Independent Financial Advisers fees vs Novice Investor!

darkpool

jem16 wrote: »

Yes I do. However I'm not so sure you understand what "the stockmarket" is. Last I looked there were several.

ehhhmmm ok, well yes there are several stockmarkets. you understand that UTs that follow a particular stockmarket are unlikely to beat it due to the fees they have?

i really think you should stick to "perp high income".

Linton

Lets put the darkpool hypothesis to the test...

If this is correct a tracker should outperform the average UT by 3% annually - ie 16% compounded over 5 years.

Look at the UK All shares sector, one of the few where there are broadly equivalent trackers available.

The figures for the total 5 year return are:

Average UT return: -4.6%
HSBC FTSE All share tracker: -2.4%
L&G Tracker : -4.4%
Halifax FTSE All share tracker: -6.8%

So the HSBC tracker performs 2.2% better than the average UT in that sector - what's happened to the missing 14%??? Or is the darkpool hypothesis wrong?

Meeper

Wouldn't that be unprecedented.......one of Darkpool's theories being nonsense. Gosh.

dunstonh

darkpool wrote: »

i would have thought all the statistical research that UTs underperform the equivalent tracker would have been an important fact. i agree that UT underperformance has no immediate impact on the fees paid to the IFA though.

but well, if i was a client of an IFA i would want to know why I was invested in UTs when it has been shown that they underperform the equivalent trackers. i thought professionals had to act in the best interest of their clients?

The point is that you are making two errors in assumption here.

1 - that IFA remuneration is linked to passive or active investment management (it isnt. If you agree say 0.5% p.a. for an IFA for services provided then it is taken irrespective of tracker or managed)
2 - that unit trusts/OEICs cant be trackers (they can and whilst generically ETFs are considered cheaper, that ignores institutional UT/OEIC trackers which are available to the mainstream on platforms)

Average pension costs of 2.34% a year. I think it fair to say annual pension costs will be a fair bit lower than a UT.

Can be identical as pensions are just a tax wrapper and can contain the same funds.

you understand that UTs that follow a particular stockmarket are unlikely to beat it due to the fees they have?

Whilst there can be some truth to that in some areas (mature markets), in smaller or niche areas, that is not necessarily the case. Also, trackers tend to give mid table consistency. So, if they are mid table, that means half the managed funds beat them and half didnt. The individual can decide if a managed fund in a sector can offer greater out performance potential or not. By refusing to consider all managed funds you will compromise your portfolio.

Ark_Welder

Which?’s investigation into PTR found that a fund with a turnover rate of 200% adds an extra 0.66% to your annual charges. We also found that funds investing in UK companies have an average turnover rate of 108%.

With the average annual charge for a fund (known as the total expense ratio, or TER) around 1.65%, our research suggests that the real cost of the average investment fund, including turnover, is actually 2% a year.

Which? research found that some funds with a high turnover underperform their peers. The Marlborough UK Large Cap Growth fund has a PTR of 567% (which, by our calculations, would increase its TER from 1.51% to 3.41%), yet has underperformed FTSE All-Share Index by 7.2% in its last financial year.

However, others with high turnover did make up the extra cost in performance. The Neptune Mid Cap fund , which had a PTR of 532% (adding 1.75% to its annual cost) beat the FTSE All-Share by 5.5%.

If you want to put your faith in a fund manager, investing through a discount broker can reduce charges. Through the likes of Alliance Trust or Cavendish Online, you pay no initial fees (typically 5% of your investment) and can cut around 0.5% from your annual fees. However, these should only be used by consumers who are confident enough to manage their own investments. Everyone else should seek independent financial advice before investing their money.

Read more: http://www.which.co.uk/news/2011/10/millions-in-charges-being-hidden-from-investors-269798/#ixzz1evvvVOHF
Consumer Champions Which?
Under Creative Commons License: Attribution Non-Commercial

dunstonh

To be honest, using a managed fund for large cap investments is pretty pointless. It is the sort of area that is ripe for trackers. However, the benchmark for large caps really ought to be the FTSE100 and not the FTSE all share. If you dont use the right benchmarks then any comparison is flawed.

Just as comparing the performance of a mid cap fund with large cap or all-share is just as poor. They are going to perform differently at different times.

For reference, in 2007, the Marlborough fund was 9th in the UK all companies sector. Not unsurprising as large caps would have been a better place to be then. However, it has underperformed since then mainly as large caps haven't been the place to be. It had a change of managers in the last month and the new one has performed poorly in the first months (possibly due to restructuring the investments as the historical breakdown has shifted a fair bit in the last few months (which would increase costs). Too early to say if this will work. Its not a fund you have on your buy list (and probably not ever if you did your research right and used sensible criteria).

The neptune mid cap fund has a short history and its benchmark is the FTSE Mid 250 index (not the index used by Which). It has benefited by launching after the initial crash in the credit crunch and with a focus on mid-caps it has again benefited with timing as that period favoured mid caps.

slickric1234

it seems obscene to me to pay 3% upfront to a financial adviser atm

at times when things are going through the roof then its still questionable

but at present you could get 3.6% in a 1 year account with the aa iirc

so you need to get 6.6% to break even

or even if just keeping in stocks and shares isa or just cash isa you must be able to et at least 3% and therefore the ifa needs to get you 6% for you to break even

i will never ever pay for financial advice like this its just not worth it
i would never invest in a unit trust where a fund manager picks shares and they take a chunk of cash for managing the portfolio

better off with cash in bank atm
or possibly looking into a buy to let property if you have enough savings

dunstonh

it seems obscene to me to pay 3% upfront to a financial adviser atm

Why?

If you invest £1000, the adviser gets £30. That may not even cover the petrol on the round trip.

at times when things are going through the roof then its still questionable

what is going through the roof?

but at present you could get 3.6% in a 1 year account with the aa iirc

so you need to get 6.6% to break even

Not comparing like for like. You dont invest to lose money in real terms in the short term. You invest for the long term to obtain real capital growth (or income)

or even if just keeping in stocks and shares isa or just cash isa you must be able to et at least 3% and therefore the ifa needs to get you 6% for you to break even

Which is quite possible and probable over the long term.

i will never ever pay for financial advice like this its just not worth it

On small amounts I would agree. On large amounts it is different.

i would never invest in a unit trust where a fund manager picks shares and they take a chunk of cash for managing the portfolio

Your alternative of cash savings is not exactly a good idea for everthing either.

better off with cash in bank atm
or possibly looking into a buy to let property if you have enough savings

cash is losing money in real terms and BTL has risks (and often greater risks than unit linked investments) and is equally likely to lose money in short term periods.

Ark_Welder

dunstonh wrote: »

To be honest, using a managed fund for large cap investments is pretty pointless. It is the sort of area that is ripe for trackers. However, the benchmark for large caps really ought to be the FTSE100 and not the FTSE all share. If you dont use the right benchmarks then any comparison is flawed.

Just as comparing the performance of a mid cap fund with large cap or all-share is just as poor. They are going to perform differently at different times.

For reference, in 2007, the Marlborough fund was 9th in the UK all companies sector. Not unsurprising as large caps would have been a better place to be then. However, it has underperformed since then mainly as large caps haven't been the place to be. It had a change of managers in the last month and the new one has performed poorly in the first months (possibly due to restructuring the investments as the historical breakdown has shifted a fair bit in the last few months (which would increase costs). Too early to say if this will work. Its not a fund you have on your buy list (and probably not ever if you did your research right and used sensible criteria).

The neptune mid cap fund has a short history and its benchmark is the FTSE Mid 250 index (not the index used by Which). It has benefited by launching after the initial crash in the credit crunch and with a focus on mid-caps it has again benefited with timing as that period favoured mid caps.

All of which (*cough*) are reasons why a individual needs to research their potential investment to get an understanding of why it has performed as it has. Far better to get facts from a prospectus and annual reports rather than rely on speculative data. Or, they get someone reliable to do it for them...

I do note that Which? are now suggesting that the average annual fund charges are nearer to being 2% - a tad different to their previous suggestion.

Personally, I'm not a fan of the FTSE100 because of the sector concentrations and the inclusion of non-UK companies that have a low free-float - even if their weighting reflects this. Recent articles in the FT suggest that some of the reasons why these companies are listing in London are because their shares will have to be bought by index trackers. But, that's my choice for me to make, just as it is for others.

darkpool

Meeper wrote: »

Wouldn't that be unprecedented.......one of Darkpool's theories being nonsense. Gosh.

it's not just a theory though..... UTs have been show to underperform the index they are meant to beat. Of course some individual UTs will beat the index, however on average most don't.

say an index has 10 shares in it. the performance of those individual shares varies from rubbish to brill. but say overall the index goes up 5%. Any UT with 3% annual fees will need to get a gross 8% return just to match the index.

Since not every UT can outperform the index I think it safe to say that the average UT will return 2% to the investor. ie 5% minus 3% annual fees.

You're an IFA, I thought you would know that kind of thing.