Investing in Funds

bowlhead99

funkey_monkey wrote: »

I have two IFA offerings:

1. 1.8% initial fee. 1.6% TER.
2. 3% initial fee. 1.2% TER.

All these include annual reviews, rebalancing etc.

Just in case it's not obvious, the second of these is the better deal, all things being equal, because the lower ongoing costs will way offset the fact that the first one gives you a larger starting pot to invest. Over 15 years with a conservative nominal growth rate of say 4-6%, maybe £10-12k difference in return. Of course, there is no guarantee that the two advisors would adopt the exact same strategy after assessing your needs.

I've been looking into the self invested passive option with more vigour at the minute.
It would seem that if I opted to plonk the money (£130k) into a passive fund with someone like iWeb and just sat back, the saving on the TER and initial fee would keep it ahead of an actively managed fund.

If the gross return is exactly the same and the fees much lower then yes, the net performance return would be better.

Of course, if you already know you want to get the exact result from following a tracker up and down for fifteen years and you don't have any particular goals to aim for, then you can throw the IFA quotes in the bin and just do that.

Generally speaking if you are savvy about the tax bits and pieces like utilising annual isa allowances, dividend /CGT calcs and pension wrappers and all that good stuff, then the reason to consult the IFA would be (as mentioned by the IFA up thread) the act of achieving a return that suits what you are looking for. Basically, a portfolio that's suitable for you in terms of things like periodic volatility, levels of natural income. overall range of potential risk and return, complexity etc.

If you really just want the result from a few hastily combined trackers and have no real needs to speak of and so don't mind what you get -then don't pay for bells and whistles, just jump onto the rollercoaster and see where it goes.

Most people don't want to do that, because they can't stand the extreme rises and falls of a highish risk portfolio - but don't know how to practically avoid it by creating a risk-targeted set of holdings (other than "buy some bonds to go with the equities") because they don't have the research and experience on hand. So those people might use an IFA to build them something, rather than "winging it" themselves or buying something off the shelf.

Is this understanding correct? I'm currently looking at the Vanguard LS80 fund. It is wise looking at this as I think it has a significant UK bias to the constituent funds.

Vanguard sell it with a UK bias (25% of the equities being UK listed and a substantial amount of the bonds being UK or GBP) because that fits their perception of demand from their UK investors, who live their lives in the UK and in pounds. You can assume that the people who buy it are ok with that bias, and they have £ billions invested with that strategy.

So, why would you be different from other UK customers in not wanting the bias? I guess if you want less UK bias you can rip up the allocation and buy your own overseas funds alongside to push the overseas component over their standard 75% of equities. But then you are back into the question of whether you know how to build a suitable portfolio or not, compared to a fund manager or IFA.

Or would a well managed active portfolio beat it over the long term (~15 yrs).

You can't say.

Quite possibly not, if the portfolio constructed by the IFA ended up being some notches lower on the risk path than the tracker or multi-asset fund as a result if your ongoing dialogue with the IFA. Of course, for some people that would be a better result even if they do not happen to make as much money as they could have made by taking the bigger risks.

What you *can* say is that the return profile would be different along the way. You have ways to control that return:

-1- pick a portfolio of funds that your research says will do what you want; or

-2- pick one or two funds that invest across regions and asset classes that your research says will do what you want, and outsource the day to day asset selection to a manager or rigid strategy or roboadvisor; or

-3- pick an advisor and let his research and ongoing discussion shape your risk exposure and investment returns from either active or passive funds or both, so that you don't have the same level of responsibility for the research or admin.

On the face of it, 1 is cheapest and most work while 3 is most expensive. 2 is something like a lifestrategy or mixed asset fund at a range of prices. At the same time 1 is probably going to result in the greatest variation in potential returns from perhaps having it right by fluke or perhaps having it very wrong.

3 obviously still depends on having the market be "lucky", to get the highest return.- and you shouldn't assume you'll catch any luck - but you would assume the chance of getting it very wrong is low if you use a regulated professional.

So then it comes down to how much fee will you be willing to pay to avoid the chance of getting it very wrong. If your assets are low relative to the potential high fees, or you don't feel it's a decision you're likely to get wrong by DIYing, you might not want to go the advice route.

Fwiw, a 1.2% ongoing all in TER on <£150k does not sound bad for tailored ongoing advice.

dunstonh

It would seem that if I opted to plonk the money (£130k) into a passive fund with someone like iWeb and just sat back, the saving on the TER and initial fee would keep it ahead of an actively managed fund.

The charges would be lower but there is no guarantee that it would be ahead in terms of investment returns.

Is this understanding correct? I'm currently looking at the Vanguard LS80 fund. It is wise looking at this as I think it has a significant UK bias to the constituent funds.

Our portfolios have outperformed VLS. I only mention that in relation to the first point in that you are focusing on cost. There are never any guarantees but charges are a secondary consideration behind investment selection.

Or would a well managed active portfolio beat it over the long term (~15 yrs).

May do. May not. That is a crystal ball job.

bigadaj

dunstonh wrote: »

Our portfolios have outperformed VLS. I only mention that in relation to the first point in that you are focusing on cost. There are never any guarantees but charges are a secondary consideration behind investment selection.

That's quite impressive, is that true for all defined risk levels?

Just checked on trustnet and vls80 is ranking 2nd, 3rd and 5th in its sector over 1,3 & 5 years.

bowlhead99

bigadaj wrote: »

That's quite impressive, is that true for all defined risk levels?

Just checked on trustnet and vls80 is ranking 2nd, 3rd and 5th in its sector over 1,3 & 5 years.

VLS 80's high ranking within its trustnet sector is a function of it sitting in the 'mixed asset 45-85% shares' sector. It has an unwavering commitment to be 80% equities at all time, which is right at the top of that scale in terms of the drivers of performance in an equities bull market.

With the benefit of hindsight we can see that we have been in a bull market for most of the last seven years in which equities was by far the best place to be (though the bonds the VLS80 held were also buoyed by the rising tide of QE that lifts all ships). It did not bother with other diversification sectors such as direct domestic commercial real estate which didn't perform so well; and it did not hold gold or other commodities which have been flat or fallen in GBP terms over the last 5 years. So, the asset mix to aim for that high performance rather than offer the average risk of a fund in that "40-85 shares" sector, has inevitably paid off during the market conditions we experienced.

While other actively managed or formula-allocated funds within that sector will have more had more moderate equity allocations, sub 80% for long periods of time, VLS80 did not. It is not risk targeted, merely aiming for the performance of 80% equities and 20% bonds regardless of stage of the economic cycle or the volatility of those markets.

75% of its equities are overseas, which is higher than a number of funds marketed to UK investors which would be in the same sector and which could be 50/50 or 60/40 or 40/60 rather than 25/75. VLS originally had a higher (30-40%) UK element at launch but reduced it some time ago. The greater exposure to foreign currency which VLS offered compared to many funds in its sector over the last six month will again be a driver of performance in that trustnet sector as non GBP assets rose 15-20% vs GBP ones when retranslated.

Also, the equity allocations are market cap weighted. There is no tilt towards income generating /dividend paying shares (which might perform better in a downturn, if we'd had a downturn instead of a raging bull market), nor any attempt to aim for low volatility - which some other mixed asset funds in its generic 40-85% equities sector might have chosen to have.

So, you can easily see why it did better than the average mixed asset fund in its broad "% equities range" grouping, being right near the top in the market conditions we got. Conversely, you can also imagine it literally being the worst in its sector over 1,3,5 years rather than being in the top five, if we'd had a 5 years bear market instead of 5-year bull market.

However, if INSTEAD of comparing it to the other 'mixed asset' funds which fit in that trustnet category (and which would generally have more moderate investment risks and a consequentially lower performance in the five year positive market that we had)... how about you compare it to a bespoke portfolio of specialist funds targeted for the same level of risk over the time period?

In such a scenario its 'advantage' that it enjoyed of sitting through a bull market while being the highest-risk, highest-reward-if-it-pays-off fund in its trustnet 'peer group', goes right out the window. That way, it's straight in at the middle of its comparators, not at the top end. Then you are comparing the performance of the VLS fund to the aggregate performance of the constituent parts of an IFA portfolio, which can perhaps contain a combination of passive and active components.

As a generally high level of investment risk is being employed, you might expect the IFA portfolio to include some higher risk components such as smaller companies, which can often perform better than the large ones that VLS focuses on. Perhaps the exposure to emerging markets is taken through an actively managed fund using locally sourced research rather than using a dumb tracker which is less suited to undeveloped imperfect markets. Maybe the UK equities allocation used by the IFA shunned the 'overexposure to oil and miners and big pharma' which was endemic in a FTSE tracker and went for a more equal allocation across industries, so was not hammered by the oil price crash and the bottom falling out of the commodities market.

So, I can well believe that VLS80 would be beaten by a similar-risk 'equivalent' portfolio constructed by an IFA firm; the fact that it "topped its sector" on trustnet is perhaps a red herring.

This is not to say that an IFA would be expected to beat a VLS80 but you could certainly imagine it happening despite the additional layer of fees.

bigadaj

I didn't say it was impossible just impressive if true and interested to see how an individual ifa contructed portfolio produced by a small firm could outperform funds produced by multi national investment banks or extremely talented specialised boutique companies. These companies are also obviously aware of the class definitions by the ima, trustnet, morning star etc and you would expect them to allocate suitably to outperform a fettered fund of funds with very strict asset allocation criteria. Different results are certainly possible over different timescales and Spectra of the economic cycle but the ten year performance data will be interesting to review when available.

There's obviously the trade off between risk and return even within a fairly well defined attitude to risk for an individual investor.

The ifa portfolio will also obviously only be able to compete at a defined level of investable assets as there will be costs on setting up and administering the investments.

bowlhead99

bigadaj wrote: »

I didn't say it was impossible just impressive if true and interested to see how an individual ifa contructed portfolio produced by a small firm could outperform funds produced by multi national investment banks

It is not really one man in his antiquated toolshed versus a big bank with their massive factory. The man in his shed will buy in the research and actuarial allocations from an IFA network research provider or whatever, getting access to data of similar quality.

In this case the fund produced by the 'big bank' is using static allocations rather than risk targeting on an ongoing basis anyway. It has a cost advantage by keeping things simple and just delivering the result of x equity and y bond and not claiming to do anything else. As with anything in the active vs passive debate, some will look to get a different performance by incurring fees to do so. They may or may not succeed over the long term. But it doesn't seem unrealistic to have found that in a given short timespan (VLS has only been going 5 years), the VLS was not as good as the 'IFA selected' portfolio of the same risk. The point is to look at the net results after fees rather than just the low fees.

or extremely talented specialised boutique companies.

I'm not sure you're looking at it the right way, as an IFA is not trying to compare his portfolio with a fund produced by an 'extremely talented specialised boutique company'. He might use the fund(s) produced by the boutique, within the overall portfolio that meets the needs of the particular individual who has come to him seeking tailored advice for their situation?

But the question was on the back of the IFA comment that low fees aren't everything. The 'extremely talented specialised boutique' is not going to be low fee, right?

These companies are also obviously aware of the class definitions by the ima, trustnet, morning star etc and you would expect them to allocate suitably to outperform a fettered fund of funds with very strict asset allocation criteria.

The 'class' definitions from trustnet / ima etc such as 'global bond', 'UK equity income', 'mixed asset 40-85% shares' are broad descriptions of what a fund that is a member of that particular class, actually does. They are not risk groupings. An IFA is not trying to build a portfolio that sits in any one of those sectors. He is trying to use funds from across all the ima categories to come up with something that offers suitable risk and return for the investor.

These class names are simply broad descriptions of what the fund does, and the fund manager will select whatever class they can qualify for that gives a favourable marketing impression. Vanguard puts its '80% equity' product in the 'mixed asset 40-85 shares' group, right at the top end.

It doesn't also ask to put its 40% equity fund into that group right at the bottom end, it selects another more conservative group for that fund, where it will appear in league tables alongside funds that may only have 20% equities and where the investors are risk averse and less likely to have a high 'global' component to their equities and may not use emerging markets and so on. If the markets are up, which they have been (especially with a massive positive currency effect on foreign holdings, which there has been), you would expect them to have been able to come top quartile in their conservatively allocated sector, which they have been.

So, you can find that the VLS funds are doing well for the ima category they have decided to be put in. But they are higher risk compared to most of their peers in the category they have decided to be put in. So in broadly positive markets you would expect them to be performing well in that peer group. It's not rocket science.

But: if you take a fund that is a high performer in a category where its peers are taking lower risks, and go and drop it into a different peer group which brought together investment solutions which expose investors to similar risks, you would not expect that fund to naturally rise to the top. All things being equal, they would be about the middle, right? The middle would contain some solutions with so-so gross returns and low fees, and some solutions with higher returns and higher fees.

So it's not at all unrealistic to find, for example, some higher risk IFA portfolios which are giving similar or better overall returns to higher risk VLS funds (especially if we were to ignore the cost of advice, which is charged separately and explicitly). Basically, VLS is going to be top end of its IMA sector category that it picked for itself, but that doesn't make it automatically top end of a more usefully constructed 'risk category' where all the options had similar risks.

The ifa portfolio will also obviously only be able to compete at a defined level of investable assets as there will be costs on setting up and administering the investments.

That is certainly true. Dunstonh has mentioned before that he has used VLS or similar funds with some of his clients. If I only have £1k to invest because I'm only at the start of a 30 year asset accumulation period, there is no point the IFA expending effort trying to find 10 funds of £50-200 each that 'suit my needs', and of course as a one off transaction it would not be worth engaging the IFA at all.

dunstonh

That's quite impressive, is that true for all defined risk levels?

Its not impressive. It is true for VLS40 and VLS60. Although short term recent performance may not be as good as the weightings VLS have suited it. Whereas over the last few years the weightings went slightly against it.

Just checked on trustnet and vls80 is ranking 2nd, 3rd and 5th in its sector over 1,3 & 5 years.

Cumulative is temporarily high on VLS due to its weightings having been suited for the recent short term period. L&G was outperforming them at the lower risk end too until Brexit referendum. Plus, it would be high in that sector because it has amongst the highest equity of the funds in that sector. It is one of the riskiest funds in that sector.

I didn't say it was impossible just impressive if true and interested to see how an individual ifa contructed portfolio produced by a small firm could outperform funds produced by multi national investment banks or extremely talented specialised boutique companies.

We don't build our own asset allocations. We buy that in. The company we use is on the biggest in the UK and supplies more IFAs than any other company. All we do is pick the funds to meet those allocations. A mixture of passive and managed. I just pulled the data on a portfolio and the 9 funds have 7 performing above acceptable and 2 at acceptable. Only one has a negative alpha and that is, ironically, a Vanguard fund. I havent run it through the software yet but its likely that fund will see its allocation reduced based on the latest allocations. I say likely as I havent checked for CGT yet. 6 of the funds are above the target volatility. One only just. However, they are offset but the others to keep the overall volatility in check with the target.

I heavily use VLS and L&G MI funds for small investors. They are perfect for your £10k- £99k size investments. I actually have a Vanguard representative because we place so much with Vanguard. Only their larger accounts get that. However, for 100k plus, the bespoke portfolio option is viable for both adviser and client. The more fluid asset allocations and ability to use managed and passive and switch funds in and out depending on research/opinion can give advantages over a fixed asset allocation with a more limited set of underlying funds.

funkey_monkey

Hi guys,

Thanks for all your input - it has been interesting reading. I'm guessing that you'd be expecting the TER to be in or around 1.5% for a £130k investment. Correct?

Is the reason to opt for a mixture of passive and active funds partly in order to reduce the TER which is higher on the active funds?

I've got most of the money in Cash ISA's. My understanding is that this money will incur a fee for setting up into a fund. Is there a way I can push it into something temporarily myself in order to circumvent the 2% - 3% initial fee?
I believe that the portion I have in a S&S ISA does not require the fee as it is already inside the target.

I've also got a pension to set up as well as I am now self employed.

Fee's seem to be negotiable - some of the other advisers I've met have reduced from 4% down to lower values without me requesting so. However, they had TER's > 2% so I discounted them after playing about in Excel - yes the TER has more of an adverse effect than the initial fee.

The second guy said he would cover the pension setup for 'free' within the 3% fee. My understanding with pensions is that I should be opting (39yo single, no dependencies, no property) for passive funds wrapped up in SIPPs? The cost of these would be in the region of TER = 0.35%.

Do I need to concern myself at this stage with AVC's etc or should I just concentrate on getting things setup and running first?

Once again, many thanks for posts - it has been interesting reading.


Thanks.

bowlhead99

funkey_monkey wrote: »

Hi guys,

Thanks for all your input - it has been interesting reading. I'm guessing that you'd be expecting the TER to be in or around 1.5% for a £130k investment. Correct?

Each advisor would have their own price point but if you said 0.5% for ongoing review and servicing from IFA, then 0.3% for access to the platform and 0.7% for management fee on the funds themselves then 1.5% could be the ballpark. On larger pots or if a lot of the investment is in passive funds with lower management fees then you might expect a lower total percentage.

Is the reason to opt for a mixture of passive and active funds partly in order to reduce the TER which is higher on the active funds?

Passive funds do have lower fees and so might be more useful for some parts of the portfolio where you just want to get cheap and easy exposure to a type of asset. Active funds can provide returns that don't just rollercoaster up and down with the market and might be more suitable in other parts of the portfolio. So some IFSs will use a blend of passive and active depending what they and their client are looking for.

I've got most of the money in Cash ISA's. My understanding is that this money will incur a fee for setting up into a fund. Is there a way I can push it into something temporarily myself in order to circumvent the 2% - 3% initial fee?

The initial fee is being charged because it takes some work to meet with the client and create a suitable plan and implement it. I would assume that if you want those assets to be considered as part of the plan you will have to tell the advisor they exist.

It might be more useful to convert the 2-3% into an amount of pounds for the initial review and implementation. It has been quoted as a percentage because people often think in percentages when considering investment costs and returns. But really it's £x. If half the money is currently sitting in something other than a cash ISA, but is still going to be invested, it doesn't halve the work in planning the portfolio or the liability for dispensing the advice, so you don't save half the £x.

I believe that the portion I have in a S&S ISA does not require the fee as it is already inside the target.

If the IFA is not doing anything with it at all, I can't see why he would charge a fee based on its value.

But I refer you to the comment above. The price for setting up a £130k portfolio is £x which you can think of as 2-3% of £130k. If the portfolio is slightly lower, the £x might be slightly lower or it might not be because the IFA will still spend a similar amount of time on the plan, not 30% less hours.

So, you might find that the £x is pretty much the same, but is slightly nearer to 3% of the (say) £100k rather than being slightly nearer to 2% of the £130k. It is still "ballpark 2-3%" ! The IFA would take you through his fee structure before you sign anything and you don't have to sign if you don't like it and have other options that you prefer. You are right fees are negotiable and a more accurate quote would be available after further discussion on scope.

The second guy said he would cover the pension setup for 'free' within the 3% fee. My understanding with pensions is that I should be opting (39yo single, no dependencies, no property) for passive funds wrapped up in SIPPs? The cost of these would be in the region of TER = 0.35%.

Yes the IFA can probably do the work to open a pension account within whatever £x thousand of initial fee you pay him.

He is probably assuming there will be some servicing work for him there from time to time. If you already know what you want, you could go off and do it yourself.

However it is unlikely that on a small amount you will get it for 0.35% all in including the sipp wrapper, any platform fee, and advice, especially as the advice on the rest of the portfolio is at 0.5% or more plus the cost of the actual investments (leading to the 1.5% you were talking about earlier). On that basis 0.35% is optimistic. But if the amounts are tiny, and the returns not too important in the grand scheme of things, you could just go off and do whatever you like for as cheap as possible.

Do I need to concern myself at this stage with AVC's etc or should I just concentrate on getting things setup and running first?

Terminology here. AVCs are additional voluntary contributions paid in alongside the required ongoing amount for a defined benefit pension (the non voluntary bit being that which is demanded by the employer). In your case you are self employed so there is no defined benefit and everything is voluntary. You can invest whatever you like when you like subject to the HMRC limits.

Speak to your IFA about the amount you can afford to invest on an ongoing basis and what sort of split between pension and non-pension investments might be appropriate for your needs.

dunstonh

Thanks for all your input - it has been interesting reading. I'm guessing that you'd be expecting the TER to be in or around 1.5% for a £130k investment. Correct?

Depends. If the instruction from the client is to only use passives, then you would be lower. If it was to only use managed it would be higher or with no instruction, we use both. Tend to come in around 1.2x% (inc adviser, fund and platform).

Is the reason to opt for a mixture of passive and active funds partly in order to reduce the TER which is higher on the active funds?

No. In some areas, passives make sense. In some areas managed do.

Is there a way I can push it into something temporarily myself in order to circumvent the 2% - 3% initial fee?

Not if you intend to use the same adviser afterwards. The only way to avoid advice fees is to not use an adviser. If you want to reduce the advice fees than use a different adviser or ask for a reduction.

Fee's seem to be negotiable - some of the other advisers I've met have reduced from 4% down to lower values without me requesting so. However, they had TER's > 2% so I discounted them after playing about in Excel - yes the TER has more of an adverse effect than the initial fee.

The nature of the fee reporting is that you have to publish your charge upon request. You could have someone that results in the same outcome that has a little work and another that has lots of work. Yet the fee rules dont really allow for that (unless you go hourly - which is the least favoured by consumers). So, you have to put your maximum charge in your documentation as you cant go above it but you can go below it. Hence, why advisers will often want to find out the work first before they price. Otherwise you just get the maximum quoted.

Do I need to concern myself at this stage with AVC's etc or should I just concentrate on getting things setup and running first?

I doubt the adviser would make any charge on an in-house AVC. Im not sure of any AVCs that support adviser charging for starters. Unless you wanted to full report and research document trail for a formal recommendation, I would expect most IFAs to give it as a freebie to a client who is on an ongoing arrangement.

As you are self employed, it is unlikely you have access to an AVC.