IFA advice...good, bad or indifferent

AnotherJoe

dunstonh wrote: »

They shouldnt do. That would be a restriction and they would not be allowed to call themselves Independent.

They might not be restricted as such, to passive trackers but always recommend them in practice.

The use of investment trusts would likely be considered a mis-sale in this case.

Can you explain why ? Since I have quite a few, I'm interested !

EnglishMohican

@dunstonh. And also can you expand on/explain why ETFs could be considered a mis-sale as you stated further up the thread. I accept that some ETFs are very high risk and specialist but so are some funds. So if an IFA considered the situation properly and then recommended VWRL for example, how could that be a mis-sale or poor advice?

fireblade28

Psudo experts. Waste of money! Save it and invest it yourself. Theres nothing that they know that you couldn't learn in a couple of months of good research yourself.

Linton

DrSyn wrote: »

.......


6. Did the IFA you saw only suggest multi manager funds with those high charges? Where low cost passive investments or investment trusts such as below mentioned at all? If not why not? Look them up.

(a) Vanguard LifeStratergy Fund.
(b) Vanguard FTSE All World ETF (VWRL)
(c) Witan Investment Trust (WTAN)
(d) Foreign & Colonial Investment Trust (FRCL)

...

These days ITs are not particularly low cost. Trustnet tells me that FRCL has a TER of 0.5% and Witan's own Investor Disclosure document quotes charges of 0.72% excluding performance fees and 0.99% including them. The idea that ITs are cheaper dates from the days when platform and advisor costs were bundled into UT/OEIC charges but not into IT charges, which is no longer the case. Compare with L&G Multiasset funds (OEICs) which are neither ITs nor passive and yet have OCF charges below 0.5%. (Performance fees and some other items are included in OCF but not TER).

DrSyn

Linton wrote: »

These days ITs are not particularly low cost. Trustnet tells me that FRCL has a TER of 0.5% and Witan's own Investor Disclosure document quotes charges of 0.72% excluding performance fees and 0.99% including them. The idea that ITs are cheaper dates from the days when platform and advisor costs were bundled into UT/OEIC charges but not into IT charges, which is no longer the case. Compare with L&G Multiasset funds (OEICs) which are neither ITs nor passive and yet have OCF charges below 0.5%. (Performance fees and some other items are included in OCF but not TER).

1.What you write is correct. Also there is the complication of the premium and discount that investment trusts can have.

2. Both have a long history, are well thought of and cost less than that quoted by the original post for the managed funds.

3. From Morningstar.co.uk

(a) Foreign & Colonial Investment Trust (FRCL).

Discount -10.59%
12M Avg Disc -9.27%

Morningstar Analyst Rating= Bronze

Morningstar Rating= 5 star

Ongoing Charge (2015) is 0.69%

Investment Objective
To secure long-term growth in capital and income through a policy of investing primarily in an internationally diversified portfolio of publicly listed equities, unlisted securities and private equity, with the use of gearing.



(b) Witan Investment Trust (WTAN)

Discount -7.90%
12M Avg Disc -4%.

Morningstar Analyst Rating= Silver

Morningstar Rating= 4 star

Ongoing Charge (2015) is 0.79%

Investment Objective
To achieve long-term growth in income and capital through active multi-manager investment in global equities.

dunstonh

EnglishMohican wrote: »

@dunstonh. And also can you expand on/explain why ETFs could be considered a mis-sale as you stated further up the thread. I accept that some ETFs are very high risk and specialist but so are some funds. So if an IFA considered the situation properly and then recommended VWRL for example, how could that be a mis-sale or poor advice?

and...

Can you explain why ? Since I have quite a few, I'm interested !

I was waiting for someone to pick up on it.

ETFs and ITs are considered more advanced investment options. There are more things to consider and understand than UT/OEICs and those things typically involve more risk (investment risk obviously but risk of getting it wrong due to lack of understanding - such as gearing or synthetic replication.)

It is a requirement under advice that you recommend products and investments that are within the knowledge and understanding of the person being advised.

The OP is a new investor. Occupations are manual. So, knowledge and experience on investing is going to be limited to non-existent. So, if you start building a portfolio of single sector funds, then you are introducing greater risks. Personally I do not agree that it introduces a greater risk are as long as it is maintained but the FOS have upheld complaints where inexperienced investors have been recommended single sector funds. There was one earlier in the year where the person was a company director and had investment properties and it decided they didnt have the knowledge or ability to understand what was being done for them and it ordered redress (it was built to a defined model and not a random selection. So, there was little wrong with it in most peoples eyes). And that was with mainstream single sector OEICS. ETFs would be single sector, not necessarily as cheap as the OEICs and they are treated as a more advanced option over OEICS. There is also no FSCS protection unlike OEICs/UTs. Investment trusts are typically rated around one risk level higher than the equivalent UT/OEIC on a like for like basis. Gearing, premium/discount and no FSCS protection push them up the risk scale in terms of knowledge and understanding.

So, it isnt that there is anything wrong with ETFs or ITs. Far from it. It is that they are considered unsuitable for inexperienced investors due to being more complex and lower consumer protection.

bowlhead99

AnotherJoe wrote: »

dunstonh wrote:

The use of investment trusts would likely be considered a mis-sale in this case.

Can you explain why ? Since I have quite a few, I'm interested !

The OP describes themselves as newbie investors involved in manual work.

Generalising, investment trusts are a more complicated product than an OEIC.

Examples:

1) The amount you have to pay to buy an investment trust or the amount you may receive on sale of an investment trust may differ significantly from the fair value of the underlying assets which the trust holds - due to market discounts and premiums which can be unpredictable, driven by supply and demand. Effectively what you can get when you want to liquidate part of your investment may not reflect its inherent 'worth', because of the overlay of discount or premium on top of the underlying assets.

2) Investments trusts or similar investment companies may also typically employ more complex techniques in pursuit of their corporate objectives - for example, using leverage to 'gear up' or amplify the return on the underlying assets, whether that is a positive return in the good times or a negative return in the bad times. This changes the risk profile of the product, especially as the level of gearing is not static.

As a concept, it is relatively straightforward to understand if you have a smart head on your shoulders - it is the same mathematical principle as what people experience when they buy a mortgaged house and later try to sell it in an up market or a down market. But it is yet another thing for a newbie investor to 'get their head around' when understanding the inherent extra risk and volatility created by the technique.

3) The product charges in an investment trust can also out-complicate the charges of an OEIC. Some of them (both of the two that were mentioned by DrSyn) expose you to performance fees where the return that you will get compared to the underlying return of the assets will vary, depending on the what the underlying return of the assets actually is, versus some benchmark which you might not even consider to be a 'fair' comparator for the portfolio that has been constructed.

Again this is not particularly difficult to get your head around when you read the prospectus or financial accounts in detail. If you did that, you would understand that the reason the expense ratio for Witan in the first half of 2016 was half of that in 2015 was because performance fees went negative due to having been overaccrued in the prior year ; the underlying investee managers within the Trust's fund-of-funds portfolio did not end up performing as well as had been projected when receiving the unrealised valuations at the prior year end. But that sounds quite complicated for a self-confessed 'newbie investor'.

4) The types of assets held can also differ between ITs and OEICs. They can of course hold the exact same assets. But a closed-ended vehicle such as an investment trust is more suitable for certain illiquid holdings such as private equity, infrastructure etc where they do not have to worry about the fund's investors redeeming and needing their money back. Instead, investors exit a holding in an IT by selling their shares on the stockmarket to someone else who is willing to buy it.

So the trust can make investments which it thinks meet its long term strategy - and in the case of the Witan and F&C ones mentioned, this can include making funding commitments to unlisted illiquid private equity partnerships whose assets are inherently difficult to value. The discounts which the market might apply applied to an IT in a significant bear market where the IT's holdings include unlisted illiquid assets last valued six months ago and for which outstanding commitments exist which might exceed the IT's cash or borrowing capacity... can be quite large.

There are probably some other features of ITs which makes them more complicated for a newbie investor, but this post is long enough.

So - generalising - ITs as a product range can be more complex than OEICs, due to less-than-transparent pricing, less-than-transparent fees, gearing, and type of assets held. This would apply to both of the examples given by DrSyn. Clearly, some ITs do not have performance fees, do not hold exotic illiquid assets and do not employ gearing. However, if they were just holding plain vanilla liquid listed equity shares or bonds, there is not a great deal of advantage for the manager to use an IT structure, and if they do, the overlay of the fuzzy-factor market discount or premium is something that could deliver an unexpected result for a newbie investor.

I can well believe that the use of investment trusts, especially the ones mentioned in the thread, could be considered a mis-sale if they are prescribed for newbie investors. That's because the product has to be suitable for the customer both in terms of their attitude to and capacity to risk, but also their understanding.

So, even though the returns from Witan or F&C might be decent historically, you could imagine a scenario where a newbie investor is advised to get one, and it loses 45% from 2007 to 2009 as they both did, and the investor says they had only really wanted a 'normal' exposure to international equities which seem to have been more like 30-35% and did not understand why the IFA was explaining their losses as partially due to 'gearing' or why the percentage fees for the last few years had been all over the place, or why they could not cash in at NAV.

The investor could of course perfectly understand these issues but happily lie about it in the hope of recovering money through a mis-sale complaint, and the FOS who is supposed to be on the side of consumer protection, would probably back him up.

I do hold a bunch of specialist investment trusts, not the two mentioned but some that expose me to niche investment sectors, discounts/premiums, performance fees and/or gearing etc. They form a useful part of my portfolio, delivering decent returns and sometimes a low correlation to plain vanilla equity indices. Of course, I am not a newbie investor and did not have an advisor selling them to me.

Edit - I see Dunstonh has already done his response while I was taking a break from typing the above to go and get a sandwich!

Eco_Miser

HarryFlatters wrote: »

I have been researching and reading various sites, primarily HL & II, are there others good for newbie investors.

There are various financial blogs by and for amateur investors - Monevator is often recommended for explaining the principles of investing.

AnotherJoe

Dunstonh & Bowlhead99, thanks for your comprehensive replies.

DrSyn

Dunstonh & Bowlhead99, thank you for the information.