IFA fees on Pension Plan seem high?

Kaliko

Hi,

I have about £200k in a few different DC pension plans (managed by the providers). I am about to retire. I would like to go the income drawdown route.

I have been with an IFA for a while, and I have spoken to him about possible options.

He has now come up with a proposal for me. He's suggesting the Skandia platform and he's proposing investing the entire amount in a handful of MultiManager funds.

- The initial charge would be 3.00% of the entire amount. All of this is paid to the IFA (through Skandia). That's £6,000.

- The fund charges are 2.5%, of which 0.5% would be trailed to the IFA. So thats another £1,000 per year for the IFA.

- Also the Skandia keyfacts document includes something about a Switch commission of upto 1.00%, but I can't tell if that is applicable in this case.

I have to say these fees seem high. I'm also not that keen on investing the entire amount in MultiManager funds. They are the highest in fees due to their dual layers of fees, and though I'd be okay with partially investing in them, I'm not completely comfortable with investing the entire amount in them.

I expressed these concerns to my IFA, who said that MM funds allow the PMs to rebalance the portfolio, so that he would not have to do constantly get my approval to do it himself. Which seems a dubious argument. He's taking fees twice over, and yet fund picking and rebalancing will be done by somebody else, which I will have to pay for. Then what exactly am I paying the IFA for?

Part of me suspects slightly that he'll get higher commission from them, which is why he's so keen on them. He had since sent me information showing the performance of the funds he has recommended against sector benchmarks (though I cannot see what sector benchmarks he has used and if they have been cherry picked). However past performance of the funds he has selected certainly seems strong.

I guess my options are to follow his advice, go with a SIPP, or leave my pension pots where they are for the moment. I'm not that keen on hunting down further IFAs if this is the kind of advice I'm likely to recieve. Or am I being unfair to the IFA?



(Also, as a sidenote, on the skandia individual fund info page printouts I can see AMC %, but not TER's. Aren't TER's more important?)

Aegis

For such a simplistic recommendation, £6,000 seems far too high. It's one transfer per policy and it's going into one fund. Ask him to do it on a fee basis and see what he quotes.

Alternatively find someone willing to do it for a lot less than 3% initial charge on everything.

dunstonh

0.5% p.a. is quite normal. However, the initial is between you and the IFA. in my opinion £6000 is high. You would expect it to be closer to £1000-£2000.

I'm also not that keen on investing the entire amount in MultiManager funds.

Have you communicated that with the adviser? Your sum is more in line with a structured portfolio being used than a lazy investment option being used. However, there may have been something in your conversations with the adviser that made him feel that MM funds were more suitable.

I expressed these concerns to my IFA, who said that MM funds allow the PMs to rebalance the portfolio, so that he would not have to do constantly get my approval to do it himself. Which seems a dubious argument. He's taking fees twice over, and yet fund picking and rebalancing will be done by somebody else, which I will have to pay for. Then what exactly am I paying the IFA for?

Switches and rebalancing does need to be agreed each time. However, that is what you are paying the 0.5% p.a. for. If he is going with the lazy investor (and therefore lazy IFA) option then you shouldnt have to pay the 0.5% p.a.

Part of me suspects slightly that he'll get higher commission from them

No. That is completely wrong. It's a fee based contract. So, regardless of fund, the remuneration is what you agree.

- Also the Skandia keyfacts document includes something about a Switch commission of upto 1.00%, but I can't tell if that is applicable in this case.

It is shown on the application what level is agreed. Typically, if you are paying trail then you would expect 0% switching charge and that is what you should aim for on your balance.

He had since sent me information showing the performance of the funds he has recommended against sector benchmarks (though I cannot see what sector benchmarks he has used and if they have been cherry picked).

The sector the fund belongs in is not set by the adviser.

I guess my options are to follow his advice, go with a SIPP, or leave my pension pots where they are for the moment.

There doesnt seem to be anything wrong with the advice and Skandia is a very good contract. Your problem seems to be cost of advice is high and you dont like the investment funds. So, you other option is to find a different IFA if you cant agree a more suitable fee.

I'm not that keen on hunting down further IFAs if this is the kind of advice I'm likely to recieve. Or am I being unfair to the IFA?

As said, its not the advice but the fee that is the issue and you dont agree on funds. Investments are about opinion. Also giving advice is about communication. You have written all this here but have you discussed it with the adviser?

£6k for a MM investment portfolio is greedy. That is the primary issue. Secondary issue is whether MM funds are suitable for someone with £200k. Third issue is the 0.5% p.a. which is quite normal for servicing advisers and goes towards paying for rebalancing, bed&ISA, reviews etc. However, when using MM funds you are not getting that. So, if your case is transactional, then you would expect the 0.5% to be lower or possibly not even exist.

(Also, as a sidenote, on the skandia individual fund info page printouts I can see AMC %, but not TER's. Aren't TER's more important?)

The Skandia funds guide uses TER and all illustrations use the TER.

atush

I agree, that is high.

Ask for a quote on Fees basis, and ask for a new fund allocation. I like you am not a fan of multimanager funds. There might be a good one in there (it would help if you listed them) but not for the whole lot. We'd also like to see the sector allocation.

Kaliko

Thanks for the replies.

dunstonh wrote: »

Have you communicated that with the adviser? Your sum is more in line with a structured portfolio being used than a lazy investment option being used. However, there may have been something in your conversations with the adviser that made him feel that MM funds were more suitable.

Yes, I did communicate this to the advisor.

From the outset he was lauding MM's quite hard. He said that his firm were recommending MM's to most of his clients these days. I was immediately sceptical, because I wasn't comfortable with the highest fee level on my entire investment - which I told him. His arguments were:

- using MM's would prevent us having to come and see him every time he needed to rebalance. I asked whether we could do it by mail but he said it would be too much hassle/not possible.

- MM's are more likely to lock in gains and get out before taking losses on a fund. Which I suppose is up for debate, and heavily dependent on picking the 'right' manager.

- When I said that it was also the most expensive type of fund, he said that "people wouldn't be paying these guys the highest fees, unless they weren't good at it." Which seemed a pretty poor rationale!

However, due to my clear resistance, he said that he would put together some figures to give me an illustration of the benefits of MM funds, and he a few days ago I recieved a report comparing his recommended portfolio against benchmarks, with risk/return charts etc. Past performance certainly has not been bad (though that's no guarantee of future returns, eh!).

dunstonh wrote: »

No. That is completely wrong. It's a fee based contract. So, regardless of fund, the remuneration is what you agree.

But wouldn't the trail commission on a fund that charges 2.5% be higher than the trail on a fund that charges 1.25%? Irrespective, I just couldnt work out why he was pushing MM funds so hard from the outset.

dunstonh wrote: »

The sector the fund belongs in is not set by the adviser.

Is there any discretion in choosing which benchmark is used to represent a given sector?

dunstonh wrote: »

As said, its not the advice but the fee that is the issue and you dont agree on funds. Investments are about opinion. Also giving advice is about communication. You have written all this here but have you discussed it with the adviser?

Yes - for the MM stuff. Though I haven't pushed him on his fees, but I did question the overall fee level. The adviser is part of a firm (small size, probably about 10 employees), so I'm guessing the fees are their standard fees. I'm not sure how 'negotiable' they are. How do you tell someone that you think their fees are too way high, without offending them!

atush wrote: »

I agree, that is high.

Ask for a quote on Fees basis, and ask for a new fund allocation. I like you am not a fan of multimanager funds. There might be a good one in there (it would help if you listed them) but not for the whole lot. We'd also like to see the sector allocation.

Sector allocation:

50%: IMA Mixed Inv 20% - 60% Shares
25%: IMA Flexible Inv
25%: IMA Global

Asset classes:

25%: UK Equities
15%: US Equities
15%: Fixed Interest
10%: International Equities
10%: Asian Equities
10%: European Equities
other sectors below 10%

I'd rather not disclose the particular funds recommended.

I don't doubt there is a place for MM funds - its the 100% recommended allocation and his pushing of it from the outset despite my reservations, combined with the percieved high fee level that bothers me.

I have thought seriously about the SIPP route through a discount broker. I know it won't be necessarily be hugely cheaper, but the sense of having more control over the fees that I pay appeals to me.

atush

Well, we can't tell you if any of the finds are keepers if you don't want to give up the names. Not sure why not though?

In any case, don't worry abt offending him. If he won't quote you on a fees basis, go to someone who will. Have a look at www.unbiased.co.uk if you can't get a personal rec for a new IFA. Call a few, and then choose a couple for an initial chat (and ask abt fees basis) and choose the one you feel most comfortable with.

dunstonh

- using MM's would prevent us having to come and see him every time he needed to rebalance. I asked whether we could do it by mail but he said it would be too much hassle/not possible.

To rebalance a portfolio or switch funds no forms are required by virtually all platforms now (and that includes Skandia). Email is acceptable as the email from the client saying go ahead is good enough. It may be his own compliance don't allow it but I cant see it.

- MM's are more likely to lock in gains and get out before taking losses on a fund. Which I suppose is up for debate, and heavily dependent on picking the 'right' manager.

There is some element of fact in that but it could be they lock in too early as well. So, for every time they are too late you can cancel it out with one where they were too early.

- When I said that it was also the most expensive type of fund, he said that "people wouldn't be paying these guys the highest fees, unless they weren't good at it." Which seemed a pretty poor rationale!

They are expensive as you are passing over a lot of the work to them. However, a portfolio of your size doesnt really need someone else doing it as its high enough for the IFA to do it once a year using a mixture of trackers and single sector managed funds.

But wouldn't the trail commission on a fund that charges 2.5% be higher than the trail on a fund that charges 1.25%? Irrespective, I just couldnt work out why he was pushing MM funds so hard from the outset.

Skandia has nominated trail as an explicit charge. So, if the IFA is getting 0.5% then they get that whether the natural trail is 0.25%, 0.5% or 0.75%. Any shortfall/surplus is paid explicitly or rebated.

Is there any discretion in choosing which benchmark is used to represent a given sector?

If multiple funds are being used then a single benchmark needs to be selected. Skandia allow the sector average from each fund weighted the same way as the funds. Or you can pick one of the industry standard benchmarks (which could be balanced managed or FTSE or similar). The benchmark should be consistant with risk (ie.. you wouldnt use a risk 3 benchmark with a risk 7 benchmark)

The adviser is part of a firm (small size, probably about 10 employees), so I'm guessing the fees are their standard fees.

He probably has to charge more as the firm are taking a percentage. Its on the advantages of getting in with the owner/partner/director of firms as they dont need to share their income. Employee advisers do and therefore have to charge more.

How do you tell someone that you think their fees are too way high, without offending them!

Tell him a little white lie. Tell him that another IFA has said they will do it on fee basis at 1% or 1.5% initial. It wouldnt take you long to find another IFA locally that will do it at that cost. The FSA published the average on collectives some years ago and found that the average take was 1.8%. So, at worst, you want to be on the average. If you had £20k, you couldnt get away with a lower than average cost but with 200k you certainly can.

Good advisers never hide from their charges. And like any business, they can choose to alter them or you can choose to not use them. Its a shame you are finding out the charges at the end. Charges should have been discussed much earlier. You would expect them to be in the earliest part of the process. Other than commission basis which is typically at the end as it appears on the illustration. £200k should be fee basis and not commission.

[Deleted User]

kaliko, pm sent