IFA fees, investment product fees, £50k investment compensation limit

peaberry

I'm currently looking for an IFA to manage investments for me. I've done lots of reading but so far a few points are still eluding me.

IFA charges for wealth management:
It seems that a 3% implementation charge and an 0.5% annual management charge is widely considered usual/reasonable, however it would be unreasonable to charge more than around £3000 for implementation and around £1500 for annual management, since it shouldn't take more than 15 to 20 hours for implementation and 7.5 to 10 hours for ongoing management regardless of the amount being invested (assuming £200 or £150 per hour). However I have looked at quite a few IFA websites so far and if fees are mentioned at all they have all been higher than this, for example one firm didn't reduce its 2.5% setup fee until the amount was over £500k. Are the £3000/£1500 amounts still a realistic goal for me to aim for? I don't want to pay more than this if I don't have to.

Investment product fees on top:
I have looked at some of the investment products available online and they all come with their own varying fees. Would an IFA be choosing amongst these products for me and therefore also paying these product fees? And therefore would this be added on top of the 0.5% fee I would be paying for their expertise in making these choices for me? So far one article I read and one IFA website has said that this would be the case, but I wonder if it is always so.

Compensation limits:
I can't seem to find out how the £50,000 compensation limit for investments is dealt with. With banking institutions we are strongly advised to keep no more than the £85,000 compensation limit in any one institution. How is the risk of the £50,000 compensation limit spread so that a client doesn't have more than the limit at risk and therefore not covered by compensation? Also if a large amount of money were lost due to a fault of the IFA (for example constructing a portfolio with a much higher level of risk than the client wished for), then I assume any compensation would be limited to £50,000 since it is one 'institution' that is at fault. Is this just part of the overall risk of investing that investors need to accept?

Totton

If you are using funds the HL state that "Unit trusts and OEICs use a trustee or depositary to actually hold the title to the underlying stocks they hold in their funds. This means that if the fund manager gets into financial difficulty your assets are protected from their creditors. The time that the FSCS does not protect you is if one of the underlying stocks within a fund manager's portfolio goes bust."

Probably best not to have more than 50k with any one firm such as Artemis, Neptune etc.

Whilst it isn't fully relevant to your question, the HL advice is here - http://www.hl.co.uk/investment-services/vantage-service/how-safe-is-your-investment

HTH,
Mickey

Linton

peaberry wrote: »

........

Compensation limits:
I can't seem to find out how the £50,000 compensation limit for investments is dealt with. With banking institutions we are strongly advised to keep no more than the £85,000 compensation limit in any one institution. How is the risk of the £50,000 compensation limit spread so that a client doesn't have more than the limit at risk and therefore not covered by compensation? Also if a large amount of money were lost due to a fault of the IFA (for example constructing a portfolio with a much higher level of risk than the client wished for), then I assume any compensation would be limited to £50,000 since it is one 'institution' that is at fault. Is this just part of the overall risk of investing that investors need to accept?

If a large amount of money were lost due to an IFA giving you inappropriate advice there is no limit to the compensation. You would expect to be put back in the position you were in previously.

Other than that what eventualities would you want compensation for? Bear in mind, that unlike with bank accounts, the money you pay and the investments you buy are effectively owned by yourself. The IFA, platform, nominee company and fund manager have just got the right to manage them. So they should be safe if any of these people go bust.

For example, fund managers have run into difficulties in the past, the funds have carried on under a different manager.

So, the only thing I can think of where the £50K compensation would come into play is fraud. And the chance of fraud with an established regulated company is pretty small. So I and many other people are perfectly happy to have much larger amounts than £50K with any one institution.

Aegis

peaberry wrote: »

I'm currently looking for an IFA to manage investments for me. I've done lots of reading but so far a few points are still eluding me.

IFA charges for wealth management:
It seems that a 3% implementation charge and an 0.5% annual management charge is widely considered usual/reasonable, however it would be unreasonable to charge more than around £3000 for implementation and around £1500 for annual management, since it shouldn't take more than 15 to 20 hours for implementation and 7.5 to 10 hours for ongoing management regardless of the amount being invested (assuming £200 or £150 per hour). However I have looked at quite a few IFA websites so far and if fees are mentioned at all they have all been higher than this, for example one firm didn't reduce its 2.5% setup fee until the amount was over £500k. Are the £3000/£1500 amounts still a realistic goal for me to aim for? I don't want to pay more than this if I don't have to.

It will depend entirely on the IFA and the amount of work you want them to do for you. £1,500 per annum might be enough to look after your affairs, but it depends on how complex your affairs are and how much work the IFA therefore has to do. If you're looking for multiple meeting per annum, calls every month, etc, then the fee will be higher. Likewise, the implementation fee might be higher if your affairs are particularly complex. In both cases you should be able to ask for full details before any billable work is carried out for you.

Investment product fees on top:
I have looked at some of the investment products available online and they all come with their own varying fees. Would an IFA be choosing amongst these products for me and therefore also paying these product fees? And therefore would this be added on top of the 0.5% fee I would be paying for their expertise in making these choices for me? So far one article I read and one IFA website has said that this would be the case, but I wonder if it is always so.

Product costs are almost always charged separately. Some IFAs I have spoken to recently have mooted absorbing platform costs into their fees, but I haven't actually seen a firm implementing this strategy yet.

Compensation limits:
I can't seem to find out how the £50,000 compensation limit for investments is dealt with. With banking institutions we are strongly advised to keep no more than the £85,000 compensation limit in any one institution. How is the risk of the £50,000 compensation limit spread so that a client doesn't have more than the limit at risk and therefore not covered by compensation? Also if a large amount of money were lost due to a fault of the IFA (for example constructing a portfolio with a much higher level of risk than the client wished for), then I assume any compensation would be limited to £50,000 since it is one 'institution' that is at fault. Is this just part of the overall risk of investing that investors need to accept?

It's a very different situation. When you deposit money into a bank, the bank lends out your cash to its borrowers, so the protection is in place in case their activities result in financial loss. With investments, the compensation is designed to protect against fraud or prohibited actions by the investment company. During the normal course of operation your investments with regulated UK firms are ring-fenced from the investment manager and are therefore not available to pay their debts in the event of insolvency. In addition, the advice to invest into those schemes is covered by the compensation scheme and, while the firm is still trading, the Financial Ombudsman Service, which covers up to £150,000 of losses. You can instead choose to sue the adviser for inappropriate advice given if your losses due to that advice exceed the maximum level of compensation.

To summarise though, yes, the limited compensation is, to an extent, part of the risk of investing.

Aegis

Linton wrote: »

If a large amount of money were lost due to an IFA giving you inappropriate advice there is no limit to the compensation. You would expect to be put back in the position you were in previously.

Strictly speaking this isn't true. When suing, there is no compensation limit, but via the Ombudsman it would be £150,000 per case and via the FSCS it would be £50,000 per person per institution. As such, it depends entirely on the route and whether the firm is in a position to pay the award.

Other than that what eventualities would you want compensation for? Bear in mind, that unlike with bank accounts, the money you pay and the investments you buy are effectively owned by yourself. The IFA, platform, nominee company and fund manager have just got the right to manage them. So they should be safe if any of these people go bust.

Absolutely agree.

For example, fund managers have run into difficulties in the past, the funds have carried on under a different manager.

So, the only thing I can think of where the £50K compensation would come into play is fraud. And the chance of fraud with an established regulated company is pretty small. So I and many other people are perfectly happy to have much larger amounts than £50K with any one institution.

There are cases such as Arch Cru where the funds were apparently above board in terms of regulation (i.e. authorised by the regulator, signed off by the custodian, officially managed by a UK-regulated Authorised Corporate Director (Capita), and with a strong audited track record) and then subsequently failed, with blame still being assigned even now. Many consumers have had to fall back on that scheme, sometimes to their detriment due to the over-exposure to that one fund.

Mostly I would agree with you though - the Arch Cru funds promised too much and had some very odd investment strategies to achieve the results they did.

Linton

Aegis wrote: »

Strictly speaking this isn't true. When suing, there is no compensation limit, but via the Ombudsman it would be £150,000 per case and via the FSCS it would be £50,000 per person per institution. As such, it depends entirely on the route and whether the firm is in a position to pay the award.

.....

And the IFA's insurance?

dunstonh

It seems that a 3% implementation charge and an 0.5% annual management charge is widely considered usual/reasonable,

3% is not uncommon but the regulator found some years back that the average was 1.8% plus 0.5% p.a. The problems with percentages is that they are usually tapered with small amounts paying more and larger amounts paying less. So, they need to be viewed in a monetary context.

Aegis

Linton wrote: »

And the IFA's insurance?

Only comes into play once compensation is awarded. If the Ombudsman awards, the insurance covers the amount over the excess, but the total compensation is still limited to £150,000 per case. If it's a lawsuit, then the insurance should pay out whatever amount is awarded, while if it's the compensation scheme, it's likely that the insurance policy will have lapsed.

Compensation is a complicated area! I've unfortunately had to assist a few of my clients with complaints against previous advisers, and it's never turned out to be simple.