What will a financial adviser do for me?

bowlhead99

dunstonh wrote: »

but would look to add contingency charging to cover unexpected workload

I guess padding the fee to accommodate potentially high-maintenance customers is something that IFAs' detractors would characterize as "fleecing the vulnerable newbies" while the IFAs would say it was a loading for childcare/babysitting services...

Jon_W

Thanks DunstonH.

I have gone back to the email to check and this is as the fees were presented. The only difference is that the 0.42% transaction fee was included in a sentence at the end saying, "For fees with an estimation of transaction costs add 0.42% to the above."

The email doesn't explain where those transaction fees will come from,

Jon_W

bowlhead99 wrote: »

My guesstimate is that they are simply providing a breakdown of the fund's "ongoing charges figure" (your number 2) in a more granular form.

i.e., the known percentage-based annual management fee on the one hand, and estimated additional costs borne by the fund on the other, to convert a 0.25% management fee into a 0.67% running cost.

Or: the AMC is equal to OCF because manager bears the normal components of running costs... while the disclosed "estimated transaction costs" are literally the costs inherent in the investment activities such as purchase and disposal of the underlying holdings which are incurred through buying and selling and portfolio churn (stamp duties, broker commissions etc) which get rolled up into the overall performance of the fund, but are traditionally excluded from OCF while still being something about which investors are curious, so they are disclosing them (as an estimate).

Either way, it looks like something ultimately borne by the investor, but clarity would be useful to compare like with like.

Jon, if version 2 is rebalanced to a target allocation for you, and the target allocation is kept up to date for your stated risk level over the course of the economic cycle, and your needs are not going to change over time... there doesn't seem a great deal of point in paying another £300 per year for ongoing servicing on your £40k portfolio. If you are already paying them to invest your new money into the plan at a rate of 4% on all new contributions (a rate that's pretty steep if the amounts are large), then you might think, what is left to pay for?

However, if the whole point of using an IFA is for you to be able to understand what is going on and get an ongoing annual meeting to discuss it because you are not confident selecting funds for yourself and understanding your options at different points in your investing life, perhaps £300 a year doesn't hurt - because it is providing that "few emails and a meeting" that you crave.

I'm pretty sure if I was the IFA I'd easily burn through £300-worth of time costs every year with you as my customer...

Ouch. No, I wouldn't be bad at all - like I said I would leave it, I certainly wouldn't be wanting constant updates. In fact the IFA said 'we will meet at least once a year'...' I said 'There's no need'. But he said that he would want tom to reassess goals, plans etc.

Audaxer

JohnRo wrote: »

The alternative is to feed the investment money into your chosen investment vehicle as an ongoing periodic contribution so that the risk is loaded towards the back end of the investment horizon, it'll possibly help to mitigate losses in the short term but will almost certainly stifle gains long term.

Sorry but can someone please explain to me what JohnRo means here, as I thought feeding money into investments on say a monthly basis was a good thing to do as you would benefit when the price falls and you are still investing regularly?

masonic

Audaxer wrote: »

Sorry but can someone please explain to me what JohnRo means here, as I thought feeding money into investments on say a monthly basis was a good thing to do as you would benefit when the price falls and you are still investing regularly?

On average you'll get a better return if you invest money when it becomes available to you. Holding a lump sum uninvested reduces risk and also normally reduces returns. Most people get paid on a monthly basis, so that's how they invest.

Audaxer

masonic wrote: »

On average you'll get a better return if you invest money when it becomes available to you. Holding a lump sum uninvested reduces risk and also normally reduces returns. Most people get paid on a monthly basis, so that's how they invest.

I've just invested in a VLS fund with this year's ISA allowance. In a few days I could invest next year's allowance, however I was thinking of either drip feeding it in monthly, or waiting to see if the market falls - as it seems high at present - and invest it then.

IF, and I know it's a big IF, the fund price did have a big fall in a few months, would I not benefit more if I managed to invest then when the price was much lower than now?

masonic

Audaxer wrote: »

IF, and I know it's a big IF, the fund price did have a big fall in a few months, would I not benefit more if I managed to invest then when the price was much lower than now?

It is a big if, but if you can hold out until the price is lower, then your return will be higher. However, in a 20-30 year timeframe, the difference is not going to be all that significant and the likelihood of a fall happening within the timeframe you want it is not very high.

bowlhead99

Audaxer wrote: »

I've just invested in a VLS fund with this year's ISA allowance. In a few days I could invest next year's allowance, however I was thinking of either drip feeding it in monthly, or waiting to see if the market falls - as it seems high at present - and invest it then.

IF, and I know it's a big IF, the fund price did have a big fall in a few months, would I not benefit more if I managed to invest then when the price was much lower than now?

Of course if you invest your money when things are cheaper you will make more money, but nobody knows where the market is going next.

For example, you could drip it in monthly taking an entire year to do it, while the market is going up (because markets do go up over time which is the whole reason you want to invest) meaning that you had paid more for every unit than if you bought today. Then just as you are finishing that slow drip having only got half the dividends available from being fully invested for the year, the market could still crash down to half today's price.

As JohnRo suggested, if you are deliberately dripping a lump sum on an ongoing periodic basis, the risk is loaded to the back end because over the time until you are actually fully invested you are getting a blend of the risk and return from your chosen investment and the risk and return from cash. An alternative would just be to pick a lower risk investment for that year and fully invest it up front.

If you are putting money in on an ongoing periodic basis as it becomes available to you (e.g. from wages every week or salary every month, or once a year when you get a new ISA allowance), then over time you will have bought at a range of prices. Many people do that without specifically referring to it as a 'drip feed' strategy or trying to time the market to catch better or worse prices.

bowlhead99

Jon_W wrote: »

The only difference is that the 0.42% transaction fee was included in a sentence at the end saying, "For fees with an estimation of transaction costs add 0.42% to the above."

The email doesn't explain where those transaction fees will come from,

Basically it sounds like the second of the two potential options I'd guessed at in my comments above:

bowlhead99 wrote: »

Or: the AMC is equal to OCF because manager bears the normal components of running costs... while the disclosed "estimated transaction costs" are literally the costs inherent in the investment activities such as purchase and disposal of the underlying holdings which are incurred through buying and selling and portfolio churn (stamp duties, broker commissions etc) which get rolled up into the overall performance of the fund, but are traditionally excluded from OCF while still being something about which investors are curious, so they are disclosing them (as an estimate).

When you are looking at the cost of funds on a factsheet, the standard way to quote fees for comparability across investment managers is to use OCF (ongoing charges figure) of which the AMC (annual management charge) is the major component.

Some funds just have the manager pick up the day to day running costs for everything (e.g. administration and accounting, producing financial reports, audit and legal, etc) and build it into the price for the annual management charge so that the OCF is no higher than the AMC.

However, there are some other inherent costs of operating a fund which don't really get picked up as an operating expense, such as when the fund buys £1000 of shares in a company it has to pay £5 of stamp duty to the government and maybe £1-£2 of stockbroker commissions, and when it sells the shares later for £2000 it has to pay £2 of stockbroker commissions again. The fund would report that it bought the shares for £1007 and sold the shares for £1998 making a profit of £991 and has no reason to report any costs within 'ongoing charges' because the stamp duty and broker costs were not ongoing operating costs that get incurred day in day out. They only happen if the fund needs/wants to buy or sell and are just something that reduce the profitability of sharetrading compared to the £1000 profit you'd have in a perfect world where the fund could buy and sell what it liked without transaction costs.

While the £9 of transaction costs which the fund incurs are not included within OCF or AMC, they are something that impacts on overall performance (compared to, for example, a fund that just buys and holds its investments for ages and doesn't need to do any buying or selling). So there is something of a trend these days for investors to ask, in the interests of transparency, whether transaction cost data for a fund is also available in addition to the ongoing raw running costs. Some investors don't really get too excited by it so it is not something that the FCA makes managers put in the factsheets.

So, if the adviser is just saying you can have Option 1 which is a simplistic collection of passive funds which can 'float' from initial allocations (charges of 0.25%) or Option 2 which is monitored and rebalanced against a target and hedged to some extent (charges of 0.75%), then those are probably the numbers you can compare against other funds in the market. It sounds like the additional "For fees with an estimation of transaction costs, add 0.42% to the above." is the additional bit of 'transparency' to capture things that are not included in a management fee or ongoing charges figure but will impact returns. But other rival portfolio funds in the marketplace would also have such 'transaction costs', because they're unavoidable, but often not disclosed in the factsheets because the regulator doesn't demand that they are.

For example the fund group Standard Life produces their estimated transaction costs figures for their funds using some historic averages of actual costs compared to fund value over the last financial year. For their "UK Equity Recovery Fund", a highly active fund, they have 0.22% of broker commissions and 0.29% of 'transaction taxes' or stamp duty. Whereas for "Asia Pacific Growth Fund" they have 0.33% of broker commissions and 0% of taxes (because most asian countries don't have stamp duty). But the transaction costs on their less-active funds in cheap markets are lower.

To be honest 0.4% for transaction costs sounds pretty high to me if it is a portfolio which principally uses passive components / trackers (which you would expect to have low levels of purchase and sales transactions because they passively sit there without buying or selling). It would be difficult to see how the fund components themselves could create underlying transaction costs that high, and especially if that portfolio is being allowed to 'float' rather than being actively rebalanced. So maybe it is the IFAs transactional costs incurred at a level 'above' the individual passive funds which are being used - i.e. the IFA buying and selling the components of the portfolio over the course of the year if he is paying broker costs to buy ETFs etc in the portfolio on top of the platform fees.

Audaxer

masonic wrote: »

It is a big if, but if you can hold out until the price is lower, then your return will be higher. However, in a 20-30 year timeframe, the difference is not going to be all that significant and the likelihood of a fall happening within the timeframe you want it is not very high.

Thanks masonic, I know what you and Bowlhead are saying. Even although I plan to invest long term I would be very disappointed if I invested my lot just now, only to find there was a 30% drop in value in the next few months, and it took 3 years to get back to my original investment value. If I can afford to hold back some now, then if there is a big equity fall I would add to my investment then to hopefully get back into profit sooner when the markets recovers?