What's reasonable for an IFA?

usefulinfo

I am going through an IFA to invest around 100,000 in a diversified way. We haven't finalised details but he mentioned charging a percentage as a fee - between 1 and 3%. I have read around a bit on here but I wondered what would be considered reasonable? I know it probably depends on how much they do for me - it will mostly be putting the money into a range of ISAs, bonds and high earning accounts. I am new to this. Would 2% be fair on a 4% return?

Don't shoot me, just starting at the beginning.
Thanks

masonic

It sounds as though you want to restrict the investments to cash or cash-like, in which case, employing an IFA might not be very worthwhile. Perhaps you could elaborate further on your situation (tax bracket, investment horizon, attitude to risk)?

dunstonh

Would 2% be fair on a 4% return?

The return is irrelevant. You are paying for advice and work to be done. It should be the same irrespective of type to remove any potential for bias. 2% is not a problem.

Agree with masonic though that you wouldnt normally use an IFA to source savings accounts.

usefulinfo

Not really savings. I need to maximise income from investments but hang onto capital. I may have misled with my list of potential ideas there. He talked about 2% , and they don't charge an annual fixed fee. He made everything sound reasonable but I have nothing to compare it with. I took recommendations on local IFAs. I'm unlikely to be a taxpayer, maybe around a seven or eight for risk, don't mind locking most of it up for five years minimum.
Thanks for your input.

Your_Hero

Sounds fair, but it's all relative to the work that's being done and the advice required. But where did you get 4% return from? This is largely irrelevant to the fee quoted.

So what is their ongoing fee?

bowlhead99

usefulinfo wrote: »

he mentioned charging a percentage as a fee - between 1 and 3%.
Would 2% be fair on a 4% return?

usefulinfo wrote: »

He talked about 2% , and they don't charge an annual fixed fee.

As others mentioned, 2% (£2k) is not far off the mark on a one off setup tailored to your needs.

If he wasn't charging an annual fixed fee thereafter, you could probably get him to give you further one-off advice on servicing it every year or two for £500-1000, but on a simple portfolio that you understand, it would pretty much run itself and you might not really need that, you could DIY.

But it's worth mentioning that if the money is deployed into investment funds there will be annual fees to the investment managers who run the funds which hold the underlying investments. These would be taken out if the value of the fund each year. You should try to get a feel for what these are, because even if he is not charging an ongoing advice fee because you don't need ongoing personalised advice, the people managing the assets will still be charging fees and some funds are much more expensive than others.

Also as others mentioned, the percentage he should charge to set it up shouldn't vary whether your goal is just to make 1% p.a. very conservatively or 4% p.a. quite conservatively or shoot for 8-10% p.a. by going all out into equities at the top end of the risk scale. And, whether the 4% you mentioned means taking 4% income out of the investment while hoping to roughly preserve capital, or just growing the value of the capital by 4% p.a. while inflation erodes it by 1.5-2.5% p.a. None of that stuff about potential returns really affects the cost of him working out what is best for you.

However, as an aside, you are comparing apples and oranges if you say "2% on a 4% return" because you have said he doesn't have an ongoing fixed charge, so the 2% is just paid once, while the 4% is an annual return forever (e.g. compounded for 10 years it would be ~50%, for 20 years it would be ~120%)

usefulinfo wrote: »

I need to ... hang onto capital.
... maybe around a seven or eight for risk,
...don't mind locking most of it up for five years minimum.

Those statements seem a little inconsistent.

Assuming you're looking at risk on a layman's 1-10 scale and saying 10 is a very risky equity investment that might quadruple your money or lose all your money in a year, while zero is no investment risk (splitting the 100k into deposits with multiple banks with insurance against them going bust and receiving a 1.5% return before inflation)

- then if you say you are an 8 that is pretty high risk. You would not say you were an 8 if one of your goals was to hang on to capital and might need to cash out in five years.

Someone with a time horizon of 10-15+ years could probably be an '8' and still not lose their capital, they would just see a lot of swings in their value from one year to the next as it bobbled around but generally trended up in the long term, and would accept that anything could happen in five or six years if they were taking a 'medium to high' investment risk.

While if yours is only 'most' of the capital can be locked away, and the timescale for the stuff that gets locked away is a minimum 5 years, rather than a minimum 10 years, it's important to realise that a higher risk approach could lose a chunk of capital and if you could not afford to risk losing the capital, you would need to select lower risk, lower return options which are probably below 7-8 on a risk scale out of 10.

Of course, you might just mean minimum of 5 years as in, indefinitely, no need to get cash back out in forseeable future, in which case higher risk choices could be made than if you definitely needed it back in 5.5 years.

masonic

usefulinfo wrote: »

Not really savings. I need to maximise income from investments but hang onto capital.

<snip>

I'm unlikely to be a taxpayer, maybe around a seven or eight for risk, don't mind locking most of it up for five years minimum.

"Seven or eight" for risk is at odds with wanting to "hang onto capital", but assuming the former option is what you really want, then returns greater than 4% would normally be expected over the long term.

As a non-taxpayer, you could get 4-5% on up to 10% of your capital by utilising high interest current accounts. The money would be instant access. The remainder could be put in the best 5 year fixed rate savings account to obtain over 3%. That is the no risk option. You should be able to get returns significantly better than this by risking your capital - that's when the services of an IFA might add value. The fee you have been quoted doesn't seem unreasonable for a one-off piece of work, but do make sure you understand what you should expect to pay for ongoing maintenance of the portfolio.

IronWolf

£1k sounds about fair to me, £3k sounds extortionate!

1-3% is a big range even though it sounds small, I'd nail him down to a fixed fee.

bobesox

usefulinfo wrote: »

I am going through an IFA to invest around 100,000 in a diversified way. We haven't finalised details but he mentioned charging a percentage as a fee - between 1 and 3%. I have read around a bit on here but I wondered what would be considered reasonable? I know it probably depends on how much they do for me - it will mostly be putting the money into a range of ISAs, bonds and high earning accounts. I am new to this. Would 2% be fair on a 4% return?

Don't shoot me, just starting at the beginning.
Thanks

I too have a similar amount to invest once I retire and have received some advice from an IFA provided by my Company but am concerned when he quotes on a cautious approach to investment which I have that over the last 5 years this would have earned me over 13% as I don't think this sounds realistic. What are your thoughts, please?

dunstonh

bobesox wrote: »

I too have a similar amount to invest once I retire and have received some advice from an IFA provided by my Company but am concerned when he quotes on a cautious approach to investment which I have that over the last 5 years this would have earned me over 13% as I don't think this sounds realistic. What are your thoughts, please?

13% over 5 years does not sound right. Or is it an annual equivalent return of 13% which would be about right. However, you should not look at the last 5 years as that doesnt include any significant negative period. It is best to look at 10 years as that includes the credit crunch/global recession. What you have in 5 years is the recovery from a low point. Not the whole picture.

usefulinfo

Thanks everyone. If I sound contradictory or just plain wrong it's because I'm just starting out and it's taking time to absorb and learn. I didn't want to be paying a daft rate but I do need advice from an experienced person so everything here is helping and I think I've found a decent adviser locally. This is very useful advice so thanks for taking the time. I'll keep reading.