What to ask at a meeting with Financial Advisor

VT82

dunstonh wrote: »

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.

He pretty much said this was the case - that he thought BD was the bee's knees so recommended them to people.

dunstonh wrote: »

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

Very true.

Thanks.

Porcupine

Aegis wrote: »

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.

Doesn't it then rely on the Guernsey/etc version of the FSCS in case the provider goes under? As people in Kaupthing Isle of Man found out after much faffing by the Manx government, the protection was barely worth the paper it was written on. (it appears they've now got 91% of their cash back, after 4 years of legal wrangling).

Aegis

Porcupine wrote: »

Doesn't it then rely on the Guernsey/etc version of the FSCS in case the provider goes under? As people in Kaupthing Isle of Man found out after much faffing by the Manx government, the protection was barely worth the paper it was written on. (it appears they've now got 91% of their cash back, after 4 years of legal wrangling).

Under the circumstances, no, as the investments being utilised are not ever actually under the management of the insurer (other than very briefly in transit from the client to the discretionary manager), so the external fund manager is the one responsible for the financial security of the assets, and in this case they are based onshore.

In any case, the assets are held in trust and are not available for fractional lending, which should mean there is no chance of liquidity issues like with the Icelandic banks. The offshore bond is essentially just an administrative wrapper which charges clients for doing a few calculations, issuing returns periodically and offering a conduit through which cash can flow from one place to another. The insurers rarely sit on much of the money, and they don't rely on using it themselves to generate revenue.

Aegis

VT82 wrote: »

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.

This is where I started looking into finance myself a few years ago, so I know what it's like to be helped out.

To respond to a few of the points:

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.

Most DFMs will time the market to some extent in their efforts to get better returns for you. To give an example, most of them won't be buying gilts at the moment because they're so high over their maturity values, so they'll either sit on the cash that would otherwise go into gilts or they'll find an alternative asset to invest into.

Pound Cost Averaging won't be as useful an option with minimum deal charges and tiered pricing, which might explain why they were unwilling to consider it as a strategy for a relatively small portfolio (in comparison to what they usual deal with, at least - please don't take offence, I would consider £200k to be a pretty large sum for myself at the moment!)

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.

Not too much to worry about with those underlying costs unless you specifically wanted tracker funds.

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?

There are a number. The biggest issue with offshore bonds is that there are so many different pricing structures out there, with different levels of initial and annual charges on both fixed and percentage basis. In addition, there's the horrible establishment charges that you've already noticed.

It's all about the model that the adviser uses rather than necessarily the specific insurer. Prudential can almost certainly go cheaper than this themselves by removing the establishment charge and paying for the initial commission up front, but the adviser may not like this because it disguises his payment less effectively!

I imagine you can therefore get cheaper bonds from Zurich, L&G, Royal Skandia, Friends Provident International and a host of others out there, but in each case the starting parameters would need to be set out in advance (e.g. no establishment charge, minimal ongoing charges). But then again, Prudential can also likely be cheaper than what you've stated here if the adviser arranges it that way.

Bear in mind that many providers of this sort of policy will only deal with advisers, not the general public.

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

Always worth remembering the VAT on a lot of these things... It's a pain because it makes DFMs comparatively expensive even if the comparison is with a fund which has the same basic annual management charge.

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.

Investment bonds aren't tricky for an IFA to use, but sometimes it can be difficult finding one with decent internal processes and ease of access to a fund platform. Using a DFM is useful here because they almost all have their own custodian and dealing processes, so you don't have to deal with the insurer's admin setup.

But to answer your question, yes, an IFA could set up a bond and select your investments for you without needing a DFM. How good they would be at selecting those investments is another matter entirely.

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.

The charges should be expressly set out in the bond illustration. You should see a section which states the initial charge, the establishment charge and the annual charges. There should also be a section stating how much commission the financial adviser will receive for this investment.

If this document hasn't been issued as part of this recommendation, then it's a serious compliance breach and you should likely walk away.

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

Never a bad plan.

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?

Some examples:

• Using the wrong tax wrapper
• Using the right tax wrapper inefficiently and causing unnecessary additional tax
• Failing to account for changing risk tolerance or investment objectives
• Failing to account for changes to the ideal asset allocation
• Accidental use of overly complex (or simplistic, for that matter) products

Something about buying income units vs growth units,

Probably not the end of the world if this happens!

forgetting about charges for things,

Much more likely to cause issues!

or a specific tax issue maybe?

As well as this. Tax is very complex in some areas and very simple in others, but when you're dealing with someone else's affairs even the simple areas become much more difficult to manage effectively. Unnecessary tax is probably the worst thing you can impose on someone from a financial planning perspective, as most financial planning should be about legitimately minimising tax through prudent strategies.

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.

As I said at the start, I began my interest in financial planning by reading around this forum and learnt an awful lot from various discussions I saw and/or participated in. There are other discussion-based websites out there, but most don't have the same breadth of covered subjects as this area.

If you're really serious about learning tax, then HMRC's website is an invaluable resource, but it's not easy going by any means. It's also incredibly difficult to navigate unless you know exactly what you're looking for.

Product provider websites can be useful, but watch out for bias.

Will do. And thanks again.

No problem.

VT82

Thanks again. I'll mull things over some more. And I think I'll recommend my mum speaks to someone else as well.

Aegis wrote: »

The charges should be expressly set out in the bond illustration. You should see a section which states the initial charge, the establishment charge and the annual charges. There should also be a section stating how much commission the financial adviser will receive for this investment.

If this document hasn't been issued as part of this recommendation, then it's a serious compliance breach and you should likely walk away.

I think I gave the wrong impression on this one - the document was issued and that's where I saw all the charges laid out. It was in the actual one to one meeting that I sat in where he gave the impression that the international bond only had negligible fees.