Investing a LARGE lump sum for income

Aegis

gadgetmind wrote: »

I guess it depends on how diverse an asset allocation the IFA would be looking to use.

An IFA wanted me to put my entire SIPP into a scheme that made mezzanine loans to property developers. I said I wouldn't be prepared to put more than 10% into an asset class such as that, which I think is a reasonable position.

Personally I think IFAs like the one you describe should be drummed out of the business.

Unregulated schemes can (very rarely) have their place in someone's overall portfolio, but only for sophisticated investors who understand the enhanced risks associated with such a strategy and who have a very good reason to be selecting such an investment over a traditional portfolio of regulated investments. Even then it shouldn't be with money they can't afford to lose, and that definition certainly doesn't mesh with someone's entire pension portfolio.

If you still have the recommendations and the guy is still trading, you might consider forwarding the report to the FCA, as they have fined a number of firms in recent years for their inappropriate recommendation of such schemes.

Those firms are very much in the minority, but it's good advice for all consumers to check whether an adviser is proposing an investment into something unregulated, as the vast majority of clients shouldn't have any exposure to these types of asset.

gadgetmind

Aegis wrote: »

Unregulated schemes can (very rarely) have their place in someone's overall portfolio, but only for sophisticated investors who understand the enhanced risks associated with such a strategy

I was aware of the risk/return ratio and would have considered it for a percentage, but can get exposure to this via specialist ITs and companies with lots more diversity, so the IFA's fees didn't appeal.

If you still have the recommendations and the guy is still trading, you might consider forwarding the report to the FCA

As it happens, a friend of mine (who recommended said IFA) is very happy with performance to date. I haven't asked what his exposure is, but based on the reaction I got when I suggested that I wasn't prepared to proceed with anything other than a percentage of my SIPP, I'm guessing it's heavy.

However, we're all grown ups, and he made a decision to go with this IFA whereas I decided it was time to go fully DIY. I guess only time will tell which decisions were sound and which risky.

mrsweep

vectistim wrote: »

I see you have a couple of houses, have you considered buying some freeholds? (eg: A block of flats might have 20 leaseholders paying say £150 ground rent a year for the next 80 odd years.)
Some such leases also include an element of indexation - a common option I've seen is the ground rent doubling every 25 years, which is a rather lumpy form of indexation at about 2.8% pa.
I'd expect gross yield to be around 7-8% for this sort of thing, then maybe lop a bit off to pay the management company to do administer the payments for you.

Ground rents is an interesting suggestion. If the gross yield is 7-8% as you suggest, this sounds like a decent return for relatively low risk (I assume that if ground rents are not paid then the holder has some rights over the property as security?).

But if ground rents yield 7-8% gross, and you pay a bit of this if you want someone to manage collection etc, then would a Fund be better? I think there are Funds like Brooks Macdonald Ground Rents Fund that achieve around 6% p.a.

Ark_Welder

mrsweep wrote: »

Brooks Macdonald Ground Rents Fund that achieve around 6% p.a.

This open-ended fund has been converted to a REIT: ticker GRIO.

horlicksjan

mrsweep wrote: »

Ground rents is an interesting suggestion. If the gross yield is 7-8% as you suggest, this sounds like a decent return for relatively low risk (I assume that if ground rents are not paid then the holder has some rights over the property as security?).

But if ground rents yield 7-8% gross, and you pay a bit of this if you want someone to manage collection etc, then would a Fund be better? I think there are Funds like Brooks Macdonald Ground Rents Fund that achieve around 6% p.a.

Are ground rents a low risk investment (do you have security with rights over the property as you say, if the rents are not paid?) In the current climate a fixed return of 6-7% without the volatility and downside risk of equities sounds very good. So why aren't more investors into ground rents? What's the catch/downside?

vectistim

That's interesting, I didn't know there were any funds dedicated to ground rents, as opposed to wider REITs (mind you, I've never looked for one)

Obviously ground rents are less liquid than stock market type investments, IME its either the odd individual ones turn up occasionally in auction portfolios - so that requires regular checking of auction catalogues, which tends not to be done by normal private investors, or its large portfolios that are fairly unwieldy for the typical private investor. So that's why I think they don't show up on most people's radar.

Rollinghome

Reaper wrote: »

I have only looked at it briefly myself but if you want to give it a go it is at: http://www.vouchedfor.co.uk/

While there must be people out there who are so inept that they have little choice but to use an IFA, I wonder how many of those suggesting that others use an IFA actually use one themselves? What experience do they have, if any, of interviewing or using IFAs?

While I'm sure that decent, honest IFAs do exist, the point made by the OP on actually finding one is very valid. The difficulty is that it's often people with little financial nous who seek financial advice with the catch that you need to be especially wary of appointing an IFA if you don't have sufficient knowledge to recognise poor advice when you hear it.

I also have a serious seven-figure sum invested and would have been more than happy to to have someone else manage it for me if I could have found an IFA who was reasonably competent or even honest. I couldn't - despite meeting several for discussions. The very limited knowledge and the willingness to mislead or be outright dishonest I found quite shocking. I'd add that I've also had discussions with several stockbrokers and 'wealth managers' over the years and found most no better.

So for now I manage my own investments having been able to reassure myself that I can do it rather better than any of the characters I met, usually from various sales backgrounds that they generally preferred to gloss over.

So yes, if you can find a decent, honest IFA or other adviser, then that might be a sensible course, but if you can't, or don't have the knowledge to properly vet them, then beware.

When I last looked at the Vouchedfor website I couldn't find onyone listed in my area with less than 4.7 out of 5.0. Given the way the site regulates reviews and is paid for that is unsurprising. The site is basicly there to generate sales leads with IFAs paying £40 a month for the "standard subscription" and considerably more for the "premium subscription".

IFAs using the service were also required to pay an additional much larger sum for every sales lead they got. I assume those paying those fees to Vouchedfor would not be too pleased if critical reviews were permitted to appear.

bowlhead99

That's the problem with anyone trying to provide a review site rather than merely a link site. If you go to Tripadvisor or Yelp and to an extent Amazon it's the same, you have to take what you read with a pinch of salt.

The advantage of those latter places is that it's almost community-based and you often sort the wheat from the chaff by seeing if instead of posting a review of lots of things they bought or places they ate or hotels they stayed in, someone has just gone on the site to vote up their own restaurant while slating everyone else.

This is harder to do if you're researching professional services funds because we don't buy several of them per month or year and the reviews are not nearly numerous enough to properly see a general feeling for a particular provider. And there is a lot more at stake than a meal out.

So, I've not tried vouchedfor but can see how it could be rather more biased than "unbiased" which is just listings. You can maybe get some sort of measure of an IFA or solicitor or accountant by looking at their own website when shortlisting them and see how badly put together they are, to filter out a few. Ultimately though you have to meet them in person and if you're not investment-savvy you won't know if they're BSing you, so it's a leap of faith if you don't have personal recommendations.

koru

If you are reasonably numerate then if I were you I would invest some time in educating yourself regarding personal finance and investments. I wouldn't bother with the money pages of newspapers, as they are not terribly well informed and do not usually look critically at the issues. Start with the Tim Hale book and some websites like Candid Money and Monevator. You will then find several other books worth reading. With the kind of money you have to invest, it might be worth looking into getting hold of some of the IFA training material, if that's possible for someone who is not actually trying to become an IFA.

On a portfolio of £1 million, an IFA would probably hope to make fees of £5000-£10000 upfront and further maintenance fees and potentially quite a bit higher. So, if you invest the time to educate yourself so that you don't need to incur these fees, you will effectively "earn" £5-10,000 in fee savings. And don't forget that this would be equivalent to more than £8-16,000 of pre-tax income (for a higher rate taxpayer).

Plus, potentially, you might make a better job of it and therefore get a better return on your money. For instance, unless you are paying very significant fees I doubt that an IFA will take the time and trouble to think about which investments would be best to shelter in tax wrappers such as an ISA or pension. In my view, it is best to put the highest yielding investments in the tax wrappers, particularly if you are a higher rate tax payer who would otherwise be paying 40% tax on the income. (Others might feel other types of investment are better in wrappers, but the point it that you should think about it.) Lower yielding investments will tend to have higher capital gains, but it is often possible to shelter these by triggering gains to use up the annual CGT allowance, and again this is not something that an IFA is likely to do for you unless you are paying top dollar.

Ark_Welder

koru wrote: »

In my view, it is best to put the highest yielding investments in the tax wrappers, particularly if you are a higher rate tax payer who would otherwise be paying 40% tax on the income. (Others might feel other types of investment are better in wrappers, but the point it that you should think about it.) Lower yielding investments will tend to have higher capital gains, but it is often possible to shelter these by triggering gains to use up the annual CGT allowance, and again this is not something that an IFA is likely to do for you unless you are paying top dollar.

On £1m, the gain required to exceed the current annual CGT allowance is just over 1%. Assuming that half this amount can be put into ISAs and a pension, the CGT allowance would be exceeded by a gain of just over 2%. For a growth portfolio, that would be a rather low return each year. So assuming that such a portfolio would grow at a faster rate then trying to manage CGT just using the annual allowance might soon run into difficulties.

However, if the investor did have enough knowledge to manager their own investments they could look at using an IFA to set up an investment bond through which to make their fund selections. Changing between funds within such a bond does not trigger CGT. Plus, they could withdraw a certain level of income that would not be taxed at 40% or higher. But they would have to consider what their likely situation would be in 20 years' time. So paying £10k upfront and having an investment bond set up, as well as the ISA & SIPP etc, might enable the investor to save even more than that within a few years.