What will a financial adviser do for me?

bowlhead99

You are right, that the all-in 2.29% (disregarding the more expensive version that the IFA thinks you won't need) is high.

You would generally strip it down to:

- Platform fees 0.25-0.35%

- Fund's Ongoing Charges Figure (which includes the fund manager's fees 'AMC') of 0.3 - 1.0% ; at the lower end if mostly 'passive' building blocks and at the higher end if mostly 'active' funds used.

- Ongoing advice/servicing fee 0.x%

The dominant figure for ongoing IFA servicing ( monitoring / advice / rebalancing) on top of the fund and platform costs, is anecdotally 0.5% with higher amounts (perhaps 0.75% or 1%) on smaller pots or more expensive advisors. I say this not as an IFA but just from threads here and from other family members' experience in looking at IFA services.

If you have a £200k portfolio and the IFA sets a fee of 0.5% ongoing servicing, that's going to get him £1000 a year. At a £200 charge-out rate that would allow him to do about five hours work over the course of the year including pulling the various reports, running the research tools that tell him if the funds are still meeting expectations, reallocating/ rebalancing capital (perhaps within or between the different tax wrappers), writing you letters or emails about it or having phone discussions, and documenting it to a proper standard so it's covered by his professional indemnity insurance.

However, if you don't have £200k but only £40k, a rate of 0.5% for his services would only give him £200, which only buys an hour of time rather than five. While the risk and complexity of a £40k portfolio is lower than a £200k one, there is not necessarily an 80% saving in workload so you would expect the annual cost to need to increase, as a percentage of your total assets

So, depending on pot size, a fee of perhaps 0.6-1.2% for the fund and platform could turn into 1.1-2.2%+ when the adviser's ongoing servicing is included. Obviously at the higher percentage rates (i.e. an expensive IFA, or a normal-priced IFA but a small pot size) the percentage fees will eat significantly into the investment returns - e.g. if the fund has gross returns of inflation-plus-4% and the fund and platform together cost over 1% to run and the IFA takes 1% or more himself, there is not much left on the table to re-invest.

That's one reason why a lot of people with sub-£50k pots or even sub-£100k or sub-£200k pots will look to DIY until they have a pile of assets on which the IFA service costs would be more efficient. I wouldn't want a 2% fee on all my assets myself. But if my investing knowledge was low and I didn't fully understand the books and other materials I'd read when trying to DIY, I could understand someone paying a 2% fee instead of DIYing and turning 5% potential growth into 5% loss by stuffing it up.

Can I post the fund's composition for comment (even 'Ooh! That's nice!') without breaching confidences?

If you have paid for advice and signed a contract and bought a tailored portfolio, then it is yours to tell us about.

If you have not paid for advice or signed a contract and so far have just been shown a sample portfolio, then what you have in your hand is just an example of what he does and is something that the advisor is happy to give away to people for free without a contract.

So either way there should not be an issue with telling us about it.

Just going back on the fees point, you had mentioned a high-sounding ongoing level of fees and also at some point in an earlier post, a percentage charge on all new amounts invested.

So if every pound of new money you add into the ISA or other investments in future years is attracting a relatively high initial fee (e.g. 4%) you would expect the 'ongoing' percentage to be lower because the IFA is already being paid to deploy any new money coming in so he is only monitoring and rebalancing the existing money. And if he used a multi-asset fund or expensive fund-of-funds instead of individual holdings, his rebalancing work would be nominal. So, try to understand exactly what is being paid for what under his pricing model. At the moment though if you haven't actually signed up, the exact holdings will not be final so it is more a case of working out the approach he will take and what sort of fees would be realistic.

I wouldn't be surprised if it is expensive as a proportion of the £40k because as mentioned, £40k is relatively low in the grand scheme of things. Not that it's low to you, just low to people who are professional advisers and might instead prefer to spend their time on clients who have larger amounts of money. A high fee on small amounts of new business can be an effective deterrent if you are focussing an IFA practice on the ones where you can deliver more value per hour.

Jon_W

bowlhead99 wrote: »

You are right, that the all-in 2.29% (disregarding the more expensive version that the IFA thinks you won't need) is high.

You would generally strip it down to:

- Platform fees 0.25-0.35%

- Fund's Ongoing Charges Figure (which includes the fund manager's fees 'AMC') of 0.3 - 1.0% ; at the lower end if mostly 'passive' building blocks and at the higher end if mostly 'active' funds used.

- Ongoing advice/servicing fee 0.x%

The dominant figure for ongoing IFA servicing ( monitoring / advice / rebalancing) on top of the fund and platform costs, is anecdotally 0.5% with higher amounts (perhaps 0.75% or 1%) on smaller pots or more expensive advisors. I say this not as an IFA but just from threads here and from other family members' experience in looking at IFA services.

If you have a £200k portfolio and the IFA sets a fee of 0.5% ongoing servicing, that's going to get him £1000 a year. At a £200 charge-out rate that would allow him to do about five hours work over the course of the year including pulling the various reports, running the research tools that tell him if the funds are still meeting expectations, reallocating/ rebalancing capital (perhaps within or between the different tax wrappers), writing you letters or emails about it or having phone discussions, and documenting it to a proper standard so it's covered by his professional indemnity insurance.

However, if you don't have £200k but only £40k, a rate of 0.5% for his services would only give him £200, which only buys an hour of time rather than five. While the risk and complexity of a £40k portfolio is lower than a £200k one, there is not necessarily an 80% saving in workload so you would expect the annual cost to need to increase, as a percentage of your total assets

So, depending on pot size, a fee of perhaps 0.6-1.2% for the fund and platform could turn into 1.1-2.2%+ when the adviser's ongoing servicing is included. Obviously at the higher percentage rates (i.e. an expensive IFA, or a normal-priced IFA but a small pot size) the percentage fees will eat significantly into the investment returns - e.g. if the fund has gross returns of inflation-plus-4% and the fund and platform together cost over 1% to run and the IFA takes 1% or more himself, there is not much left on the table to re-invest.

That's one reason why a lot of people with sub-£50k pots or even sub-£100k or sub-£200k pots will look to DIY until they have a pile of assets on which the IFA service costs would be more efficient. I wouldn't want a 2% fee on all my assets myself. But if my investing knowledge was low and I didn't fully understand the books and other materials I'd read when trying to DIY, I could understand someone paying a 2% fee instead of DIYing and turning 5% potential growth into 5% loss by stuffing it up.

If you have paid for advice and signed a contract and bought a tailored portfolio, then it is yours to tell us about.

If you have not paid for advice or signed a contract and so far have just been shown a sample portfolio, then what you have in your hand is just an example of what he does and is something that the advisor is happy to give away to people for free without a contract.

So either way there should not be an issue with telling us about it.

Just going back on the fees point, you had mentioned a high-sounding ongoing level of fees and also at some point in an earlier post, a percentage charge on all new amounts invested.

So if every pound of new money you add into the ISA or other investments in future years is attracting a relatively high initial fee (e.g. 4%) you would expect the 'ongoing' percentage to be lower because the IFA is already being paid to deploy any new money coming in so he is only monitoring and rebalancing the existing money. And if he used a multi-asset fund or expensive fund-of-funds instead of individual holdings, his rebalancing work would be nominal. So, try to understand exactly what is being paid for what under his pricing model. At the moment though if you haven't actually signed up, the exact holdings will not be final so it is more a case of working out the approach he will take and what sort of fees would be realistic.

I wouldn't be surprised if it is expensive as a proportion of the £40k because as mentioned, £40k is relatively low in the grand scheme of things. Not that it's low to you, just low to people who are professional advisers and might instead prefer to spend their time on clients who have larger amounts of money. A high fee on small amounts of new business can be an effective deterrent if you are focussing an IFA practice on the ones where you can deliver more value per hour.

As ever, incredibly grateful for your considered and detailed advice, BoWLhead.

The information I have on charges was given via a letter and via and email, with different figures on both. So the figures above may be off, I have tried and failed to reconcile the 2 sources of info. In my defence, the communications are ambiguous as well (honest).

So, as communicated to me:

Version 1: - investment in the IFA-designed model portfolio

AMC 0.75% (up to 1.17 with transaction costs)
Platform charge 0.37%
Service charge (optional) 0.75%
Total: 2.29%

Version 2: I choose from the passively-managed funds put together by the IFA. No daily analysis and rebalanced only 4 times a year:

AMC: 0.2 to 0.25%
Platform: 0.37%
Total 0.62%

The letter then discusses that the model portfolio is worth the extra 0.92% due to the currency hedging software used.

This is included in the AMC in the top, model portfolio as 1.17-.0.92 = 0.25% (the 'choose your own funds' AMC).

So the top one is expensive (and how effective is the currency hedging and is it worth it, anyway?)

I'd imagine the 'choose your own' fees are broadly similar to investing in a passive, multiasset fund via Hargreaves Lansdown or similar.

Yes BH, the implementation fee is at 4%. This is an issue, I am not able to work-out where and how the model portfolio is invested but he referred to the portfolio being made -up of funds, so the IFA's model portfolio is a fund of funds, it seems.

So we have high ongoing fees, a relatively high implementation fee and minimal rebalancing actually being carries-out (with the caveat that I don't know what the currency hedging entails - but also don't know how efficacious it is).

I don't think I need to list the asset breakdown as I have pretty-much made my decision on the foregoing, I'm out. Though I will post it if anyone is curious, let me know. And I am still not too keen on the model portfolio being comprised of nearly 50% UK exposure.

Performance over the last year is also around 1.1% lower than the Vanguard LS 60 about 4% lower than the LS 80.

Bowlhead > Cheers! :beer:

Jon_W

As things stand I am going for a Vanguard LS product. Probably the 80. (Yeah, I know, 'we told you so'! :-) ). Or a similar global multi-asset when I

Alternative is a market cap weighted all-world global equities index tracker and a separate high quality bonds fund. I am struggling on the appropriate split though. 80/20 equities/bonds?

And at what age should I start moving the allocations as I approach retirement? (Nearly 40). And do you do this in/at the end of a year even when the equities have lost value?

Also with funds, what happens when, and how do you, get your money out if you need to? I suppose this depends on whether it is incorporated, and if so, it is by selling your shares? Which would hint at it being able to be performed within the day?

AnotherJoe

Jon_W wrote: »

As things stand I am going for a Vanguard LS product. Probably the 80. (Yeah, I know, 'we told you so'! :-) ). Or a similar global multi-asset when I

Alternative is a market cap weighted all-world global equities index tracker and a separate high quality bonds fund. I am struggling on the appropriate split though. 80/20 equities/bonds?

Flip a coin, no one knows, perhaps fit it to your risk appetite. Also, in general, the younger you are the lower bonds % you "should" have. At age 40 I would say zero or maybe 20 but then it's not my money. .

And at what age should I start moving the allocations as I approach retirement? (Nearly 40). And do you do this in/at the end of a year even when the equities have lost value?

That's what happened when people bought annuities when they retired. Unless you plan to do that, that approach is not the "modern" way if managing it, since you'll potentially be invested another 20+ years past that. So you potentially wouldn't change your investments at all, you might gradually build up a bigger cash buffer to ride out poor years.

Also with funds, what happens when, and how do you, get your money out if you need to? I suppose this depends on whether it is incorporated, and if so, it is by selling your shares? Which would hint at it being able to be performed within the day?

You wouldn't be cutting it so fine, since that implies you have 100% investments and need to sell some VLS80 this morning so you can afford this afternoons Sainsburys shop. :eek:

You'd most likely have several years (at least one) in cash or cash equivalents and you'd top that up in good periods by selling the investments and building up the cash buffer if it was depleted.

There would also most likely be some dividends paid out which also provide an income stream. Then there are other pensions including state which provide a cash income.

Jon_W

Ah, I didn't know there were dividends I thought the VLS were accumulatory.

Thanks, Joe, for your help. What was the thinking behind moving more to cash as opposed to moving more towards bonds as one ages? Is that just because of the awful real yields on bonds at the moment, or something else?

mollycat

Jon_W wrote: »

As things stand I am going for a Vanguard LS product. Probably the 80. (Yeah, I know, 'we told you so'! :-) ). Or a similar global multi-asset when I

Alternative is a market cap weighted all-world global equities index tracker and a separate high quality bonds fund. I am struggling on the appropriate split though. 80/20 equities/bonds?

And at what age should I start moving the allocations as I approach retirement? (Nearly 40). And do you do this in/at the end of a year even when the equities have lost value?

Also with funds, what happens when, and how do you, get your money out if you need to? I suppose this depends on whether it is incorporated, and if so, it is by selling your shares? Which would hint at it being able to be performed within the day?

Just a short bit of advice on a less high falutin level than the thread has taken, (although Another Joe has beaten me to it); you wouldn't be organising your finances/investments in a way where you had to sell units in a hurry, possibly at the bottom of a market cycle.

AnotherJoe

Jon_W wrote: »

Ah, I didn't know there were dividends I thought the VLS were accumulatory.

Thanks, Joe, for your help. What was the thinking behind moving more to cash as opposed to moving more towards bonds as one ages? Is that just because of the awful real yields on bonds at the moment, or something else?

Sorry I was talking generically, you are correct no dividends from VLS. I was thinking you'd be more diversified than one fund and some of those investments would provide an income stream. But that was a bad assumption.

I wouldn't say it's moving more to cash, its (and I horribly oversimplify) the idea that you have your investments and your cash, let's say 2 years worth . Each six months or so you look at your investments. If they rose top up your cash to the 2 year (or whatever) mark otherwise let them grow. if they didn't rise, keep spending from the cash buffer.

There are lots of papers around and no agreement on how big the cash buffer should be how gradually you should top it up after it's gone down, and so on, and no agreement at all about what's best .

But before you retire you don't need that 2 or 3 year cash buffer so you'd only build that just before retirement.

Within the investments you have your mix of equities (probably as funds) and bonds and also dividend paying equities/funds. Bonds seem to be falling out of favour at the moment for reasons you mention.

My approach is a mixture of everything except bonds maybe that's right maybe it isn't I don't know only hindsight will tell. To me bonds just look like poorly performing equities and I think the consensus is shifting to a view that In a crash bonds will dip along with equities.

FWIW I'm not as much in favour of VLS as others as 25% UK seems to high to me but then again
I wonder if many of the "UK" equities in it are companies like BP and Vodafone (e.g. top of the footsie) which arguably aren't that U.K. focussed anyway ?

justme111

Jon_W wrote: »

Ah, I didn't know there were dividends I thought the VLS were accumulatory.

Thanks, Joe, for your help. What was the thinking behind moving more to cash as opposed to moving more towards bonds as one ages? Is that just because of the awful real yields on bonds at the moment, or something else?

It may be because you can not pay for coffee with bond.

Jon_W

mollycat wrote: »

Just a short bit of advice on a less high falutin level than the thread has taken, (although Another Joe has beaten me to it); you wouldn't be organising your finances/investments in a way where you had to sell units in a hurry, possibly at the bottom of a market cycle.

Hopefully not but you just NEVER know what is going to happen!

mollycat

Jon_W wrote: »

Hopefully not but you just NEVER know what is going to happen!

Ok, thanks for the advice.

Good luck if/when you get round to investing.