churns the portfolio, which is very difficult for the investor to find out.

The only difference between NMA and old style advisors cost wise seems to be that one lot gets paid upfront and the other lot has it spread over a few years - IIRC whiteflag has made this point a few times.

This *may* mean that the NMA guy pays more attention - but more attention can simply cause more charges, rather than more profits.

There is still no compelling connection between how much money the investor makes and how much the advisor gets paid.

jem16

EdInvestor wrote:

This *may* mean that the NMA guy pays more attention - but more attention can simply cause more charges, rather than more profits.

If the adviser has done his job properly in the first place and chosen funds from a funds supermarket or suchlike where there is no switching fee, how does this create more charges?

There is still no compelling connection between how much money the investor makes and how much the advisor gets paid.

It would be a rather foolish NMA that sat back and did nothing whilst the value of an investment went down. He'd soon go out of business.

dunstonh

Am I getting there? When you say its new, its new for the ways the older IFAS used to work;

There are different business models out there but the main one is called old model and that is full upfront commission all the time. When the adviser takes a small upfront commission and rebates the rest and relies on trail or management fees then that is classed as new model.

That bit about "more alligned than you" meant that you have as much interest in your clients portfolio performance as an NMA. I was asking Dun why he thought it didn't.

I see no difference. Both investment managers and NMA IFAs are remunerated on performance. The difference is against old model where there is no remuneration on performance.

But, I must admit, I sometimes question whether a client who pays an annual management fee actually gets the service that he is paying for.( NOT YOU GUYS). Ii is all too easy to relax knowing that the fees are coming in and as long as you have a huge mix of different sectors that the portfolio will be stable for a very long time. However, bad bear markets aren't too selective - so that is a risk.

The charge to the client is no different. The annual management charges are exactly the same.

On investments, the old model adviser could paid indemnity commission with could be as high as 8.5% as CM states although 5-7% was more typical. The provider is making up the difference in the initial commission out of their own pocket. They will see a loss initially but they get to keep the 0.5% for themselves. So, over the years they will break even and then profit.

NMA dont take the indemnity commission and take the natural 0.5%.

So, if the annual manangement charge is 1.5% on a unit trust, it makes no difference whether its old model or new model as the charges are identical. NMAs do typically discount initial charges though. I take 1% when the usual available on that basis is 3-4%. The rest is rebated. The FSA figures (updated every 6 months) show that the average initial commission taken is 1.8% so things are positive on that front.

I'm afraid that there doesn't yet seem to be much in the way of alignment between the interest of the investor and the advisor.

You wouldnt though. Your nature is to look at the negatives of everything and be negative towards advisers.

Most funds still charge 1.5% annual fee, regadless of performance.

1.5% of the value. The higher than value, the more that 1.5% represents. The lower the value, the less that 1.5% represents.

The only difference in total charges seems to be related to how much the fund manager churns the portfolio, which is very difficult for the investor to find out.

Because you are the only one in the country bothered about it.

The only difference between NMA and old style advisors cost wise seems to be that one lot gets paid upfront and the other lot has it spread over a few years - IIRC whiteflag has made this point a few times.

NMA is cheaper due to initial charge discounts but apart from that, financially you are correct. However, it isnt financial that is the main difference to the client. The adviser has a buy in to the performance of the investment. The more it goes up, the more they are paid. Also, if you feel the adviser isnt doing the work, you can move the portfolio to another adviser (without having to cash in and restart) and that new adviser will be paid the 0.5% ongoing. The old model wont pay the new adviser a penny as the original adviser took the lot up front.

This *may* mean that the NMA guy pays more attention - but more attention can simply cause more charges, rather than more profits.

It doesnt cost a penny more.

Chrismaths

I'm afraid that there doesn't yet seem to be much in the way of alignment between the interest of the investor and the advisor.

Most funds still charge 1.5% annual fee, regadless of performance.

Not if you negotiate extra trail and rebate it, or buy institutional units. On bonds funds, I pay between 0.2% and 0.7% (if I use someone else, because I think they are better than me at that), on equity funds, I usually pay between 0.4%, and 0.75%, although there are a couple of specialist funds that we pay up to 1.25% for. You make the judgement on net-net (after fees, after tax) risk adjusted expected returns. If you can't find someone who you think will outperform thus justifying their fees, I either use an ETF (if one is available), ask someone to create Medium term note for me, or do it myself if I think I can do it well.

The only difference between NMA and old style advisors cost wise seems to be that one lot gets paid upfront and the other lot has it spread over a few years - IIRC whiteflag has made this point a few times.

So that whole issue of aligning interests is irrelevant then? If you go to an OM advisor, who subsequently you work out you want to change, then you've already paid up front, and the OM advisor doesn't really (financially) care. With an NMA, if you want to leave, the amount you have paid is less. This makes the NMA want to hang on to your business, by producing a high level of service.

This *may* mean that the NMA guy pays more attention - but more attention can simply cause more charges, rather than more profits.

For someone who said "the market will rebalance your portfolio for you" without irony, I don't think you are really presenting a useful argument here.

There is still no compelling connection between how much money the investor makes and how much the advisor gets paid.

Depends how you define compelling. I have 2 ways of making money. One is to increase funds under management by good performance, the other is by getting new clients - one leads to the other.

Flynn_2

Thanks Dun and Chris. It's all coming back to me now.

As a client, it does seem possible for there to be a misalignment of interests if the advisor, NMA or otherwise, receives his remuneration from the seller of the investment rather than the client and that remuneration varies from one investment to the next. I can see there will be some direct reward to the advisor for above average performance in having the portfolio increase in size but that looks like being fairly marginal except in extreme cases to be a major incentive and there could be less demanding ways to increase profits. There will be a real incentive for the NMA to retain the business, unlike with upfront fees, always assuming the client is capable of recognising reasonable performance versus risk and the opposite wasn't the reason he needed an advisor in the first place.

Seems there's still possibly a problem even with solely performance-related remuneration if the manager benefits from any gains but only the client is fully exposed to losses, not unlike Barings found with Nick Leeson. A small local stockbroker here offers management by taking 20% (or something similar) of the gains but of course doesn't return it when there's a loss so the client could regularly pay across 20% but still end up wih less than he started with - a bit like the scheme the made Horace Batchellor the pools tipster rich. As things are normally done it still seems the most essential skill for IFAs is going to be salemanship rather than financial abilities. Hope that doesn't sound too cynical?

The really tricky part for a simple soul like myself seems to be in identifying a good advisor or manager who'll give value for his fee. It's hard enough evaluating collective investments where there are performance figures, how do you do the same with an IFA or investment manager? Handing over your funds for someone to play with for five years before you know how good they are doesn't sound ideal.

brixandmorta wrote:

I just can't understand why you have not at least invested in either stocks / shares / property etc...
I agree with a previous post, why not off load some money now, there are loads of very needy charities as I write this,

Brix, we do have other investments including shares albeit neglected, but yes, also a large amount in cash. You seem to assume we haven't already 'offloaded' fairly large sums to charities, which as it happens isn't the case. The assets we now have are what remain. I also help run and work in excess of 40 hours a week for several charities which is the reason I haven't had time to manage our assets. Most people, possibly including you, won't die as paupers. The reason why most don't give away all their surplus assets before they die, either to their children or to charities, is because they can only give them once and they then lose all options on how the assets are used. The clog-popping process ends those options so that's an ideal time. We aren't talking Bill Gates style sums that are near impossible to spend of course, just the price of an average house round here. I know quite a lot about charities and how to dispose of money which is why that wasn't what I was asking. Thanks anyway.

dunstonh

As a client, it does seem possible for there to be a misalignment of interests if the advisor, NMA or otherwise, receives his remuneration from the seller of the investment rather than the client and that remuneration varies from one investment to the next.

With a few exceptions, trail is 0.5%. Its the intial commission that varies. NMA advisers equalise the initial charge so its standard regardless of tax wrapper.

A small local stockbroker here offers management by taking 20% (or something similar) of the gains but of course doesn't return it when there's a loss so the client could regularly pay across 20% but still end up wih less than he started with

Makes the 0.5% that the IFA gets seem tiny.

As things are normally done it still seems the most essential skill for IFAs is going to be salemanship rather than financial abilities. Hope that doesn't sound too cynical?

It is historically a sales industry. However, you can get the two to work together with fair remuneration.

The really tricky part for a simple soul like myself seems to be in identifying a good advisor or manager who'll give value for his fee.

Thats the same for any occupation or profession. My fence is being replaced. I didnt know anyone and went to the yellow pages. I will only know if a good job is done when its done.

It's hard enough evaluating collective investments where there are performance figures, how do you do the same with an IFA or investment manager?

Ask to see the research.

Handing over your funds for someone to play with for five years before you know how good they are doesn't sound ideal.

Any decent investment manager/IFA will have a strategy on how they invest and why. Discuss it with them. If they dont have a strategy or cant explain how and why and what for then you know not to bother with them.

Flynn_2

dunstonh wrote:

Thats the same for any occupation or profession. My fence is being replaced. I didnt know anyone and went to the yellow pages. I will only know if a good job is done when its done.

Hmm, not sure I'd fully agree with that comparison.

If it's important to you I'd suggest you ask for references and see other fences he's done, all pretty standard for building work but not it seems for financial services. Presumably you know exactly how much the hit to your bank account will be afterwards and assuming he's insured you won't suffer any loss apart from what you've agreed to pay. I'd suggest don't pay him without seeing the finished result and checking it's done to a reasonable standard. If you're going to be handing over several hundred thousand on this then you may be paying too much.

dunstonh wrote:

Ask to see the research.

Could you elaborate Dun? What research would be available for me to see?

dunstonh

If it's important to you I'd suggest you ask for references and see other fences he's done, all pretty standard for building work but not it seems for financial services.

Why not? I have given out examples of real portfolios in the past when requested. You cant be accused of using past performance then either as these were created in the past before performance was known.

Presumably you know exactly how much the hit to your bank account will be afterwards and assuming he's insured you won't suffer any loss apart from what you've agreed to pay. I'd suggest don't pay him without seeing the finished result and checking it's done to a reasonable standard. If you're going to be handing over several hundred thousand on this then you may be paying too much.

Isnt that much the same with an NMA? Old model gets paid on application. NMA gets the bulk of their money over the next 10 or so years. If you dont like what they do, you move it to someone else (and that moving doesnt cost a penny in charges normally).

Could you elaborate Dun? What research would be available for me to see?

The research that is used to build your portfolio. The information that was used to ascertain your risk profile. The sector allocations that go with that risk profile and how the portfolio was built. All that information goes on the file and a decent adviser would supply it to you. If you dont get it automatically, you can ask for it.

dipsomaniac

NMA is a distraction. A good 'so called' old model adviser will always be better than a bad new model adviser.