IFA Fees / Charges - Reasonable

masonic

cgzz wrote: »

There are some on this forum who paint a very rosey picture about Financial Services and IFAs. As soon as someone highlights that there is a murky side they go into "attack" mode and make out the person is speaking nonsense.

I don't think that's true at all. From my time around these parts, there is a lot of criticism that is taken on the chin and it's only when people go over the top that those people get taken to task.

If I've had bad experiences with IFAs then the probability is others will so that's why I give advice - from experience and not ill informed!

Here is the problem. You are confounding experience with probability. What if you had won the lottery? Would you be advising people to give up on investing and take up gambling instead? If you did so, you'd still be giving advice from experience, but that wouldn't mean it wasn't ill informed too.

What's nonsense about advising people to be very careful when dealing with IFAs? There is something fundamentally wrong where an IFA can earn his cut after the client has lost money.

I think people should be careful, but I don't think they should be unrealistic in their expectations. If you think that an IFA should give up their remuneration whenever their clients investments shrink, then you clearly don't understand what you are paying an IFA to do.

If people are blindly going to hand over tens of thousands of pounds of their own hard earned cash to someone who will supposedly look after it without having a penalty clause to prevent rewarding loss then they really should think twice about using an IFA.

People who think along these lines should not even consider an IFA. They should either DIY (as I do) and take responsibility for their own losses, or stick to cash-like investments that won't lose money in nominal terms.

bowlhead99

Cgzz - that is the same mindset that says a banker should not be allowed to earn a six figure salary in a year when his division of the bank loses a million pounds. And he should definitely not take any kind of bonus in a year he works eighty hours a week to ensure the company only loses a million pounds instead of a billion pounds, because that would be "rewarding failure".

I am not a banker or an IFA, but I get paid a salary when I perform work for my employer. Ideally he will make profits, or at least revenues, as a result of the skilled labour I provide him.

If I worked in the public sector the revenues might not be so obvious but hopefully I'd be helping deliver a health service without too many deaths or a police service without too many unsolved murders or a school without too many idiots. If I go to work and do my best but the idiot kid still gets a grade D instead of an A (even if worst case scenario with a poor teacher he could have got an F, or perhaps got so disillusioned with the education system that he goes on a shooting spree in class) - I would still want to get paid.

I would say sure, be careful of the fee structure when working with an IFA, and try to shop around and do something to assess the quality of the service they provide. Personal recommendations are ideal, albeit harder to get than for plumbers or joiners or mechanics or cleaners because the full picture of quality of service from an IFA might take 10 years to become apparent.

However, the concept of don't pay him if you don't make money, is nonsense. If you lose 20% instead of 70% in a crash, because he was cautious and didn't simply put you fully into the nanocap fund that you saw went up most last year, that is a Good Thing and a fee of 10% would have been well worth it even if he only wants to charge you 1%.

If you pay me a performance fee only, I would recommend you invest your portfolio 100% into a casino high low, red black, binary bet. If you win, and half the time you will, I'll take a 30% cut. Your net return will still exceed any mainstream equity fund you could have picked. And sure, if I don't make money that year I'll be happy to forego my fee that year. Is that how you'd like the system to work?

bigadaj

I think cgzz has put his point very clumsily but I think it's important for people to acknowledge what an ifa can and cannot do.

He can't guarantee returns but could he really save the client from a period of underperformance? That in itself would be outwith his remit, as this is simply to ascertain the risk profile of that client and allocate assets to meet that and determine a probabilistic outcome of whether the client can achieve the detailed objectives he expresses.

The levels of fees charged by the ifa would surely mean that a limited section of the population would either benefit or be able to afford any advice. Anything much less than six figures woudknt appear to be worth bothering with, and as this would typically translate as a minimum £3000 upfront and £1000 a year to manage that would incentivise people to learn a little about investment with the benefit that an individuals potential for underperformance is balanced by the savings in fees.

I have no problem with people using IFAs it's just that as an individual you have to value your time at a level that equates to the fees noted above, or have come into a large amount of money and need support with such a life changing sum. There is often an indication that IFAs have knowledge that allows them to outperform DIY individuals which isn't transparent or honest in my opinion.

dunstonh

There are some on this forum who paint a very rosey picture about Financial Services and IFAs.

no one can claim perfection but IFAs account for 1% of complaints at the FOS. The FOS also commended IFAs on the quality of their files. There are things to improve but that can be said for any industry.

As soon as someone highlights that there is a murky side they go into "attack" mode and make out the person is speaking nonsense.

You are talking nonsense. The role you describe is not what an IFA does. So, expecting them to do it and also get paid for doing it is nonsense.

There is something fundamentally wrong where an IFA can earn his cut after the client has lost money.

Why? The IFA is not responsible for the loss and will need to do work to adjust the portfolio to rebalance, tweak and use tax wrappers whether it goes up or down. That is the work the IFA is being paid for.

If I've had bad experiences with IFAs then the probability is others will so that's why I give advice - from experience and not ill informed!

You are ill informed. You are not matching the role to the job.

gadgetmind

Most IFAs know very little about the maths and stats behind asset allocation because, 1) their qualifications don't cover this, 2) they rarely have the degrees (or even A-levels!) to allow them to understand even the basics, 3) that's something they usually outsource.

However, they do understand the fundamentals of investing, pensions, taxation, IHT, and much more, which is of value. Just don't think of them as investing wizards, as they aren't and don't claim to be.

bowlhead99

bigadaj wrote: »

I think cgzz has put his point very clumsily but I think it's important for people to acknowledge what an ifa can and cannot do.

He can't guarantee returns but could he really save the client from a period of underperformance? That in itself would be outwith his remit, as this is simply to ascertain the risk profile of that client and allocate assets to meet that and determine a probabilistic outcome of whether the client can achieve the detailed objectives he expresses.

If he does his job and matches asset allocation to goals and risk capacity and risk tolerance etc etc, he may well save the client from unreasonable underperformance. That doesn't mean making a profit every year it just means getting a return that's reasonable in the circumstances given the aims of the portfolio.

If he achieves that, job done, and the £3000 paid once at the beginning of a 15 year investment period has been well spent if client's own haphazard portfolio construction would have otherwise cost him a cumulative £5000 lower performance by year five.

In fact, arguably if the IFA's return is identical to what was achieved haphazardly over five years but was achieved with lower volatility or a lower overall level of risk, then the returns might be considered "better" even the numbers happen to be the exact same, this time around. The person buying an off the shelf fund which happens to work out to give the same as the tailored portfolio this time around, may not be so lucky next time.

Of course the IFA sceptic will say "haha these jokers are now saying it's worth paying money out even the return isn't better than I got myself, this is all a con job"; but the more astute readers will see what I was getting at.

The levels of fees charged by the ifa would surely mean that a limited section of the population would either benefit or be able to afford any advice. Anything much less than six figures woudknt appear to be worth bothering with, and as this would typically translate as a minimum £3000 upfront and £1000 a year to manage that would incentivise people to learn a little about investment with the benefit that an individuals potential for underperformance is balanced by the savings in fees.

I have no problem with people using IFAs it's just that as an individual you have to value your time at a level that equates to the fees noted above, or have come into a large amount of money and need support with such a life changing sum. There is often an indication that IFAs have knowledge that allows them to outperform DIY individuals which isn't transparent or honest in my opinion.

I agree with that, although the last part about IFA skills and training being disingenuously portrayed as out of reach of the lay man would perhaps be debatable, because

a) the IFAs generally would probably agree that many could do it, even if they don't think you would perhaps do it as well as them if you haven't had lots of experience; same in most professions from hairdressing to plumbing to accounting or legal work I expect...

b) actually many people don't have a great aptitude for this stuff. I like maths and finance but don't try and paint my own artwork. An artist or musician would kick me into the dirt at any of that creative or delicate stuff which is why I buy my music and art and hire musicians to pay at family weddings rather than DIY. A musician might think vice versa about financial advice. There will be people in the middle ground and some of them will find it easier than others.

On paper a huge portion of the population could save money by changing their own oil in their cars each year, and could learn the skills swiftly online. That many of them don't, points to the fact that with busy lifestyles there's not a lot of value in it - you can get a pro to do it for not much more than the cost of the oil, without getting dirty or having to find a spare piece of convenient land and half an hour, or having to watch a YouTube how-to.

With investment planning it's a little different. Still some people get a pro because they're lazy and others because they can't be bothered learning or don't think they would be any good at it, but there is perhaps a higher bar to reach for the knowledge base (including tax, access to markets, asset allocation theory and mathematical concepts such as statistics and other financial gubbins) and there seems to be more at stake if you get it wrong.

So, as you say, there's a perception that this stuff is hard if you're not a professional and you might not do so well. And there's a certain truth to that perception but it's challengeable. A couple of ways to look at it are:

1) An IFA has to understand a lot of concepts and have awareness of a lot of products, and skills and time to do (or cash to outsource) the due diligence on these products competently.They also need to able to create solutions to a wide set of problems from a wide potential base.

But you as an individual do not need to learn the solutions to all the problems in the world and spend money on an office and professional indemnity insurance and learn how to meet your compliance obligations for every idea you have. As Mr or Mrs DIY, you just need to focus on a certain set of problems that are actually relevant to your situation and future situations and fully understand what is offered by fund managers (or direct investment opportunities) by way of solutions.

2) The cost of an IFA might indeed be £3k or so in year one as bigadaj says. To some this is a lot of money or time that you could spend learning to DIY. When you are looking at doing this you get diminishing returns.

The potential losses from rookie mistakes, or the gap between your return and the IFA's return for the risk or volatility accepted, might drop significantly after you've spent 50-100 hours reading and learning. It will continue to drop as you pick up experience and get your head around more concepts and opportunities to make returns or reduce costs and tax.

But you won't reduce the gap, if there still is a gap, by anywhere near as much when your hours of immersing yourself in the subject and reading and learning, tick up from 1500 to 1550, compared to when you ticked them up from 10 to 60. At some point, which could be way earlier than £3000 if you only value your time a pound an hour or a tenner an hour, you will find a place that is "good enough".

For many, this doesn't require a lifetime of training or a thousand man hours of research. I would contend that for some, they are not smart or patient enough, or their time is simply too valuable, that they would spend as long as they are willing and they would still not get that last percent of annual return through thick and thin that the IFA claims is out there, so they might as well give up on it or pay the IFA to try to get it for them. In the case where they relent and see an IFA, they would have have been better off just doing that on day one and saved the grief.

None of this is a recommendation that you should see an IFA at all, or stick with the first one you find as a great fix for your lifetime planning and beyond. But also none of it is a recommendation that you should save your cash from their clutches and stubbornly struggle on alone.

The industry has already tried the "halfway house" approach of giving you a third option: instead of paying high fees to an IFA, why not have your friendly local bank offer you a simple non whole-of-market investment solution that didn't require you to explicitly write them a cheque for huge fees up front and they wouldn't bamboozle you with 10000 investment fund choices. You could freely pick a bank and just drop in for a chat while you were in paying your gas bill.

The problem was, it was balls. It was just as expensive due to fees taken from the product, without the quality or impartiality of advice.

So now everything is clear and explicit. We can see that professional advice costs real money. And it seems quite a lot of money when by quirk of history, 80% of the funds on any DIY investment platform are up over 3-5 years; most of them show graphs, automatically cutting off at 5 years, which show that pretty much whatever you choose will make money, just some sectors seem to have been luckier than others.

I'd expect this makes some people avoid IFAs due to a false sense of security. But others are tempted to IFAs as they know it can't last and they have a sufficient pot from the last bull market to be able to afford one now. Personally I'm still not using one as I feel I can DIY, like many here. We are perhaps skewed from mainstream society as it's an investing forum after all.

But I wouldn't hesitate to recommend the idea of buying professional advice to my family, at least the ones where they have enough of a pot for each percent to be worth something, and where they are simply not as interested in this stuff as I am.

nrsql

If IFAs were renumerated depending on profit then they would tend to deliver portfolios with higher risk.
In good years they would earn from most of the portfolios. In bad some would probably still increase in value and give them earnings.
They would try to make sure their clients portfolios were as different as possible to make sure they didn't all tank at the same time.
Presumably they wouldn't get negative earnings from portfolios that fell in value so no incentive to reduce losses.

I wouldn't want to be a part of that.
But this isn't helping the OP and should probably be another thread.

robatwork

I wonder if any IFAs on here - or others - have any factual information on studies on investment. For example take a portfolio of £100,000 for person A, and let it be invested with the same goal by:

IFA
DIY with no experience
Sophisticated DIY
Monkey with a keyboard (ie. random allocation)

Results of a study like this might help the OP understand where the value of an IFA actually lies. Or how he should spend his time becoming a sophisticated DIYer.

bigadaj

The original diatribe against using IFAs is unjustifiable but I just wanted to provide some balance against the responses, which seemed to just skew things too far the other way.

I'm not quoting bowlheads posts as, in common with many of his comments, it's is very interesting but brevity is not a strength and it's just too much text to copy.

My point is that whilst I accept the point that we all have different strengths and in common with many on here I have a scientific or mathematical background so find these things relatively easy, whereas more practical things don't come easily to me, and certainly nothing artistic or requiring patience.

My points are really two fold. At the risk of repetition then the cost of an ifa just seems too high in relation to typical contributions made by inexperienced investors. They could, of course, save the individual from a complete balls up, but that rather smacks of the insurance argument which was behind ppi and product insurance, and individuals need to make an assessment of the applicability of the product they are buying and how useful it is to their particular circumstances.

Let's face it, it's not that long since IFAs were taking commission on products instead of or possibly in addition to fees, and this wasn't made evident to the customer in most instances, it was buried deep in large volumes of paperwork.

My main point though is that the general tenets of investment are fairly simple, there are a limited number of fixed rules and beyond that it's personal opinion as much as anything technical or requiring detailed research. For a younger investor putting moderate sums into pensions or an isa, say ten grand a year which is well above what the vast majority if the population will be saving or investing, then a long term target would be served by a heavy equity allocation through a global tracker and some small satellite funds. Achieving this through a spread of risk by sector and geographically, using vanguard or blackrock funds for example for the core funds, and an acknowledgement that the ride will be an upward trending roller coaster which needs to be ridden rather than lead to panic selling will be appropriate for most. It would then just be a case of checking providers and their costs and rebalancing, though the latter would be taken care of largely by the lifestrategy or consensus funds that are selected as the core holdings.

I find it very interesting to discuss issues here and welcome the input from IFAs but their costs are too high for me to consider using them, with the possible exception of specialist one off transactions like annuity purchase.