Reasonable Charges?

Wilkins

FatherAbraham wrote: »

On the contrary, Wade Pfau has done extensive work on broadening the original "Trinity" study (which suggested the 4% "rule") into the international context, including looking at UK historical returns.

For example, take a long hard look at: http://www.fpanet.org/journal/CurrentIssue/TableofContents/AnInternationalPerspectiveonSafeWithdrawalRates/

Excluding Canada, almost everywhere would've done very badly with a 4% withdrawal rate.

Annuities are such better value than most people think.

Warmest regards,
FA

Actually, it was Pfau's work that I was alluding to, but I had not
seen that international comparison --thanks.

bigadaj

M.R.W. wrote: »

I haven't seen any research myself, but my own personal experience supports the fact that customers prefer percentage charging to flat fees. The reason for this is that it can help to align the IFAs financial interests with the clients.

Example being, client invests £100,000 and IFA agrees to take a fixed monetary fee of £1,000 per year for managing the investment. Now the IFA will make £1,000 per annum as agreed regardless of the investment performance.

Whereas if the client opts for a 1% fee, the IFA will only get £1,000 per year if the investment performance keeps the fund at or above £100,000. If the IFA neglects and ignores the clients investment then they could lose out financially too as their % cut will be smaller. Now the IFA has an added incentive to really manage those funds well.

So it's not just because 1% sounds tiny to most people whereas £1000 is a lot of money to the majority of the population?

M.R.W.

gadgetmind wrote: »

Don't most outsource asset allocation and rebalancing?

I fear you're just being pedantic now I don't claim to be an expert but in my personal experience with IFAs, all have done their asset allocation and rebalancing in-house.

But nonetheless, the same principle surely applies? A % fee would just become an incentive for the IFA to ensure the outsourcing company does a good job!

bigadaj wrote: »

So it's not just because 1% sounds tiny to most people whereas £1000 is a lot of money to the majority of the population?

We could debate this until the cows come home...but the truth is that professional services are expensive. I would group IFAs alongside accountants and solicitors, and they don't come cheap either.

This is obviously a matter of opinion rather than fact, as you will no doubt say that the services of an IFA are not worth £1,000 per year, and I will respectfully disgree

gadgetmind

M.R.W. wrote: »

A % fee would just become an incentive for the IFA to ensure the outsourcing company does a good job!

It's been shown that financial incentives for managers do not improve investment performance.

It sounds counter-intuitive, but simpler approaches that use mechanical rebalancing on top of low fee investments perform better.

bigadaj

[QUOTE We could debate this until the cows come home...but the truth is that professional services are expensive. I would group IFAs alongside accountants and solicitors, and they don't come cheap either.

This is obviously a matter of opinion rather than fact, as you will no doubt say that the services of an IFA are not worth £1,000 per year, and I will respectfully disgree [/QUOTE]

It is of course a matter of opinion, the value of something will vary dependent on individuals situation. In certain cases it may be worthwhile having the ifa input and perspective for me that situation would be limited whereas for others who don't have the time or inclination to DIY it may be worthwhile.

Even gadgetmind has suggested he may consult an ifa and I can see the worth in this for third party confirmation of plans and potentially to utilise what might be expensive modelling software, I'm not sure of that last point but am just extrapolating from my own work. Similarly for annuity purchase it's a no brainer.

The issue I have is simply with clarity of charging, we've seen several cases on here of people with large sums being quoted very high fees in absolute terms because of percentage quoting of charges. Several of the IFAs have confirmed that such charges are excessive, and this is my issue, is annual servicing of a £500000 pot worth five grand a year, I'd suggest not.

Lump sum charging is at least clear, and in most cases would be within a limited range, presumably less than a grand might not be worthwhile for the ifa but more than say 3k is difficult to justify no matter what the pot size.

jamesd

FatherAbraham wrote: »

Excluding Canada, almost everywhere would've done very badly with a 4% withdrawal rate.

It's an interesting but very limited study. Thanks for mentioning it so I read it again.

Since we're discussing the UK here it's perhaps of interest to note that the UK worst case rate was just 0.25% lower than the US, for retiring in 1900 in the UK vs 1969 in the US. Also interesting that the UK failure rate at 4% was just 3.8% with an assumption that the investor ignores what's happening around them and keeps a constant income whatever happens. The worst case 4% income failure was at age 91 for a person retiring at 65; the ages for the other cases weren't provided.

Going back only as far as 1981 for the UK shows that life expectancy for a 65 year old male was just 14 years then. The earliest failure at 5% drawdown in the study was after 17 years. That 14 year life expectancy is from the ONS 2010-based principal projection cohort life expectancy spreadsheet for the whole UK for that year.

It's interesting to observe the potential cost of the my own country only investment approach. Just have a scan of the SAFEMAX year in table 2 and observe the way it varies from country to country. Seems to be a good argument for not being parochial when investing.

FatherAbraham wrote: »

Annuities are such better value than most people think.

Well, that study does tend to reinforce a bad deal view of annuities, given that:

1. An RPI annuity would currently pay out about 3% to a 65 year old while the study used 4% and 5%.
2. The study showed failure for a 65 year old retiree at age 91 in the UK worst case, with only 3.8% of cases failing even that late and the hypothetical annuity succeeding at whatever it would have paid out, ignoring any annuity failures and the reduced income from them.
3. Meanwhile all of the rest get the 33% higher income for life and leave larger inheritances if they don't pick an annuity.
4. The GAD limit forces the reduction in income that protects against the failure case, though that wasn't included in the study.

The study did use very optimistic domestic-only investment only choices and charges, though, so that'll offset the other limitations to some extent, though not the GAD limit issue that provides much of the protection in the UK today.

I don't suppose you're aware of any study that does a similar comparison vs the best annuity income available, failure rate of those annuities, failure rate if the annuity income rate is taken in drawdown, percentage of investors who die before running out of money in both annuity and non-annuity cases, pot remaining to be inherited at death and worst case income?

I expect that there are some times where in the UK the annuities would have provided a much better deal than drawdown, provided the annuity provider survived the market drops that would hurt drawdown.

FatherAbraham

jamesd wrote: »

4. The GAD limit forces the reduction in income that protects against the failure case, though that wasn't included in the study.

Well, having to reduce one's income in retirement is in itself failure, if the goal is to have a steady income. Once one permits variability of income, then of course drawdown "wins", because total loss of capital can always be avoided.

Warmest regards,
FA

sandsy

Re. Withdrawal rates vs annuities, another consideration may be the relative mortality of annuitants vs those taking drawdown. On average, I'd expect drawdown folks to be a self-selecting group with better life expectancy than the average annuitant.

dunstonh

Please provide links to that research and (ideally) provide figures that show that percentages benefited the customer over the long term.

I havent seen any research that has showed that (either for or against). All there was in the lead up to RDR were surveys on how clients preferred to pay and hourly rate was one of the last popular. Percentage and fixed fee were most popular.

Don't most outsource asset allocation and rebalancing?

Allocations may be paid for from outside companies are but not the fund selection.

gadgetmind

FatherAbraham wrote: »

Well, having to reduce one's income in retirement is in itself failure.

I guess that depends on your viewpoint, but firecalc lets you select various strategies for how to handle unexpectedly large pot consumption. As long as you have an approach like this in mind from the get go, it's a predicted potential "soft fail".