Cost of IFA to invest £50k

Iffy_IFAs

dunstonh wrote: »

Although if you get it wrong it could end up costing you.

So IFAs don't get it wrong? Just because someone pays an IFA and gets a return on their investment doesn't mean the IFA got the best return for that person. A small return which could have been a much bigger return if the IFA had done something different costs the client as well.


IFAs don't publish hourly rates because the underlying question most people would ask themselves is "how could that have taken an IFA so long to do?". An IFA makes their money by "getting their hands on your money" (although not in the literal sense) so tread carefully and, if you can, build your own confidence in the DIY approach.

bowlhead99

Iffy_IFAs wrote: »

So IFAs don't get it wrong?

Hmm, nice new and impartial sounding username you've selected there, which I'm sure you didn't think up deliberately to bait/troll the resident IFAs, honest guv.

I don't think anyone suggested that an IFA could never get something wrong, because to err is human, even if there is training and checks and balances and quality control and compliance obligations to mitigate the risk of getting it wrong.

However, if an IFA gives duff advice, you have comeback and compensation via their regulator. If a non advised individual obtains duff advice via an internet forum or overstretches themselves in terms of risk by not fully understanding their options and opportunities, they don't.

Just because someone pays an IFA and gets a return on their investment doesn't mean the IFA got the best return for that person. A small return which could have been a much bigger return if the IFA had done something different costs the client as well.

That is the same whether the IFA or the individual chooses the investment. Either of them could get a small return when a larger return was theoretically available.

Often of course the larger return carries larger risk, and so even though as the individual investor you would have liked to have made 20% instead of 15%, you would probably not have liked to have lost 40%, and if the IFA knows what you are really looking for, he/she might not put you in the investment that had the chance of 20% because they know you don't want the downside 40%. They might have selected one with lower volatility to meet a long term goal with acceptable risk.

For most investors, maximising the upside without concern for the downside is not what they are really looking for. However, left to their own devices, newbies will often pick investments by looking purely at the 3-5 year charts on investment websites and not look in depth at the mix of underlying investments currently held by the fund manager and the mix of investments that were held for that same strategy during the dips in the 5 to 15 year timeframe. The average newbie investor is not an investment professional and does not have years of training and experience.

That is not to say that individuals cannot DIY, but it isn't quite so simple as read a book and save yourself 2% every year forever.

IFAs don't publish hourly rates because the underlying question most people would ask themselves is "how could that have taken an IFA so long to do?".

I work in professional services but am not an IFA.

Most people wouldn't know what my appropriate chargeout rate would be as it relates only partially to my salary (and other direct employment costs) and mostly to how much the business spends in rent, infrastructure, staff costs of non chargeable personnel, training, software, insurance (and self-insurance) etc, together with a suitable return to the owners of the business. Together with the fact that 100% of my hours can't practically be charged to a client because there are various admin and training and governance tasks that need to be accomplished over the day, week or year before I am in a position to carry out any direct work for a client, and after I have completed any work for a client.

You are right that someone would wonder how it could take me 6 hours to complete a project, when they are not a specialist in it. But at the end of the day there is subjectivity in the cost per hour anyway. If I take 6 hours to accomplish something, it has not actually taken me 6 hours to complete it. It has taken me 6 hours plus the 20 years of experience I needed to be able to start it.

It is difficult to explain to someone who doesn't run his own business why my firm might like to charge me out at 300-400 ph even though I might only take home a fraction of that. Or why it takes 6 hours to deliver a report without the client actually watching me for the 6 hours to see what it is that I am doing. Perhaps I am not actually feverishly typing up the report for the whole 6 hours, and instead have delegated some of the grunt work to a minion - so that I can swot up on my review skills to critically evaluate the report once someone else has written much of it, ahead of presenting a quality product to the client.

An IFA makes their money by "getting their hands on your money" (although not in the literal sense) so tread carefully and, if you can, build your own confidence in the DIY approach.

Absolutely. The more money you entrust to an IFA, the more risk they are taking in providing you advice and the more complex solutions they're likely to offer to you. So, they make money by helping to deploy your money in solutions ; or in some cases giving you transactional advice on how to deploy your own money in solutions.

Hundreds of thousands of people find their own solutions either because they are confident in knowing what they are doing (perhaps, overconfident) or they can't afford or don't want to pay for an advised solution. Some of them do very well. I have myself. However, obviously any muppet can make money over the last 5 years when stocks and bonds globally have been rising in value. Some people will lose their shirts selling out when the investments drop in value even though an IFA might have found them an investment that does not drop in value so severely or at least given them the priceless advice not to dump investments while the values are at the bottom.

dunstonh

So IFAs don't get it wrong?

If they do, then you get consumer protection to put it right. Something you dont get when you DIY.

Just because someone pays an IFA and gets a return on their investment doesn't mean the IFA got the best return for that person.

Correct. An IFA is not an investment fund manager. The IFA is there to recommend suitable investments. They are not mystic meg.

IFAs don't publish hourly rates because the underlying question most people would ask themselves is "how could that have taken an IFA so long to do?".

If the demand for hourly rates was there then they would be available.

An IFA makes their money by "getting their hands on your money" (although not in the literal sense) so tread carefully and, if you can, build your own confidence in the DIY approach.

An IFA makes their money by giving advice.

and, if you can, build your own confidence in the DIY approach.

And if you had been here longer (or are not just another poster trying to troll under a new username) you will know that the adviser posters here support DIY just as much as advice. As long as the person is capable of understanding what they are doing. Some of the posters here who DIY show very good knowledge. Other posters who DIY are completely off the mark. Often finding out after the event they messed up.

Iffy_IFAs

Really, is that they best you could do?

bowlhead99

Here's a long answer for a lazy Sunday evening...

If it were as clear cut as that, you would have a good point. Thing is though, it doesn't necessarily cost twice as much to advise on 400k than 200k and ultimately the bill should reflect that.

An element of the work will be the same, an element could be more costly (more complex solutions) and the liability is higher. So, that gives extra work and risk as you suggest, although probably the risk is the only think that rises directly in line with value of assets and it may not be 1:1. So overall with literally double the assets you would not necessarily expect double the charge.

But in reality you don't get the same exact percentage for all levels of assets. For example, someone with £200kish of assets might pay 0.5% p.a. for ongoing servicing, which is £1000ish. While someone with only £40-60k of assets might have simply been quoted 1% p.a. for his ongoing servicing which is £400-600. The smaller asset base might be fewer hours work and less on the IFA's insurance premiums, but the IFA can't knock down the absolute amount of pounds by three quarters because knocking a zero off the amounts invested does not change the cost of running an office.

So when you see fees quoted as percentages or basis points of assets it doesn't mean you literally pay that same percentage on everything from £10k to £1m.

Ultimately the IFA might look at the situation and ask how you want to be billed and then say 2% for a one-off charge on £100k investment, or 10 hours at £200ph for a £100k investment, or a flat fee of £2000 for your £100k investment. It is all the same amount of money. From experience he basically knows what he needs to get as revenue for a job of a certain size. If you had a different amount to invest, perhaps the hours or percentages or flat fee would be different.

However, one person's £100k investment might be invested in a more or less complex way depending on what other assets they have, wrappers available, inheritance and tax planning and level of understanding of the investor and the types of risk they want to take. Thus, the initial conversations to formulate a quote.

According to your linked Which article from earlier this year, the average charge for investing £60k was £1579 which scaled down to £50k would fall in the £1000-1500 range suggested by Dunstonh. It will obviously depend where you are in the country and whether the particular provider you picked really has the appetite to service a customer with £50k when he could be spending his time servicing customers with £400k - who are less fee sensitive in terms of price per hour (because they are looking to realistically grow their assets or not shrink their assets or save tax by larger absolute amounts of pounds).

Consumer group Which? sent researchers posing as potential clients with common money dilemmas to more than 200 advisers, and found it wasn't easy to find out charges without first sitting through free but lengthy face-to-face sessions.

I think that's quite good. You can't get a price for a tailored piece of consultancy without first sitting through a free session to properly understand your needs so that the solution being quoted for is appropriate. Then if you don't like the fees, you can walk away and try someone else; the IFA who spent the time with you will write it off at no cost to you, instead rolling the costs of running that business development exercise into the charges levied to people who do take up the service.

By doing it that way, there will be some 'lengthy conversations' that don't get charged to those who have them and turn into IFA running costs for them to recover elsewhere. Ergo, cross-subsidy is inevitable but it means the initial discussion is free at the point of having it. Nobody gets a bill for just trying to find out more about how the IFA can help, and the IFA doesn't have to quote a fixed fee for a piece of work without fully knowing exactly what his remit for that piece of work is going to be.

Which? researchers called 30 advisers posing as potential clients with £60,000 to invest and asked for an indication of how much advice was likely to cost.

More than half of advisers failed to do so, opting instead to 'swerve the question'...

Accusations of "swerving the question" is something that Daily Mail publications will always levy at politicians, celebs and business etc because that's what journalists are paid to do, it makes their copy read more exciting, confrontational and sensationalist to the readers. "This is SHOCKING, [person being interviewed] wouldn't give us a SIMPLE STRAIGHT ANSWER. Excuses excuses excuses".

However, the negative slant is quite unwarranted as you can see from the responses.

Excuses included:
'It's difficult for me to give you an exact figure.'
'To be honest with you I don’t really know until I look at what’s involved and what you’re trying to achieve.'
'If I start quoting figures over the phone they might be meaningless.'

Clearly, you can't conduct your diligent planning and quotation process over the phone for a tailored personal service, with someone who is not quite ready to engage with you and has only been told by their boss to "pretend you have money and find out how much investing it will cost, but don't have a whole load of personal details that you're willing to explain to the IFA because not all the other fake callers will remember the whole fabricated backstory. And we're only trying to get general answers not a proper solution that we pay for and evaluate"

That was covered reasonably well in the 'right to reply' from the IFAs who pointed out the regulator is the one that says they have to understand the work and quote a fair fee to the customer via key facts and they can't start work before they have engaged with the customer to understand what the proper remit of the work would be. I think that seems reasonable. It would not stop you, beancurd, being able to procure work on a per hour basis after a conversation about what work you wanted.

However, many people are uncomfortable with paying per hour. It implies there is an incentive for the supplier to be inefficient and spend his time playing Tetris or writing on MSE or using employees that take longer. So the customer typically wants a capped fee or some sort of flat fee. They do not really want 'per hour'. They want to cap the fee but don't necessarily want to cap the workload - they don't care how long it takes. By contrast the advisor wants to cap the workload but doesn't want to cap the hours because it could be difficult to judge those hours.

The inevitable solution is to agree what specific tasks will be performed or advice will be provided and what fee that will be, whether that is 2% on the £100k or simply £2000. That way, the '£200 times about 10 hours' method does not get mentioned because neither the customer nor the advisor actually wants it, when it comes down to it.

If, once the customer has his £2000 quote or his "2%" quote, if he suddenly remembers that he has twice as many assets to invest or half as many assets to invest, the fee might need to be adjusted from £2000 to something higher or 2% to something higher, accordingly, because the parameters have changed. As it is with lawyers or accountants or other kind of consultants. So generally I would assume with IFAs, one is always working to an agreed set of terms.

There is nothing in the Which / Daily Mail article to suggest you can't just rock up to an IFA and have a chat about what you'd like them to do and get a quote on whatever basis is suitable. An IFA that wants your type of business will give you a quote on the basis you want; of course it might not be the price you want. Also, as mentioned by one of the respondents, the quality of work you'd receive is not something you can easily quantify in a Which survey that just goes round suppliers asking for fictional quotes and writing them down with some soundbites. That is why a face to face is useful with any personal service.

For you as a prospective customer who wants to window shop, it is perhaps not an ideal solution, because you don't want three or four face to face teaser sessions. However, an online list of prices per hour does not really help you evaluate which provider is better and select one from afar, unless you know how readily you will get along with your advisor, how many of those hours from what grade of staff would be used on your individual case etc etc...

You mentioned you aren't judging how long something does or doesn't take, it might take that long etc. So you aren't really in a position to say how many hours of work you need. You might think 'well, I'm not an expert but ouch, 10 hours sounds a lot' or 'well, I'm not an expert but ouch, £200ph sounds a lot'. But in the same vein, you might think 'well, I'm not an expert but ouch, 2% of my £100k assets sounds a lot'. Ultimately if it sounds a lot and the adviser can't convince you otherwise, you won't pay it. Likewise if you want it cheaper and you can't convince the adviser, he won't service you.

So, the price ends up being whatever the market will bear. It is all quite bespoke based on what info an adviser can elicit from a prospective customer and what a particular adviser's core customer base is, which is why some of the Which respondents had a range of prices.

But perhaps what you are missing is that the percentage charge will change with the amounts of assets involved. If the ones that charge 4% on £40k do that all the way up to £millions, they will lose potential customers who expect to pay <£10k for initial investment of their million. If the ones charging 1% on £500k do that down to £20k, they will go out of business. So in reality if an adviser services a wide group of clients he'll have break points in the fees.

If the adviser doesn't have those break points, he is just relying on his marketing engine being slick enough to keep getting the £million investments at the high percentages or charging high flat fees to customers with smaller investments. If the marketing machine isn't slick enough, or if he isn't good enough to get repeat business and referrals, he won't still be in business with top end customers at those high percentages. So a percentage is not going to be fixed for all values of assets.

But as something to quote to investors as a fee basis, percentage (particularly on ongoing servicing fees) is easy for investors to put into context with their underlying performance percentages, management fee percentages, tax percentages etc that they are gaining or losing each year. It will always be popular even if other methods are available.

clarky_cat

bowlhead99 wrote: »

But perhaps what you are missing is that the percentage charge will change with the amounts of assets involved. If the ones that charge 4% on £40k do that all the way up to £millions, they will lose potential customers who expect to pay <£10k for initial investment of their million. If the ones charging 1% on £500k do that down to £20k, they will go out of business. So in reality if an adviser services a wide group of clients he'll have break points in the fees.
.

The first IFA I have spoken to has quoted a 3% charge for the £50k investment. Would this be considered a reasonable charge? Is that p.a.?

dunstonh

clarky_cat wrote: »

The first IFA I have spoken to has quoted a 3% charge for the £50k investment. Would this be considered a reasonable charge? Is that p.a.?

You should look at the fee in monetary terms. Indeed, it is a requirement that percentage charges are displayed with a monetary figure.

So, in this case, its £1500. Its at the upper end of the scale you would expect. Not rip off but you could do better. Although its difficult to put a price on a job when we dont know the complexity of your situation. We also dont know if the adviser firm is a prestige or city based firm or a more rural one (the former tend to be more expensive as those city locations etc cost more. In case of prestige, your value may not be in their target range and are not really that interested in taking you on unless you pay that higher figure)

bowlhead99

clarky_cat wrote: »

The first IFA I have spoken to has quoted a 3% charge for the £50k investment. Would this be considered a reasonable charge? Is that p.a.?

Whether it is p.a. or not - the adviser should be telling you that, not us.

But if it was p.a., it would be crazy expensive. I assume it isn't. It just sounds like the initial charge for doing an assessment and setting up a solution for you.

If you go back up to post #2, one of the resident IFAs here suggested something like £1000 to £1500 being about right. It will depend where in the country you are (big city advisers might have higher costs and richer clientele than others ) and other facts about your circumstances and what sort of solutions he's likely to find suitable for you. So £50,000 x 3% is £1500 which sounds like what the other IFA guessed at.

It's the sort of money that will not destroy your capital to pay it - it only does the same damage as a year or so's worth of inflation and you should make it back over the years by having a better planned portfolio than if you had done it yourself as a newbie. However, £1500 could be spent on all sorts of things so think twice before handing it over. Importantly, make sure you know what you're getting for your money.

While it might be a 3% one off fee to set things up, there is likely to be other things you would like doing on an ongoing basis such as rebalancing the portfolio as the values of your different holdings shift about, and perhaps selling some assets to move them into tax wrappers each year. That ongoing 'servicing' work is unlikely to be included in a one-off 3% fee because you might remain a customer for decades needing this annual servicing every year - 3% doesn't buy you lifetime servicing.

Edit - I see dunstonh beat me to it, and he's the expert on what his peers charge, not me. But I did see fees like that when doing some research for a family member some time ago.

clarky_cat

Would the £1500 be a one off?

I'm just looking for advise on investment funds. They are a city based company and were recommended by a friend who used them. I have had a 2nd recommendation of a non-city advisor so will see what they come back with.

clarky_cat

Just seen bowlhead99's response. No mention of p.a on the letter he's sent so it must be a one-off (but I will check). I will also ask about any ongoing charges before I decide whether to go with this particular advisor.

I don't think I know enough to go for DIY at this moment so pretty much decided on using one of the IFA's. I'm hoping the increased returns will cover their charges.

Thanks

hornmeister

sounds to me like a 3% initial charge for the analysis, advice and setting up the investment.
Typically you would then have an annual fund based charge of 0.25% - 1% for continued servicing, pay an annual fee or hourly rate.

To be fair if you want to invest £50K and then get a loan for 70K to buy a property, unless you think you may need the cash quickly further down the line is it not more prudent to reduce the loan to £20K? Can you guarantee a return on the investment at a higher rate than the loan repayment?

Just thinking aloud.