Investing a lump sum to generate an income

bowlhead99

bigadaj wrote: »

Interesting that percentage fees are being quoted when Rdr would require a fixed fee.

I'm not sure that it does? It is designed to remove commission bias where a fund house gives the IFA a kickback out of the fund, which might incentivise the IFA to put the punter's money in that fund compared to giving truly independent advice which might have otherwise been to have an element in an investment trust, index fund or something else that doesn't pay commission (or pays lower commission).

So, fees should be agreed with the investor up front. As far as I know, there isn't a rule that stops this agreed fee being based on the number of hours work, the size of the portfolio, the complexity of the solution likely to be needed, how much of a pain in the !!! the investor is going to be, or what day of the week it is when the investor has his first meeting with the IFA. As long as it's agreed?

If I were the type of person to be buying IFA services I wouldn't mind if he agreed a % fee for the service. I might be rather more willing to accept a 3% fee on 40k than on 200k though, as the latter gets him a much larger absolute amount of cash for his services while the work is probably not five times as much, even if the liability is higher.

Aegis

bigadaj wrote: »

Interesting that percentage fees are being quoted when Rdr would require a fixed fee.

There's actually no such requirement, though this is a very common misconception. As long as the charges are fully disclosed, it's down to the individual adviser to decide how they want to bill, and that can be on a percentage basis if so desired.

gadgetmind

Aegis wrote: »

As long as the charges are fully disclosed, it's down to the individual adviser to decide how they want to bill

I predict that in many cases such disclosure will be like the river Nile; Very lengthy and somewhat opaque.

bigadaj

So in an ideal world for the adviser this would be a naive investor with a large lump sum.

I work in consultancy and this idea of percentage commission is a very old concept, hourly rate times volume of work should be the basis assuming that the ifa wants to be transparent. If not then the ifa is just relying in the naivety of the individual investor who can't tell whether he's being ripped off or not.

I know there are arguments about risk of work and knock on effects on insurance but ultimately this shouldn't be a primary factor surely?

grey_gym_sock

whether 3% is the going rate or too high depends largely on the size of the sum invested. the going rate for financial advice is quite expensive, though.

not sure what this insurance bond thing involves, but it sound like the kind of opaque product i'd avoid. the IFA does have to reveal what he's being paid, but is it clear what the insurance company are being paid?

feeding money into S&S ISAs each year is usually a good idea (if they wouldn't otherwise be used).

jem16

johnnyredgate wrote: »

You agree that 3% is high for this type of insurance investment bond too, would be interested if anyone has this type of bond through an ifa with a set up fee, or whether the bonds can be accessed without needing to go through an ifa?

You may find an insurance company that will deal with you directly but to be honest it will probably work out just the same, if not dearer, than using an IFA.

My understanding was that is was a secure investment so also a bit disconcerting to read that it is not.

A Guaranteed Investment Bond is guaranteed, hence the name. The Investment Bond is just a type of tax wrapper just like an ISA. Used in the right circumstances it can be advantageous. It is usually used where tax deferral would be useful - ie to avoid higher rate tax now. Like any other tax wrapper you can place various investments within it.

The Guaranteed Investment Bond guarantees that you won't get back less than you invested but of course with any guarantee it comes at a price.

Here is one such product - note this is not a recommendation.

http://www.metlife.co.uk/individuals/investments/gib/index.html#overview

Feel like I am going round in circles!! Whilst I am naive to investing and concerned about making the wrong decisions I do feel a bit uncomfortable about leaving decisions to an ifa without doing my own research also, and if there are relatively safe options that can be accessed with out the need for an ifa, perhaps investigating those further.

The problem is that if you don't know what you are doing you can lose much more than you save through not using an IFA.

In saying that I think that 3% on an investment of £100k/£150k is too high. Half of that would be better so I suggest you keep looking for an IFA.

grizzly1911

Thanks for attaching that example the "how it works" helps explain the mechanics.

jem16 wrote: »

You may find an insurance company that will deal with you directly but to be honest it will probably work out just the same, if not dearer, than using an IFA.

In my example I got the impression that we could pay the % fee separately or that 97% of the amount would be invested. The IFA then went onto talk about market value reductions if the product was surrendered in the first five years.

I know on previous similar investments this was to account for the fees paid out by the issuer to the IFA. i.e. the MVR was -3% at the outset reducing to nil over the 5 years.

If by drawing out your allowed 5% you deplete the capital value, the undelying fund value will also reduce if "growth" doesn't keep pace.

jem16 wrote: »

The Guaranteed Investment Bond guarantees that you won't get back less than you invested but of course with any guarantee it comes at a price.

The returns during the currency of the bond are not guaranteed. The final amount will be lower in real terms if there is no growth and there is little you can do about it in the short/medium term once invested.

jem16 wrote: »

In saying that I think that 3% on an investment of £100k/£150k is too high. Half of that would be better so I suggest you keep looking for an IFA.

In the case I describe the fee is for an additional product into a portfolio. It would double the existing size on which the IFA is already getting the ongoing trail. The new product would also pay a trail of 0.5%.

An new ISA now is also being pursued and 3% is the commission/fee being discussed here too.

For an ongoing, non complex, relationship 3% seems high to me plus the ongoing trail.

grizzly1911

grey_gym_sock wrote: »

whether 3% is the going rate or too high depends largely on the size of the sum invested. the going rate for financial advice is quite expensive, though.

not sure what this insurance bond thing involves, but it sound like the kind of opaque product i'd avoid. the IFA does have to reveal what he's being paid, but is it clear what the insurance company are being paid?

The bond is opaque.

The suggested fund management fee is 1% of the income and 0.5% trail, but quite what that income is derived after and what costs have been consumed to achieve the smoothed income is any ones guess. The income is at their discretion dependent on investment performance.

Providing you don't consume all the income/growth from balanced individual funds it should give scope to self smooth but leave you flexible.

The individual concerned is a standard rate tax payer so no capital draw down advantage from the bond.

One advantage is if you die within the term of the bond the life insurance element isn't part of your estate for IHT purposes. If you aren't healthy enough to qualify for the life insurance element the "protected" capital would still form part of your estate on death

grey_gym_sock

if the bond has penalties for early withdrawals, why pay for on-going advice about it? it sounds like it's 0.5% per year to say: this bond still has early redemption penalties, so you'd better keep it for another year.

i suspect that these bonds were designed to lock ppl in, while hiding how much they pay both the insurance company and the adviser. the adviser's remuneration now has to be disclosed, but perhaps he's just selling the same product out of habit.

as has been mentioned, bonds may have tax advantages. does that apply in this case? (EDIT: i see you already answered this.) a bond can enable the tax liability to be deferred. which can be advantageous when somebody is a higher-rate tax payer now, but will be in a lower band when the bond matures.

if there's no tax advantage, it's just inflexible and opaque.

jem16

grizzly1911 wrote: »

In my example I got the impression that we could pay the % fee separately or that 97% of the amount would be invested. The IFA then went onto talk about market value reductions if the product was surrendered in the first five years.

MVRs usually only apply on with profits funds. However the tax wrapper itself can have early exit fees during the first five years.

Was your IFA planning on using with profits funds or are you mistaking that for early exit fees?

The returns during the currency of the bond are not guaranteed. The final amount will be lower in real terms if there is no growth and there is little you can do about it in the short/medium term once invested.

On a Guaranteed Investment Bond you are guaranteed to get back at least the capital that has been invested. For example if you invest £100k it won't fall beneath that on maturity although may do in between. Obviously the real value will decrease through inflation in that case.

However not all Investment Bonds are guaranteed. I have an Investment Bond which is not guaranteed and which will rise and fall as per the investments held within it. It's now 7 years old and past any early exit charge.

In the case I describe the fee is for an additional product into a portfolio. It would double the existing size on which the IFA is already getting the ongoing trail. The new product would also pay a trail of 0.5%.

An new ISA now is also being pursued and 3% is the commission/fee being discussed here too.

For an ongoing, non complex, relationship 3% seems high to me plus the ongoing trail.

It is new advice and could well be the subject to the same initial fees. Some IFAs may well put it through as a lesser fee but there is still the same amount of work involved for additional work as for new work.