IFA and DFM's - do I really have to have an IFA?

sc52

By way of a friend, a few years ago I ended up with an IFA who advised that I should have my investments managed by one of the bigger, as they refer to them, DFMs. Since then an annual management fee of 1.5% has been split between the 2 parties, 1% DFM, 0.5% IFA.

(Previous to this I had been with what I knew as a Stockbroker - but they don't seem to call themselves that anymore)

Due to errors made by the DFM over the years, I'm looking at having my investments managed elsewhere and my IFA has recommended various alternatives. Now whilst I like my IFA there is very little by way of advise that I get/need and therefore whilst everything is "up in the air" I have suggested that I no longer wish to pay his fee as previously agreed but on a per consultation basis, as and when required.

However, each of the perspective DFMs we have spoken to have insisted that they can only deal with my investments if I retain an IFA.

Is this now the case with all Private Wealth Management Companies? At present I don't see the need for an IFA but it seems I'm being told I don't have a choice?

Please advise

Rollinghome

Sorry, I've never felt the need of a DFM and so can't give recommendations. I self-manage a seven figure sum and have always been comfortable doing that. From time to time, I've considered using a DFM but the figures have never stacked up. (I did use a very good stockbroker on an advisory basis for a while until the company was taken over and the principal of the company who advised me retired).

One of the few firm rules of investment is that, as Warren Buffet often makes clear, you reduce your chances of a decent return if you give handouts to layer upon layer of "helpers". Google for his famous story of "The Gotrocks and Helpers".

I'd suggest the first thing to do is to ask whether you need a DFM in the first place. Have you calculated the total costs, including all trading costs etc., and measured the benefits? What are you being invested in, nothing like the Madoff funds so favoured by Nicola Horlick for her unfortunate clients I hope?

There various types of services that call themselves DFMs but, for the full service with a custom portfolio, minimum funds of £500k are normally required. On that basis you'd be paying your IFA alone at least £2,500 a year. You should certainly be looking at what you get for that apart from passing you on to someone willing to pay him that kickback.

The idea of being "reassuringly expensive" is a trap we can all fall into from time to time but the whole object of investment is to maximise returns and keep as much of those returns in your pockets, not those of someone else.

If you really don't want to manage your own money and don't want to use collective investments then perhaps you could check out Ruffer http://www.ruffer.co.uk/ or someone similar. I've no idea of how good their private client service is but they also run various collective funds, both UTs and ITs, which have published figures that you can compare. On that basis they have a good record for conservative management and wealth preservation.

Let us know how you get on.

Edit: link to Gotrocks tale http://money.cnn.com/2006/03/05/news/newsmakers/buffett_fortune/index.htm

sc52

Thanks Rollinghome.

I'd like to manage my portfolio but I don't think I know enough about the range of investments out there let alone which ones I should at present be investing in, to be confident of getting it right.

The limit of my investment knowledge would probably only allow me to invest in a range of fairly well known funds, but that may not lead to a balanced enough portfolio.

However, as you say, I'm currently paying out a fortune and perhaps even with my lack of knowledge I'd still be better off managing my own investments.

Thanks again.

jem16

sc52 wrote: »

However, as you say I'm currently paying out a fortune and perhaps even with my lack of knowledge I'd still be better off managing my own investments.

Thanks again.

Is your portfolio big enough to warrant the services of a DFM?

Another option is to use only an IFA on a servicing agreement and thus only pay 0.5% or a fixed monthly fee. whichever is better for your amount.

Aegis

sc52 wrote: »

By way of a friend, a few years ago I ended up with an IFA who advised that I should have my investments managed by one of the bigger, as they refer to them, DFMs. Since then an annual management fee of 1.5% has been split between the 2 parties, 1% DFM, 0.5% IFA.

(Previous to this I had been with what I knew as a Stockbroker - but they don't seem to call themselves that anymore)

Due to errors made by the DFM over the years, I'm looking at having my investments managed elsewhere and my IFA has recommended various alternatives. Now whilst I like my IFA there is very little by way of advise that I get/need and therefore whilst everything is "up in the air" I have suggested that I no longer wish to pay his fee as previously agreed but on a per consultation basis, as and when required.

However, each of the perspective DFMs we have spoken to have insisted that they can only deal with my investments if I retain an IFA.

Is this now the case with all Private Wealth Management Companies? At present I don't see the need for an IFA but it seems I'm being told I don't have a choice?

Please advise

If you're looking to stick with DFMs, it's likely that you will be able to beat the fees you've highlighted in your post. For a client with a portfolio the right size for a DFM service (at least £250k, possibly more) I would expect fees of 0.75% for a manager using predominantly collective investments. 1% might be feasible if they were going to invest into direct equities, as that reduces the overall expenditure. For portfolios significantly over the threshold mentioned above, the cost can drop significantly.

Whether you still need the IFA is down to you. If you think he might be useful but don't want to pay 0.5%, then negotiate down at the very least.

sc52

Aegis wrote: »

Whether you still need the IFA is down to you.

Hi Aegis,
That's where I seem to be having the problem - I've being told by the DFM's that I have to have an IFA....
I take from your response that I don't and therefore probably need to arrange meetings with prospective DFMs without my IFA being present.
SC

sc52

jem16 wrote: »

Another option is to use only an IFA on a servicing agreement ...

Thanks jem16,

What is a servicing agreement and what would I expect from it?

SC

Steven1978

A service agreement is just an agreement for a set product/service at a fixed price.

The information you have recieved on this thread is 100% correct and very good.

I work in the industry as an advisory investment manager and the proposition that you must use an IFA to access a DFM is preposterous and totally incorrect, you see, most DFMs have relationships with large IFA groups and won't take a client on unless they can pass you through "their mates" who will then also earn out of you.

Try and find a small-mid sized firm of managers, they won't insist of fleecing you for an extra layer.

0.5% does not sound a lot, but it will absolutely all add up over the long term.

Thankfully with RDR around the corner, this, along with many other shoddy practices desgined to line the pockets of those in the industry whilst asset stripping the man on the street are about to end!

jem16

sc52 wrote: »

Thanks jem16,

What is a servicing agreement and what would I expect from it?

SC

IFAs can be employed on a servicing basis or a transactional basis. Transactional means that you pay for the advice etc as and when needed.

An IFA employed on a servicing basis would be paid an annual fee to monitor your investments on an ongoing basis. This would include reviews (annually or more often as agreed), rebalancing, Bed&ISA each year and ongoing advice.

Rollinghome

Hot from the press on FT Adviser:

"FSA’s move to ban DFM kick-backs highlights “long-standing problems” of the DFM-adviser relationship.

Advisers should not fear that discretionary managers are going to poach their clients as this is not a “commercial reality”, but they must ensure that they control the client relationship to avoid clients jumping ship of their own accord, according to Verbatim Asset Management

Speaking to FTAdviser Dan Russell, head of sales at the firm, the financial planning and portfolio management arm of SimplyBiz, said that there is fear among some advisers that they may struggle to retain clients as a result of new rules enforcing higher transparency in remuneration agreements between clients, advisers and discretionary managers.

...Earlier this year, SimplyBiz announced that it was to launch a new discretionary fund management service under the Verbatim umbrella that will be designed so that the firm is not provided (sic) access to any details of the underlying clients to ease switching between managers."

More: http://www.ftadviser.com/2012/10/18/ifa-industry/product-providers/dfms-poaching-clients-is-not-a-commercial-reality-kGWqOq4FszU4HRVdZPaUxH/article.html

Financial advisers trying to ensure they continue to get their kickback is an issue for anyone recommended by an IFA to use a DFM. Clearly, they need to be sure that any recommended DFM is selected for their best interests and not for the best interests of the IFA.

And sounds as if avoiding Verbatim Asset Management might be a good idea. Bring on "greater transparency".

gadgetmind

Rollinghome wrote: »

Google for his famous story of "The Gotrocks and Helpers".

Yup, an absolute classic and a great favourite of mine.

I self-manage a similar sum to you (well, same exponent, undisclosed mantissas on both sides) and am entirely comfortable doing this as I took the time to learn about asset allocation etc. before diving in.