Independent Financial Advisers fees vs Novice Investor!

Janeybo

Hello
I've sought advice from an Independent Financial Adviser re. Stocks & Shares ISA's. Last year we invested the full allowance for myself and my husband. We paid 3% commission to the IFA (plus annual renewal fee), plus the Fund Managers fees. This came direct from the amount we invested i.e. we weren't invoiced for the IFA's time.

I've just met again after a year and of course they have lost some money due to the current climate. I've asked about investing our ISA allowance this year and found out that it's another 3% commission, but all the funds are the same ones a before.

I understood the initial commission last year as there was time spent getting to know us and selecting the 13 companies to invest in. £700 this year seems a lot as our risk level is the same and all the funds have remained the same.

My first question is: Is this the norm? Is it reasonable to pay the same commission?

I have asked if we can pay an hourly rate, and will wait to see what comes of this.

The second part is that I had my own cash ISA, which I'd paid into over the years, approx. 3% interest. So I asked about transferring this into a Stocks and Shares ISA. Again the quote came back with all the same 13 companies and a 3% initial commission fee = £460, the quote took 5 mins. to produce.

The total of just the IFA's fees will be £1,102.14 this year if I invested the full ISA amount, plus transfer my cash ISA over.

My second question is: Is it worth transferring my cash ISA into a S&S ISA? I know people are convinced that there will be a recovery, but I'm not sure if it's safer just leaving in a Cash ISA earning 3% (less than inflation!).

I'm a novice so maybe the answer is that you pay an IFA for the knowledge & safety reasons, but it still seems quite a lot. I've had a brief look at the Discount brokers, and although I could invest based on the IFA's recommendations, I'm not sure I'd know what to do after that.

Any help or advise would be much appreciated.
bw
Janey

Lokolo

I would email the advisor and advise him that if he wants to continue this service then he should come back with a realitic quote.

dunstonh

My first question is: Is this the norm? Is it reasonable to pay the same commission?

Yes it is the norm for commission. 3% is a typical amount for a commission adviser or one that you have employed on commission basis. A fee based adviser may be cheaper or more expensive depending on amount.

The second bit about it being reasonable, the answer is yet. Increments to existing ISAs are treated as new investments from a regulatory point of view. So, all the things that were required for the initial amount are required for the increment.

However, what happens with different IFAs and how they look at this varies. A transactional IFA will always take initial commission or charge an initial fee per advice transaction. A servicing IFA will typically not take anything on increments as you are paying for them on a servicing basis. There are those that fall half way in between.

The amount you have to invest is often the decider. If you employ a servicing IFA and you have say £200k plus, then you should expect the IFA to put top ups into the portfolio at no cost. To not do so is greedy. However, if you are talking about £10k then the IFA really has no choice but to levy an initial advice fee (or commission if you choose that option). It isnt really cost effective to employ a servicing IFA on small amounts. So, you are nearly always looking transactional with initial costs).

Lokolo

dunstonh wrote: »

The second bit about it being reasonable, the answer is yet. Increments to existing ISAs are treated as new investments from a regulatory point of view. So, all the things that were required for the initial amount are required for the increment.

So in that case, surely a new fact find, a new recommendation report etc. should all be created surely?

If not, then I must disagree, is it not a resonable charge as it is a transaction.

dunstonh

So in that case, surely a new fact find, a new recommendation report etc. should all be created surely?

Yes (although the level of work is less as the factfind just needs a few updates, if any and the report can be much shorter. The due diligence has to be done from scratch. So, it is less work than a brand new one. £300 in isolation is not very much).

Janeybo

Hi dunstonh & lokolo
Thank you for this it's very interesting, and I now have gained the correct language - increments! I think I find it hard to think that an increment, top up etc costs £640, that doesn't include the annual admin fee. although that is small. The work as you say is a fraction of what is was before.

It seems that IFA's do have flexibility, so it depends on who you get in terms of whether they decide to charge the same for the increments as the initial set up?

I think if it was all from scratch, new companies, new everything, I'd feel more comfortable. I've now been told that the hourly rate would come to £1k plus VAT.

I don't think I'll transfer my cash ISA over to Stocks & Shares as that's the one that took 5 mins. to prepare (I realise that research etc goes on prior to me being there) but this costs £461.38 IFA's fees, £115.52 Fund Managers fees, plus £62.41 annual fee.

If I was offered a lower fee I'd do the whole lot, so to be able to negotiate could be mutually beneficial I would have thought. So I don't think it is reasonable to charge 3% as nothing new has been produced.

I really appreciate your thoughts & information.
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J.

Janeybo

Sorry another question, dunstonh you say that 'It isnt really cost effective to employ a servicing IFA on small amounts' Does this apply to the IFA I have employed? if they are repeating the same investments are they just servicing? thanks again J.

dunstonh

It seems that IFA's do have flexibility, so it depends on who you get in terms of whether they decide to charge the same for the increments as the initial set up?

Like any profession, you may get one individual who sets their fees at good value levels and another at damned greedy levels.

Sorry another question, dunstonh you say that 'It isnt really cost effective to employ a servicing IFA on small amounts' Does this apply to the IFA I have employed? if they are repeating the same investments are they just servicing? thanks again J.

Lets take an adviser with a minimum charge of £500. If you had just £10,000 that would equate to 5% of your investment. However, if you had £50,000, it equates to 1%. 100k, = 0.5%. So, with larger values it has less an impact. For smaller values, it is harder to justify. Plus, with smaller amounts the level of servicing is less.

Servicing is what you agree with the IFA but typically it is a review of goals/objectives, risk profile check, analysis of investments, rebalancing the portfolio, bed&ISA, bed&pension and platform/provider check.

Increments at no cost will depend on how much you are paying for servicing. £20k invested at 0.5% is just £100 a year. So, you wouldnt imagine you would get nil cost increments. However, £200k at 0.5% a year is £1000. At that level you would expect nil cost increments.

BobQ

Dunstonh, the fact that you take the trouble to provide so many useful and sensible opinions on this site gives me a problem, probably because my experiences of IFAs have made me very sceptical about the profession.

I do wonder whether a small investor who understands the difference bewteen the levels of risk category of different funds is likely to find much difference in the peformance of funds an IFA has selected for them compared with investing for themselves in a funds supermarket? I have no evidence one way or another but I now pick funds through a fundsupermarket although I have no professional expertise of the markets.

I'm wondering how much value does an IFA really add, obviously they need to make money out of it and this is fair, but is there much evidence that its usually repaid in the performance achieved?

dunstonh

I'm wondering how much value does an IFA really add, obviously they need to make money out of it and this is fair, but is there much evidence that its usually repaid in the performance achieved?

How much value it adds will depend on the individual in question.

1 - You have low knowledge consumers as well as those with good knowledge. IFAs are better placed to deal with the former.
2 - You have those that have better things to do with their time and dont mind paying for it (I have a decorator in the house at the moment doing a number of rooms - I could do it but I prefer to pay someone to do it)
3 - A little bit of knowledge can be a bad thing - your Daily Mail reader will think they know everything but typically they know nothing. A small investor may not need to know much but a large investor does or they need to use someone who does.
4 - DIY is not always cheaper than using an IFA. Take HL's SIPP. An IFA can undercut that in pricing depending on amounts involved (wont with small amounts but larger amounts they can). Annuity purchase is a no-brainer via an IFA as there is nothing to gain by DIY.
5 - IFAs can buy data and research that the public wont have access to or more limited access. If you could see Financial Express Analytics (paid for version) and compare it with the cut down free version (Trustnet) then you would see what I mean. A small investor may not need the info or it may make negligible difference. A large investor will.

I'm wondering how much value does an IFA really add, obviously they need to make money out of it and this is fair, but is there much evidence that its usually repaid in the performance achieved?

You cannot measure it as it would require all things being equal. I frequently recommend different product providers and investment funds to different people based on their IQ, level of understanding, risk profile, timescale, amounts, features wanted etc.

Indeed, today, I completed a case in a product which I personally would not have, with a provider I would not have and in an investment I would not have. However, it was totally right for them.

An IFA is not an investment manager. An IFA is a planner, researcher and facilitator. Investment knowledge is a key part but IFAs should not be measured on the returns.

I have being doing this a long time now and I have heard people say one investment they were put in was rubbish but the other was really good. Yet, when you find out what they had you realise the that first one was the better one. The only difference was timing. One was during a crash and the other during growth. (the "bad one" could have gone down less in the period of decline and up more in the growth but they didnt look at that).

There is room for DIY and IFA. Like any form of DIY, if you can do it well enough then it can save you money. However, anyone can DIY and some will make a right pigs ear of it. That is where the IFA can come in.

IFAs have also evolved significantly over time. I look back at my reports written 5 years ago and think they are poor compared to today. If I look back at what I did 10 years or 15 years ago then even more so. It doesnt make the advice wrong in that period. Just that things move on. Sometimes we forget that. 15 years ago it was all insurance bonds. Unit Trusts were for the wealthy more sophisticated individual. So, an insurance bond recommendation of 15 years ago shouldnt be measured against todays options.

Bottom line, an IFA can add value if you cant or dont want to do it yourself and the cost is understood and sensible.

saveonarola

Is the 'ISAs and Tax-free Savings' sub-board supposed to be for all ISAs or just Cash ISAs? The reason I ask is because I think this query might have provoked an interesting debate - or at least provided the OP with a broader range of experiences and opinions - had it been posted in the main section of the Savings and Investments forum. With all due respect to dunstonh, who seems to be a knowledgeable and ethical adviser and from whose (free) advice (on this forum) I have personally benefitted, OP, if I were you, I'd repost it. I'd also include a bit more detail. What platform is the stock and shares ISA on? Do you also pay trail commission to the IFA?

Edit: Or maybe there's some way to move the thread without starting it again? You could ask the site administrators.