Finding an IFA you can trust...

HappyHarry

Audaxer wrote: »

Is the 4% pa income after your IFA fees and platform fees are deducted? I looked at an IFA website which showed income portfolios with about a 3.8% yield, but that was before their platform fee of 1.2% and it said other additional portfolio charges were not taken into account, which I assumed it meant IFA ongoing fees for annual reviews etc.

If your clients are receiving 4% pa after all charges, is the capital value of their portfolios also expected to continue to grow over the long term?

If I tell my clients to expect an average of a 4% return, that is what they expect to receive. It would be pretty stupid to set a client expectations at 4% and tell them further down the road that they should expect 4% less all sorts of costs.

A 4% average net return is completely realistic over the long term. This would typically be a lower risk portfolio, ideal for a client that perhaps hadn't invested outside of cash before, or had a minimal exposure to higher risk assets. Or a client that doesn't require much growth to meet their objectives , and can therefore be happy in the knowledge that their portfolio is avoiding significant risk.

Higher risk portfolios are available that would expect to return higher amounts on average over the long term. However, they come with periods of larger losses, that would not be suitable for all clients.

The return would normally be a mix of yield and growth. It matters not to most clients which it is, unless there are tax issues around one aspect or another. Then, of course, these will be addressed.

All clients and their objectives are different. There is no investment strategy that fits all clients. An IFA should be working with clients on an individual basis, and planning to meet each different clients needs, in whatever way is most appropriate.

Audaxer

HappyHarry wrote: »

The return would normally be a mix of yield and growth.

Sorry, when you mentioned getting your clients a good level of sustainable income in retirement I assumed you were just talking about dividend income. Whether DIY or going through an IFA I would certainly hope for at least an average 4% total return over the long term.

HappyHarry

Audaxer wrote: »

Sorry, when you mentioned getting your clients a good level of sustainable income in retirement I assumed you were just talking about dividend income. Whether DIY or going through an IFA I would certainly hope for at least an average 4% total return over the long term.

Which is perfectly reasonable.

You probably have a higher tolerances to risk than those who would be happy with 4%, and so would be suited to a very different investment strategy.

There is nothing wrong with having a higher or lower attitude to risk. What is important to every client is having an investment strategy that is clear and unambiguous, and is appropriate to their own circumstances.

I have many clients, similar to yourself, who would be incredibly disappointed with a strategy targeting 4% net. However, I also have clients for whom that type of strategy is entirely appropriate.

jimjames

dunstonh wrote: »

That is incorrect. IFAs are not allowed to have any restrictions. FAs are. It sounds like yours were not IFAs.

I read that quote as being that IFAs cannot advise on other things than investments so can't give advice on property. Is that not the case anymore if they are an IFA?

bowlhead99

jimjames wrote: »

I read that quote as being that IFAs cannot advise on other things than investments so can't give advice on property. Is that not the case anymore if they are an IFA?

FCA says that if you want to advise 'independently' on investments and say you're doing so without restrictions on any type of regulated retail financial product, you need to be able to do that on everything under the banner of retail financial products:

The definition 'retail investment products' covers:
life policies
units
stakeholder pension schemes
personal pension schemes
an interest in an investment trust savings scheme
a security in an investment trust
any other designated investment that offers exposure to underlying financial assets, in a packaged form which modifies that exposure when compared with a direct holding in a financial asset, or a structured capital-at-risk product

As buying direct ownership of land and buildings is not a retail financial product, an IFA doesn't have to be able to provide advice on whether buying a specific property as part of a property lettings business (or just to live in) is in your best interests, even though he might have some sort of opinion about whether it's generally risky or not. Not providing that advice (because he's advising on regulated retail investments and is not a home ownership consultant) does not mean he's "restricted" ; he can still say he's independent in relation to the broad market of retail packaged financial investments.

Similarly if he won't tell you whether now is a good time to specifically buy a directly-held share in Barclays, or sell a share in HSBC, that doesn't make him 'restricted' - it's just something outside of his remit as an IFA. He can offer you comments about whether holding investments in individual companies is generally a high risk or low risk thing to do - but advice on a specific company share or on adding a bit of equity in a house is not inside the scope of an 'independent' service.

Aegis

aroominyork wrote: »

I have been through similar. I have had three IFAs over the years and all have turned out dire for one reason or another, which is why I have just started self-managing my investments.

The term IFA is a misnomer. Independent? They are often restricted to one form of investment or another. My last IFA would assess your risk and put you in one of the six portfolios they constructed. In pub terms they are tied houses not free houses. Financial? Only to a degree! I asked for advice about investing in property and was told they could not advise me on that – they only do stocks. Adviser? As already said … salesman!

Just to put a slightly different spin on this, did you have any requirements or requests which made you different to the "normal" client (whatever that is) for the firm? Generally speaking, if you have someone who comes out as Medium Risk (say, 5 out of 10 on a scale, though see below for more discussion on risk profiling) and doesn;t have any ethical restrictions or preferences for one type of investment over another, then a firm carrying out sufficient due diligence on the whole market should end up with fairly similar investment portfolios for all clients in such a position. This is specifically looked at by the FCA when they visit firms - outliers from the norm will raise questions because if the firm is following a process there should be a reason for any deviation from the optimum outcome.

That said, an independent firm should be able to accommodate your requests. If you decided that you only wanted trackers or investment trusts, for example, then this likely wouldn't fit the standard models of most firms and something new ought to be created for you. The firm could elect to advise against that preference, and should then either decline to work with you or proceed only on an execution-only basis, but that would be their decision.

I don't personally see anything wrong with model portfolios designed to meet the needs of, say, 90-95% of clients who come to the firm, with a separate investment policy for the outliers. But unless you are one of those outliers, you shouldn't be placed into a different solution, as it isn't likely to be what the firm believes is in your best interest.

I also think their way of assessing risk appetite is inherently flawed. You fill in a load of questions but they do not give you any context by informing you of how markets move over long or short periods of time. So you answer whether you would mind losing capital for the chance of earning higher returns, but without them priming you to understand the difference between a 10 year and 30 year investment period that is meaningless.

This is a confusing area of work for an investment professional, let alone anyone else, however the two things you have mentioned here are actually separate issues altogether. The questionnaire you mention is designed to assess your tolerance of investment risk, i.e. how steadfast you will be watching your portfolio fall in value during market downturns, regardless of how long you have left before your goal. For example, someone investing their pension into pure equities in early 2008 may well have seen 40%+ drops in value - risk tolerance is a way of trying to predict whether that person would be so unnerved as to sell their portfolio during the downturn even if they had, say, 40 years to go before retirement.

Timescale of the investment falls under the remit of capacity for loss, which is a mathematical exercise that should be carried out by the firm to determine whether you would be able to recover from a loss in line with your maximum tolerance. If, for example, the firm assumes that a Medium Risk investor is able to tolerate a loss of around 25%, then the capacity for loss analysis should assess whether your goals are still achievable - or at least better than cash - if that maximum loss occurs during the life of your investment. Timescale plays a huge part of this, which is why no adviser in their right mind will ever suggest that you invest in risky assets for goals within three years, but almost all advisers will recommend investments for all clients with a 30-year time horizon.

If an IFA has a limited number of funds for you to choose from, get clear graphs/data about how they have performed over a long period of time after accounting for fees, and then compare to Vanguard LifeStrategy that bostonerimus favours. You might find that a low cost tracker will do for you.

Personally the specific investments selected really don't matter that much to me, as long as they fit the risk profile. My usual approach is to assume that trackers are a great starting point for anyone accumulating wealth, while active funds tend to be better for drawing down. I am, however, largely agnostic towards the active/passive debate these days (this was not always true, as you will see from my posting history). I feel that my role as adviser is more suited to helping people manage their expectations and to ensure that they minimise unnecessary taxes.

There are now a number of low-cost investment propositions out there, and I think they're fantastic for a very significant chunk of the UK market, perhaps even the majority. I now see myself slotting in to help out where things have become much more complicated.

bostonerimus

Aegis wrote: »

Personally the specific investments selected really don't matter that much to me, as long as they fit the risk profile. My usual approach is to assume that trackers are a great starting point for anyone accumulating wealth, while active funds tend to be better for drawing down. I am, however, largely agnostic towards the active/passive debate these days (this was not always true, as you will see from my posting history). I feel that my role as adviser is more suited to helping people manage their expectations and to ensure that they minimise unnecessary taxes.

There are now a number of low-cost investment propositions out there, and I think they're fantastic for a very significant chunk of the UK market, perhaps even the majority. I now see myself slotting in to help out where things have become much more complicated.

I agree with these observations. I don't really see the worth of an IFA in choosing and managing investments for anyone with a bit of common sense and the willingness to acquire some basic financial knowledge. However, many people will benefit from professional advice about tax planning and complicated topics like trusts and estate planning if they become necessary.