Paying Ongoing Advisor Charges

ianj1

I'm puzzling as to the most efficient way of paying the ongoing charges to my IFA. He charges 1% of my fund value. I have no problem with that. Until now there has been a small cash element in the overall fund which was used to pay the ongoing advisor charge, and which I would often top up with cash. They are no longer maintaining any cash element, and they would prefer to take the OAC out of the overall investment, at ~0.083% monthly. I think that it would be more efficient if I pay the 1% annually as cash, rather than eat into the capital value of the investment, the reduction of which will compound over the years.

The IFA says paying monthly means the OAC more accurately reflects the value of the portfolio over the year, rather than paying at a single annual valuation point. He has a point. If the value is increasing (and there is the £15K annual ISA limit going in there in monthly installments) then a 1% charge at the end of the year will be more than the total monthly payments. But what is the impact on overall capital value of taking the OAC from the investment?

Having a hard time getting my head around this one!

TheTracker

Ask your IFA to explain it. May be a good test.

bigadaj

I assume it will vary dependent on how the investments are held. Best to pay outside the investment if held as an isa but inside if held as a pension. If unwrapped then just down to personal preference.

dunstonh

Normally, you would expect to pay in advance. So, if the value is increasing, you are better off paying monthly as the balance in month one would be lower than in month 12 (bar price movements) due to the increasing amount paid in.

i.e. paying month 1 through 12 and then a review at the end. vs paying in month 12 when the review is due.

If you also hold unwrapped investments, then many platforms allow you to take the charge from the unwrapped account rather than the ISA.

masonic

An ongoing charge of 1% is a bit pricey. Are you getting any other benefits like reduced fund charges?

dunstonh

masonic wrote: »

An ongoing charge of 1% is a bit pricey. Are you getting any other benefits like reduced fund charges?

1% has become more common on smaller investment values. One of the consequences of reducing cross subsidy under RDR.

TheTracker

dunstonh wrote: »

Normally, you would expect to pay in advance. So, if the value is increasing, you are better off paying monthly as the balance in month one would be lower than in month 12 (bar price movements) due to the increasing amount paid in.

i.e. paying month 1 through 12 and then a review at the end. vs paying in month 12 when the review is due.

No, this is incorrect. It doesn't matter if the fee is taken at the start (in advance) or end (in arrears) of a period. You know this already, you use it when you give examples of tax relief and the effect of compounding.

Eg start with 10k, growth 6%, fee 1%. Pay in advance: £10k has £100 fee, £9900 grows to £10494. Pay in arrears: £10k grows to £10600, then £106 fee, leaving £10494.

dunstonh

No, this is incorrect.

The OP is paying into the investment. So, the value will increase through increments.

TheTracker

dunstonh wrote: »

The OP is paying into the investment. So, the value will increase through increments.

Yes, just like with someone paying into a pension. It matters not if the fee/tax is taken at the front, back, or periodically, nor if we are talking 'periods' of months or years.

All the OP needs to be aware of is that when changing periodic fees the correct calculation is used. We all know this from our savings account, with headline interest rates versus AERs and monthly rates. e.g. an annual rate of 3% is not 1/4% per month. As it happens, with a 1% fee and 2 decimal places and penny rounding 0.083 is probably close enough. If it was me I'd ask him to demonstrate the effect rather than having to nut it out myself.

dunstonh

it does matter as the charge in month 12 will be based on that value at that time.

£10k increased by £2000 after 6 months will see 6 months of fee taken on 10k and 6 months on 12k if paid monthly. If paid annually in month 12, the fee would be 12 months worth on £12k.

So, 6 lots of £10,000 @ 0.0833% is £49.98 and 6 lots of £12k @ 0.0833% is £59.98. Total £109.96

Whereas if taken as a single amount at the end of month 12 it would be £12,000 @ 1% which is £120

Thrugelmir

Perhaps the change in charging structure is in response to the falling markets that are being experienced.