Yet more DB transfer questions

Gsea

Hi all,
Like many others, I have decided to transfer my pension out of a deferred DB scheme.
I have met a couple of FA’s and have spent many hours researching funds and forums to understand my options and I now have a feel for where I would like to invest. During an initial meeting with one FA, he proposed using a DFM through a well know company (BD). If I understood him correctly, he explained that a DFM is more active with investments and can purchase units at a wholesale price, therefore offsetting the extra charges for using a DFM. For some reason I feel uneasy about using a DFM but that could down to not understanding how they work or value they add. I understand there are no guarantees but do DFM’s generally out perform more passive funds offered by the mainstream insurance companies? What are the Pros and Cons for using DFM’s?
Fees are another area that I’m a little confused about, if someone could help explain. Transfer, ongoing management and fund fees apart, there appears to be a host of other fees I’m not sure are always applicable such as, product fees, fund manager fees, platform fees and custodian fees. Additionally are any of these fees subject to VAT?
Out of interest, if someone is not happy with their FA is it simple enough to withdraw his services and if so how do you go about agreeing any fees due.


Thanks

tacpot12

What's a DFM? I only ask because I've only heard of Discretionary Wealth Managers (DWMs).

Gsea

Hi tacpot12,

It was described to me as a Discretionary Fund Manger, I think think it may be the same thing?

xylophone

Why have you decided to transfer out of your DB Scheme?

bigadaj

Ifas are split into two camps on this it appears.

Many would consider the use of a dwm,as they are normally termed, unnecessary. It's another layer of unnecessary charges, so makes it less likely your returns will be maximised. The FA may say they add value and take some of his workload, which makes you wonder what you are paying him for, he'd likely say hell provide translation and context, assess you and your risk levels etc but to me it's an expensive way of doing it. Presumably bd means brewin dolphin?

The FA might say they have specialist knowledge but there are no guarantees, have they stated what the various fees will be, that will give an indication of total charges which may well be significant.

You are effectively asking for a number of separate transactions. Teh transfer out from the db initially, which requires a specialist IFA, only around 10% have this qualification so many you meet will be looking to outsource that so you need to be clear about that. Waht sort of sum is the cetv you are looking at?

Then there's the investment pot to be managed, you aren't committed to using any firm, or firms, going forward, so could transfer out and then utilise another firm or go diy subsequently.

tacpot12

Thanks Gsea. So DFM and DWM are the same - someone you pay to manage your investments on an active basis.

The alternatives are:
1) Self-management - you manage your own investments on an active basis.
2) Infrequent management via your financial advisor - you pay them for a one-off review on a regular basis (usually yearly).

Pensions, to my mind, don't need a lot of active management, as the underlying investment portfolio is usually invested in collective investment funds or trusts. Portfolio management is limited to deciding an appropriate asset allocation at the outset and reviewing this as retirement approaches. The alternatives seem perfectly adequate, and cheaper, which maximises your return as stated in earlier replies.

Also bear in mind that you are not being sold a bespoke service at BD; BD will have a small number of model portfolios that they use for all clients with similar investment needs. You will be allocated to a model portfolio and inherit all the adjustments made for all clients allocated to that portfolio.

DB might negotiate discounts with some fund providers, but they can't so do with ALL fund providers. DB will have a small number of funds that form the core of all the model portfolios, and they will have negotiated discounts to purchase units in these core funds. This will improve the apparent investment performance of these funds, but you are limited to investing in these core funds. If you self manage, or manage via a regular review with your FA, you could buy (at full price) any fund you like, including ones that outperform the DB core funds to a degree that negates the effect of the DB discounts. The discounts work in DB's favour as it improves the apparent performance of their portfolios without them having to do work harder to select better funds!

That said, self-management will also incur dealing costs that can be radically reduced by using a DWM.

I would suggest you review with the FAs how much they would charge for annual reviews of the portfolios, what evidence they have that their reviews produce better outcomes than passive investing, and then map out the platform fees (including dealing costs) for self-management to see if using a DWM makes sense for you.

Malthusian

Gsea wrote: »

Hi all,
Like many others, I have decided to transfer my pension out of a deferred DB scheme.
I have met a couple of FA’s and have spent many hours researching funds and forums to understand my options and I now have a feel for where I would like to invest.

If you end up using a DFM then all of that was a bit of a waste of time. After all that research you should either know what portfolio you want and be able to DIY, or alternatively you know that you don't want to DIY, but you do have a general idea of what you want and any IFA should be able to recommend a portfolio that meets those requirements.

I fall firmly into the camp that says that DFMs are a waste of money. I have yet to see a DFM portfolio that is substantially different from what an IFA could have recommended at much lower cost. Or one that has delivered notably impressive performance or demonstrated greater than average insight into the markets.

I assume there is a substantial amount of money involved in the DB transfer. For the amount of money you are handling you should be taking advice from an independent FA. Why pay the same or more for less? Some IFAs also use DFMs, but you should be able to tell them that you don't want to pay extra for a DFM and they should be able to recommend an alternative solution. Otherwise they are not independent.

Fees are another area that I’m a little confused about, if someone could help explain. Transfer, ongoing management and fund fees apart, there appears to be a host of other fees I’m not sure are always applicable such as, product fees, fund manager fees, platform fees and custodian fees. Additionally are any of these fees subject to VAT?

You tend to get more of these fees in DFM arrangements or when using a DIY platform, especially one dealing in individual shares. The fee schedule should say whether VAT is due.

With a straightforward unit trust portfolio there should typically be a platform fee, fund management fees per fund, and an adviser fee if you are using one. Outside that you may get ancillary costs or dealing costs but those two or three are the main elements.

Out of interest, if someone is not happy with their FA is it simple enough to withdraw his services and if so how do you go about agreeing any fees due.

You'll have to check with the adviser. Usually however you would only pay whatever fees have already been paid - FAs do not charge exit fees, with the notable exception of St James Place. The DFM may apply charges for transferring stock out or dealing costs on sales.

AnotherJoe

What on Earth would be the point of spending a long tIme choosing your areas and funds and then paying someone else to buy and manage them???? If you can chose them you can buy them and I find it very dubious you’ll get some sort of “special” discount which is the implication.

I would be concerned that an FA has advised you to do this, id suspect the two are in cahoots and you’d end up paying a substantial % of any growth needlessly, so I’d dump the FA as well as the DFM or whatever they are called.

bigadaj

AnotherJoe wrote: »

What on Earth would be the point of spending a long tIme choosing your areas and funds and then paying someone else to buy and manage them???? If you can chose them you can buy them and I find it very dubious you’ll get some sort of “special” discount which is the implication.

I would be concerned that an FA has advised you to do this, id suspect the two are in cahoots and you’d end up paying a substantial % of any growth needlessly, so I’d dump the FA as well as the DFM or whatever they are called.

It's not an uncommon practice apparently, more fees for everyone and the FA liability is probably reduced, or at least shared.

AnotherJoe

bigadaj wrote: »

It's not an uncommon practice apparently, more fees for everyone and the FA liability is probably reduced, or at least shared.

Wow. A nice little earner and some buck passing.

bostonerimus

The CETV on a pension can be very attractive, but have you actually been given an estimate of the income you might expect after all fees if you transfer. It looks like you are being set up to pay multiple levels of fees and if they get up to around 2% thy could be as much as half of the income that can be safely generated by your money.

How much is your DB pension income, is it index linked, how old are you, what is the CETV and what are the fees being proposed? Don't do anything just yet as I think you need to do a lot more research and understand your options a bit better.

Also an IFA is working for you. Don't treat them with kid gloves. If you don't like the service then fire them.