Evaluating an Initial IFA Meeting

grey_gym_sock

from a fairly cautious investment strategy, you might expect to make an average real (i.e. in addition to keeping up with inflaiton) return of, what, 3%, perhaps?

so if you pay 2.2% in charges, that leaves you 0.8% to live on - any more, and you're gradually spending your capital (which may be reasonable if you're old enough, and you're spending it slowly enough).

however, for ppl who really don't don't want to run their own investments, it's much better to pay an IFA 0.5% on-going than to leave most of your money in cash. but you can still get total costs down to about 1% by ditching the discretionary management, and using mostly trackers instead of actively managed funds. IMHO, that approach, plus negotiating on the initial fees, would be the obvious way to reduce costs in this case.

the value of an IFA is mainly in giving you a sensible asset allocation (plus a bit on using tax shelters sensibly).

grey_gym_sock

Aegis wrote: »

I like passive portfolios as accumulation strategies because they're easy to understand and the extra volatility makes for good pound-cost averaging opportunity, but I'd generally prefer to put clients into something with a little more active stock selection for drawdown in the hope of reducing the volatility.

well, don't you reduce volatility by holding more bonds? and perhaps holding equity income for some of the equities? or just more UK equities, since that is higher yield, and less exchange rate volatility.

you could argue that equity income is better done actively.

Aegis

from a fairly cautious investment strategy, you might expect to make an average real (i.e. in addition to keeping up with inflaiton) return of, what, 3%, perhaps?

I tend to estimate 2.5% real return, the difference is that I tend to estimate that as a net figure rather than a gross because of the decreasing impact of fees mentioned above. The reason for this is that, as I mentioned above, studies seem to show that average active management broadly breaks even compared with passive management, therefore the added cost should not, on average, factor into the return predictions as simply as indicated below:

so if you pay 2.2% in charges, that leaves you 0.8% to live on - any more, and you're gradually spending your capital (which may be reasonable if you're old enough, and you're spending it slowly enough).

For full balance, this calculation should likely include some sort of efficiency factor, i.e. how well a given manager recovers his own costs on average compared to the passive funds in his index. This might well be modelled on the Information Ratio, as an example, but these aren't always readily available.

Hence I find that this is fairly unreliable as a calculation. I tend to instead tell those clients of mine in retirement (who usually seem to average somewhere between Low to Medium and Medium risk) that 3% withdrawals increasing with inflation should be sustainable almost indefinitely while 4% is likely to deplete the portfolio over a period of around 25-30 years.

however, for ppl who really don't don't want to run their own investments, it's much better to pay an IFA 0.5% on-going than to leave most of your money in cash. but you can still get total costs down to about 1% by ditching the discretionary management, and using mostly trackers instead of actively managed funds. IMHO, that approach, plus negotiating on the initial fees, would be the obvious way to reduce costs in this case.

Possibly, but it would very much depend on the stage of life. Trackers are great for providing exposure to markets, but you won't get a guaranteed 1% extra return a year by going into a tracker fund at 1% less cost. Some measure of the general success of active management has to be factored in here - even if active funds are found to lag behind passive funds by 0.5% each year on average, for example, this would make the net extra return 0.5% rather than the full 1%. Otherwise the benefits of passive funds are being overstated by a considerable margin.

These figures were selected to be non-contentious rather than to reflect reality.

the value of an IFA is mainly in giving you a sensible asset allocation (plus a bit on using tax shelters sensibly).

Agreed, though I'd put far more emphasis on the tax shelters bit.

grey_gym_sock wrote: »

well, don't you reduce volatility by holding more bonds? and perhaps holding equity income for some of the equities? or just more UK equities, since that is higher yield, and less exchange rate volatility.

you could argue that equity income is better done actively.

Normally this would be a good option, but within the fixed interest space there's currently a gap that would normally be occupied by index linked and conventional gilts, which currently represent a significant risk due to their very low yields. As a consequence this means that you either have to hold considerably more other fixed income investments (many of which are also still overpriced on both long term records and compared to owning the equity of the company instead) or decide instead to hold a large proportion of low volatility equity assets and offset it with something else low risk.

Low risk is actually very difficult to achieve these days because by holding large proportions of traditionally low risk assets you run the risk of achieving worse than cash over the longer run. As such, my preference for those in drawdown is for some active management of the asset allocation at the very least, whether at fund level, adviser level or discretionary manager level.