What to ask at a meeting with Financial Advisor

VT82

Thanks to all the suggestions so far. I will let you know how it has gone at the weekend.

wriggly

Some other thoughts:

1. Get documentation of all fees involved, and spend some time to work out the likely annual cost.

2. Check out how the advisor plans to use their discretionary permit. Do they earn extra commission if they churn you through products several times a year?

3. Ensure the advisor knows about all your mother's assets, even those that she is not planning to invest through them, as these additional assets may affect the investment decisions and tax planning.

VT82

Good points. I will.

Just got a couple of quick questions if anyone can answer them before the meeting -

a) does anyone know the current yield on the top few Building Societies' PIBS (or where I can find them online), and whether or not they have any clauses saying that they can lower the coupon payment if needed. I was thinking of suggesting Nationwide/Coventry/Leeds if this guy hasn't thought of it already (up to a maximum of £10-15k).

b) if A gifted a £500k business to B and £500k in cash to C, but then died before any taper relief, how would the IHT be reclaimed? If the bill was £240k, would that all be taken from C's cash, and if so, would B have an IOU of £120k to C? Just wondering (complicated family).

Thanks!

VT82

Ok, so here’s the crux of what they were recommending:

Whacking the lot into a Prudential International Portoflio Bond, then transferring this to Brewin Dolphin to be the DFM. They would then invest this in c. 41% fixed interest and cash, 40% UK equities, 11% overseas equities, 5% commercial property and 3% absolute return. The weighted average TER would be 0.9%.

The FA recommended the Prudential International bond as an insurance wrapper that would allow the income tax liability to be minimised. It is also apparently the cheapest viable option that allows a DFM arrangement.

The fee for the DFM was 1%, of which half went to the FA, for which you get the FA’s ongoing support (he has tax efficiency expertise, he said he would help my mum review her own IHT issues etc.), and the BD manager’s expertise in structuring a portfolio, as well as their work in things such as B&B’ing, ISAing, arranging income payments to be made, providing twice annual statements and an annual visit to review.

There were also transaction fees from BD – 1.25% down to 0.5% depending on the size of the transaction, but because of the number of funds to be purchase, they would almost all incur a 1.25% fee, although there shouldn’t be too much churn so this would be mostly in year 1. The BD guy said there would be no initial charge if they took over a portfolio of investments ‘in specie’ (sp?).

They gave the impression that the fees for the Pru bond were minimal as it’s just a wrapper, but when I looked into it after they left, it would be £125 per quarter, plus 0.95% per year for 5 years (with breakage costs if she leaves early), plus 0.1% per year for having a DFM assigned. The fixed element of the fee seems particularly steep in light of the fact that the FA was recommending this even when he thought the investment amount was £70k. I also saw that the FA got £6k (3%) from the Pru on completion, even though he’d given the impression he got his cut from the 1% - was too late to ask if the £6k was rebated by the time I spotted it. My mum is also very concerned about anything being ‘off shore’, in particular whether or not the government will close the loophole while she’s tied into the bond.

They were very convincing at the time, but since I’ve done the numbers, it looks as though you’re paying at least c.14% of the capital in fees (excluding fund fees) in the first five years. And if you’re drawing an income as well (20% over 5 years), you’ll start well down before your investments have a chance to recover. They claimed that you could expect to withdraw 4% as income and the capital value should still grow and hopefully match inflation over the long term. However, you’d be starting with the goalposts so far back it feels? Will need to be getting a lot of value out of the Pru bond element once the establishment charge is paid off. And 1% p.a. + transaction charges seems a lot – it’s not like they’re stock picking, just creating and rebalancing a diversified portfolio aren’t they?

I would offer to learn the ropes and do it for her, but then I worry that one little thing I get wrong could wipe out the gain that you’d get by not paying fees for a professional job.

So putting aside the fees, do you think it seems like a reasonable strategy? But on the subject of fees, do they seem normal or excessive? Is the International Bond worth the money and/or too risky?

If you need any more info to help, I’ll do my best. Thanks so much!

Alex2011

from my experience the Financial Advisor is waste of time and pointless person as doesn't have clue about proper investing as currently my personal investments at least 5 times are better of than Financial Advisor recommended and invested.

My Financial Advisor apparently a company with more than 50 years of experience but the investment shows opposite.


The good question to ask to Financial Advisor:
How much do you get from investments? Do you care about your job?

Aegis

VT82 wrote: »

Ok, so here’s the crux of what they were recommending:

Whacking the lot into a Prudential International Portoflio Bond, then transferring this to Brewin Dolphin to be the DFM. They would then invest this in c. 41% fixed interest and cash, 40% UK equities, 11% overseas equities, 5% commercial property and 3% absolute return. The weighted average TER would be 0.9%.

I've no experience with Brewin Dolphin as a DFM, so can't comment too much on them as a potential manager, so the only thing I'd suggest at the moment is a little care in examining their suggestion about the fixed interest component in depth. Some fixed interest, gilts in particular, is trading at very expensive levels compared to the maturity value at present, therefore it might be something to avoid in the short term.

Good quality corporate debt, on the other hand, can be a good place to look for decent yields. The rest doesn't seem too bad, and the TER on the underlying holdings isn't riotously expensive.

The FA recommended the Prudential International bond as an insurance wrapper that would allow the income tax liability to be minimised. It is also apparently the cheapest viable option that allows a DFM arrangement.

This is absolutely not the case. This week I arranged a bond with a 0.6% initial charge and an annual fee of a little over £400 a year for an investment of about £250,000. This provider also charges nothing extra for adding a DFM (as they shouldn't - it's a lot less work for the bond provider to simply delegate all investment reporting responsibility to a third party). In short, this is not the cheapest offering by the sound of it.

At this stage I should point out (in case it hasn't been by this adviser) that insurance-based investments don't actually reduce income tax without clever timing. They are designed to defer the tax until the point of sale, at which point all gains are liable to income tax at your highest marginal rate (subject to top slicing rules). This allows for gross roll-up during the life of the bond, but whenever you want to access the investments again, all the tax you've saved becomes due, some of it potentially at a higher rate.

It's worth noting at this point that an insurance-based investment is generally best for:

1. Investors who are already using their capital gains tax allowance in full each year
2. Investors who are paying a higher rate of tax now than they might be in a few years
3. Investors who are looking to use a trust or two to mitigate inheritance tax to some extent

If your mum fits some or all of these criteria, then it might be worth using an offshore bond, but nothing you've said so far screams out for such a vehicle.

The fee for the DFM was 1%, of which half went to the FA, for which you get the FA’s ongoing support (he has tax efficiency expertise, he said he would help my mum review her own IHT issues etc.), and the BD manager’s expertise in structuring a portfolio, as well as their work in things such as B&B’ing, ISAing, arranging income payments to be made, providing twice annual statements and an annual visit to review.

Presumably there's VAT to pay on top of this?

There were also transaction fees from BD – 1.25% down to 0.5% depending on the size of the transaction, but because of the number of funds to be purchase, they would almost all incur a 1.25% fee, although there shouldn’t be too much churn so this would be mostly in year 1. The BD guy said there would be no initial charge if they took over a portfolio of investments ‘in specie’ (sp?).

On a £200k portfolio, transaction charges are likely to be high because the individual holding sizes will be fairly small. I'm not convinced that this represents a cost-effective solution in comparison to a managed portfolio service, a fund of funds or a portfolio of retail investments held on a platform which can minimise transaction charges.

They gave the impression that the fees for the Pru bond were minimal as it’s just a wrapper, but when I looked into it after they left, it would be £125 per quarter, plus 0.95% per year for 5 years (with breakage costs if she leaves early), plus 0.1% per year for having a DFM assigned.

As mentioned above, this is more expensive than I've seen this week.

The fixed element of the fee seems particularly steep in light of the fact that the FA was recommending this even when he thought the investment amount was £70k.

The fixed element will be the insurance company's administration charges, not the IFAs. The IFA will be paid from i) the split of the commission on the DFM charges and ii) an initial commission from the bond, as it looks like he's taken a 5-year establishment fee charging basis, which is very likely to come with an initial commission of at least 4%. I hope he disclosed this to you in full as coming from your mum's investment, as that's what the higher charge for the first 5 years is paying for.

I also saw that the FA got £6k (3%) from the Pru on completion, even though he’d given the impression he got his cut from the 1% - was too late to ask if the £6k was rebated by the time I spotted it.

3% initial and 0.5% ongoing is still fairly typical in the industry, but it can very likely be beaten by approaching a fee based adviser and asking them to do the work for you on a nil-commission basis. £6k initial is a lot for a £200k portfolio, especially when that portfolio is going into a single bond with a DFM doing all the investment decision making.

My mum is also very concerned about anything being ‘off shore’, in particular whether or not the government will close the loophole while she’s tied into the bond.

Much less of an issue here than she's worrying about. There's an equivalent structure onshore with almost the exact same tax treatment, the only real difference is that offshore bonds have a wider range of available investments and generally a lot more flexibility with what can be done to the various policy segments.

This isn't a dodgy area of tax planning - HMRC is very aware of offshore bonds and doesn't seem to have any concerns with their use as a tax deferral tool.

They were very convincing at the time, but since I’ve done the numbers, it looks as though you’re paying at least c.14% of the capital in fees (excluding fund fees) in the first five years. And if you’re drawing an income as well (20% over 5 years), you’ll start well down before your investments have a chance to recover. They claimed that you could expect to withdraw 4% as income and the capital value should still grow and hopefully match inflation over the long term. However, you’d be starting with the goalposts so far back it feels? Will need to be getting a lot of value out of the Pru bond element once the establishment charge is paid off. And 1% p.a. + transaction charges seems a lot – it’s not like they’re stock picking, just creating and rebalancing a diversified portfolio aren’t they?

The charges do seem high, especially once the dealing fees and VAT are factored into the equation.

I would offer to learn the ropes and do it for her, but then I worry that one little thing I get wrong could wipe out the gain that you’d get by not paying fees for a professional job.

It's worth being very careful there. Professional advisers have indemnity insurance and there's a free compensation procedure available to their clients. If you adviser her as her son and made a rookie mistake which lost a lot of money, there would be no recourse.

So putting aside the fees, do you think it seems like a reasonable strategy? But on the subject of fees, do they seem normal or excessive? Is the International Bond worth the money and/or too risky?

Without knowing more, I can't even say whether the offshore bond is appropriate. I remain sceptical that the DFM and adviser fees together are worth paying for, especially on top of the bond charges.

It's probably worth getting a second professional opinion if nothing else, and not from on here. Find another IFA local to you and run through another factfind and see what they say.

grey_gym_sock

first note i have no professional expertise in finance. these are just some impressions ...

if your mum's income is about to be £18k (rent) + whatever income is generated by £440k capital (less a little that can be put in ISAs, etc), then she will probably only be paying basic rate tax, which makes using a bond which defers tax a little odd. especially as she might even become a higher rate payer in the future (if her investments do relatively well, and the government continues to hold down the starting point for higher rate tax).

are there penalties if she goes into this portfolio bond and wants to leave after less than 5 years? does it effectively lock her into keeping these advisors/DFMs for the 5 years?

it is bizarre that they want to put part of the money they'd be managing in cash. you can do better yourself, by picking the best interest rates and putting no more than £85k in each institution. there's no point in paying management charges on cash. also, if they put it in money market funds rather than deposits (i don't know if that's what they intend), then that would be more risky because you'd lose the FSCS protection which you get if you deposit no more than £85k in each institution.

i'd also question how much they have in fixed interest (unless that 41% is mainly cash - do they say how much is in each?).

the equity component is very heavily weighted to the UK rather than overseas. there could be a reason for that, but have they said? have they said how it's invested in UK or overseas equities? because it's very vague as it stands. trackers or actively managed? does it invest in funds which have further charges of their own? which overseas countries? what investment strategy?

i'd also avoid "absolute return" (though they've only suggested a small percentage). it can mean anything - basically trusting the fund manager to do whatever they think best - but it's usually like being part in equities, part in cash, with a bit of gambling thrown in.

with £200k, it is fair enough to pay for advice if you're not confident to do it yourself. but a fees-based IFA (who would rebate any commissions) could be significantly cheaper, and i don't think there's any evidence that they'd be less effective.

dunstonh

if your mum's income is about to be £18k (rent) + whatever income is generated by £440k capital (less a little that can be put in ISAs, etc), then she will probably only be paying basic rate tax, which makes using a bond which defers tax a little odd.

If the withdrawals are 5% or under p.a. then there is no tax to pay on them. Tax is deferred. This can allow lower withdrawals to be taken as there is no immediate tax to be paid and as there is more left in the investment, the potential for growth is greater. It can work well when you manage it well and time things correctly. However, get it wrong and it can be a very expensive mistake. For a lot of people, it could be too complicated and whilst it MAY offer potential if strictly followed, it may not be worth it for an "average" consumer with "average" knowledge.

it is bizarre that they want to put part of the money they'd be managing in cash. you can do better yourself, by picking the best interest rates and putting no more than £85k in each institution. there's no point in paying management charges on cash. also, if they put it in money market funds rather than deposits (i don't know if that's what they intend), then that would be more risky because you'd lose the FSCS protection which you get if you deposit no more than £85k in each institution.

Offshore bonds can access institutional deposit accounts and some of these can be quite good. The wording says fixed interest and cash which suggest it allows them to move between fixed interest and cash allowing, in theory, 41% cash or 41% fixed interest or anything in between.

the equity component is very heavily weighted to the UK rather than overseas. there could be a reason for that, but have they said? have they said how it's invested in UK or overseas equities? because it's very vague as it stands. trackers or actively managed? does it invest in funds which have further charges of their own? which overseas countries? what investment strategy?

I was surprised at that too. Most sector allocations from various acturies have been reducing UK allocations for some years now. Compared to just 11% overseas, it does appear overweight in UK. However, investing is about opinion and you will rarely get opinions agreeing on the same amounts or areas to invest in as there are just too many options.

with £200k, it is fair enough to pay for advice if you're not confident to do it yourself. but a fees-based IFA (who would rebate any commissions) could be significantly cheaper, and i don't think there's any evidence that they'd be less effective.

Im not sure 200k is really enough for a DFM or even an offshore wrapper (without strong reason for using it). With annual use of bed&ISA and careful CGT management and putting the higher yielding funds into the S&S ISA and low/no yield into the UT/OEICs you could avoid a lot of the tax.

Caveat is that we dont know the facts, just snippets, and it is all about opinion. However, I suspect that this is a firm where they stick everything with the DFM as that is their model. There are plenty of these around and best avoided as you have to fit them rather than them fitting you.

Great post by Aegis by the way. Leaves little to add as it covers everything so well.

VT82

Firstly I just want to say a big thank you to the last few replies. It means a lot that people would be so thorough in their advice to a stranger.

To respond to a few of the points:

Aegis wrote: »

Some fixed interest, gilts in particular, is trading at very expensive levels compared to the maturity value at present, therefore it might be something to avoid in the short term.

Good quality corporate debt, on the other hand, can be a good place to look for decent yields. The rest doesn't seem too bad, and the TER on the underlying holdings isn't riotously expensive.

The BD guy said they try and finesse the timing of purchases. I asked him why he thought the market was inefficient and he could second guess it as part of our discussion about pound cost averageing (but not in quite such a blunt way). He got the hump a little bit and said if we wanted to time lump sum payments ourselves we could do. I figured, it would avoid the money sitting in their 0% deposit account for any length, but would ensure all transactions incurred the full 1.25% fee. Probably not worth it on the whole.

When I talked about fixed interest and cash, that's just what it was called on the prospectus but I think it was mostly corporate debt. I saw a list of the planned funds but didn't bring a copy home with me. I noted that of the 0.90% TER, the main ones were 1.1% for UK equities and 0.75% for Fixed interest.

Aegis wrote: »

This week I arranged a bond with a 0.6% initial charge and an annual fee of a little over £400 a year for an investment of about £250,000. This provider also charges nothing extra for adding a DFM (as they shouldn't - it's a lot less work for the bond provider to simply delegate all investment reporting responsibility to a third party). In short, this is not the cheapest offering by the sound of it.

That's quite explosive to me. They will be grilled about that. Do you have the name of the alternative bond that can be used?

Aegis wrote: »

Presumably there's VAT to pay on top of this?

Yep it was 1% + VAT p.a. So I guess that's another 2 grand in the 'first five years calculation' I had missed.

Aegis wrote: »

On a £200k portfolio, transaction charges are likely to be high because the individual holding sizes will be fairly small. I'm not convinced that this represents a cost-effective solution in comparison to a managed portfolio service, a fund of funds or a portfolio of retail investments held on a platform which can minimise transaction charges.

And is this therefore something that an IFA could sort out themselves without involving a DFM, and you would still get the statements for filling in tax returns, rebalancing (subject to cost) and so on? Sounds much better if so.

Aegis wrote: »

The fixed element will be the insurance company's administration charges, not the IFAs. The IFA will be paid from i) the split of the commission on the DFM charges and ii) an initial commission from the bond, as it looks like he's taken a 5-year establishment fee charging basis, which is very likely to come with an initial commission of at least 4%. I hope he disclosed this to you in full as coming from your mum's investment, as that's what the higher charge for the first 5 years is paying for.

Yeah the £125 was from the Pru. They weren't very explicit about that charge, or even the massive establishment charge of which 2/3 goes to paying the FA's commission - I only spotted it in the paperwork afterwards.

Aegis wrote: »

The only real difference is that offshore bonds have a wider range of available investments and generally a lot more flexibility with what can be done to the various policy segments.

This isn't a dodgy area of tax planning - HMRC is very aware of offshore bonds and doesn't seem to have any concerns with their use as a tax deferral tool.

Good to know. Something to be discussed with an alternative IFA I think.

Aegis wrote: »

It's worth being very careful there. Professional advisers have indemnity insurance and there's a free compensation procedure available to their clients. If you adviser her as her son and made a rookie mistake which lost a lot of money, there would be no recourse.

Could you explain what sort of rookie mistakes are most easily made? I was just thinking of setting up the same mix of funds that they recommended, and making sure it was rebalanced each six months say. Could you explain what the most likely mistakes I could make in this scenario would be so I can avoid them? Something about buying income units vs growth units, forgetting about charges for things, or a specific tax issue maybe? Would really like to know this. I know I should probably read a book but a couple of pointers would be useful to decide if I would even bother trying the DIY route.

Aegis wrote: »

It's probably worth getting a second professional opinion if nothing else, and not from on here. Find another IFA local to you and run through another factfind and see what they say.

Will do. And thanks again.

VT82

grey_gym_sock wrote: »

are there penalties if she goes into this portfolio bond and wants to leave after less than 5 years? does it effectively lock her into keeping these advisors/DFMs for the 5 years?

Yep - it's pretty much making sure they take enough out of you, if you closed it in any of the first four years, so that they've not been out of pocket by paying the 3% commission. With a bit on top for them.

grey_gym_sock wrote: »

The equity component is very heavily weighted to the UK rather than overseas. there could be a reason for that, but have they said? have they said how it's invested in UK or overseas equities? because it's very vague as it stands. trackers or actively managed? does it invest in funds which have further charges of their own? which overseas countries? what investment strategy?

I did see a list but don't remember it. Don't think there were any trackers. Recognised Invesco Perpetual (unless that was a Fixed Income one?) I didn't see the list of overseas countries, just a variety of funds. All funds had their own TER on top of the DFM.