IFA fee structures (new thread)

Aegis

harlequin95 wrote: »

I'm looking to engage an IFA for the first time in many years; I've read the "IFA Quote" thread - I've always felt it strange that the market (us punters) appears to be happy to pay a fixed % pa. Consider:

1) Does an asset pool of , say, £2M, need 8 times as much servicing as a £250k pool?

No, but if it's structured properly it will involve far more administrative work each year to ensure that tax efficiency is maximised. £250k is relatively simple to manage with maximum tax efficiency, £2m is a lot harder.

2) At 0.75% pa (not untypical) the larger client above will pay £15,000 pa. This is a huge sum.

Agreed. I don't charge 0.75% except on portfolios below £120,000, and that's only because there's a fixed fee element to my service for me to provide enough of my time a year for an annual review. I'm always somewhat saddened when i see a prospect client who's coming to me with an existing portfolio where the adviser is taking 0.75% or higher and is then outsourcing the investment management as well - the fees are eye-watering in such cases.

I can usually save those clients a lot of money, but thankfully it's rare that I see such cases.

4) I've heard that some IFAs may cap fees, or use a sliding scale with % reducing as pot grows, though I've never been offered that. That would seem fairer, although it could reduce the incentive to seek growth - undesirable.

There shouldn't be any incentive not to seek growth. Such scales should (if designed well) mean that any increase in value will result in an increased fee, just not at the same rate as the average to that point. I do this by using a fixed review fee and a percentage based annual investment monitoring fee far lower than the 0.75% mentioned above.

5) So the big question. Do any IFAs offer a fee structure which seriously rewards good performance? Of course I'm not expecting them to share in any losses (though that would be a really good incentive!), but paying, say 0.25% of the value + , say, 20% of the annual gain would seem a win-win situation to me. (I'd probably be happy to go rather higher than that 20% figure, it's a starting point for discussion)

It would be a conflict of interest to share your gain with the adviser, as he/she would be seriously tempted to take extra risk to generate greater fee income. Far better to agree with the adviser that the investment should be managed according to a given level of risk and monitored for performance against a suitable benchmark.

Freecall

dunstonh wrote: »

Most firms (nowadays, not historically) will do a tapering to ensure those with larger amounts dont get too much.

We certainly can't have those with larger amounts getting too much can we.

I guess they shouldn't pay too much either.

mania112

harlequin95 wrote: »

1) Does an asset pool of , say, £2M, need 8 times as much servicing as a £250k pool?

2) At 0.75% pa (not untypical) the larger client above will pay £15,000 pa. This is a huge sum.

5) but paying, say 0.25% of the value + , say, 20% of the annual gain would seem a win-win situation to me. (I'd probably be happy to go rather higher than that 20% figure, it's a starting point for discussion)

Ok, so I manage a £2m investment and it returns 12% in a year. 20% of this profit is £48,000.

So yes, I would accept those terms. Thank you.

Perhaps looking at these figures you'll understand that an IFA fee can be insignificant if you want to compare it to the performance of the fund.

Nonetheless, employing an IFA isn't cheap, but this is more to do with the costs of being an IFA rather than the greed you think they may suffer with.

The FCA has mixed opinions on the matter. What's happening is that it's being realised that smaller pots are being hit hardest when an adviser uses a pure fee-based approach.

Let's take a pension transfer case: Traditional fees would be, let's say, 3%. On a £30,000 pension that's £900.

Modern charging would surely be £1,500 for a pension transfer as a minimum.

Turns out to be a lot more than 3%.

So my view is that percentage based works fine, but let's employ a maximum charge and/or a sliding scale for large pots.

SallyG

IFAs "are not there to guarantee (or even offer) fund performance" but would an IFA advising people on investing for drawdown recommend funds to invest in?

dunstonh

SallyG wrote: »

IFAs "are not there to guarantee (or even offer) fund performance" but would an IFA advising people on investing for drawdown recommend funds to invest in?

Yes, the IFA would advise on the investment funds. The adviser has to carry out due diligence on those funds and make sure they are structured in a suitable portfolio that is built to match risk profile, understanding of the investor and capacity for loss. They would advise on the drawdown suitability and provider.