Personal pensions: do adviser charges upfront help your pension grow more, long-term?

Silver66

Hello,

I'm looking at personal pensions and my first port of call was to ask some other self-employed friends which pension provider they use (they are in their 60s; I am 35).

They work with a company that charges 0.75% annual management (the fund is actively managed and investments switched if necessary, and you also get free ongoing financial advice on any topic from independent advisers) but you also have to pay 3% initial adviser charge on every lump sum that you pay into the pension. This pays for an adviser to work out where best to invest it.

My friends are really happy with the service they've had from this provider, and their fund has grown a lot. I'm shopping around to see how other pension providers work, and what their charges are.

I've found out that many providers offer a slightly lower annual management charge, if you choose your own investments, and you don't have to pay for advisers unless you want to. If an adviser does help you decide where to invest the funds, there are different ways of charging for this. Some providers ask for a pay-in charge, others add the fee for advice to the annual percentage fee. It doesn't come for free anywhere.

I'm wondering whether or not it works out better in the long term to pay for an adviser to help you decide where to invest. I'm a completely inexperienced investor, and will obviously read up on it as much as I can, but I'm sure that a trained financial advisor would make better choices than me, and my pension might grow more in the long term. But I'd be 3% down from the beginning.

I'm wondering whether it works out better in the long-term to pay the financial adviser fees upfront, which seem quite high to me, but possibly worth it for future pension growth?

Does anyone have experience of this?

OldMusicGuy

There are no guarantees. You might do better, you might do worse. The only guarantee is you will pay an IFA regardless of whether your portfolio goes up or down. It depends entirely if you are prepared to put the effort into reading and researching enough to become confident to be a DIY investor. If you are not, you should use an IFA.

Personally I begrudge paying IFA fees, so I am a DIY investor. But it's taken me 4 to 5 years of seriously focusing on pensions to get to that point.

cfw1994

Wot OldMusicGuy says there!
I too am loath to remove big chunky %s from my pots - the one thing I do understand is that the more you lose in charges, the more you lose over the longer term!

I've also spoken with a few friends (some also older & now retired), & none of the stories of IFAs/advice I have heard have really filled me with a warm fuzzy feeling. I appreciate there are some on here who VERY generously give all kinds of snippets and hints (*cough*, not 'advice' !) for free, & I am grateful to those!

FWIW, my main fund is with Aviva, and I have funds split across a few pots in there: BlackRock World ex UK Equity Index Tracker FP, then Aviva Pension ones with North American, Global Equity & a Global Equity Fund of Funds.
Annual Management charges range from 0.25% to 0.61% for those funds, with no separate platform fees (they are included) to suck money from my future!

I appreciate the funds might sound broadly similar in those, but my goal was to spread a little amongst different funds that I felt were as global as possible (North American 10% notwithstanding!). They have all done well, but then we have been in a growth time for equities these past few years, for sure - I *feel* a correction is due (overdue?), but the beauty of global funds is that any loses would hopefully balance out. Hopefully!
I'm a believer in the http://kroijer.com/ approach - don't try to beat the market - very few fund managers do that for 3, 4, 5 years in a row, never mind the 30+ I hope to have left (& more for you!).
I do appreciate other opinions will differ!

The lowest charges possible in funds you feel comfortable with ought to work for most people.

Advice I wish I'd known when I was much younger would be to try to pop as much into these funds as possible (within reason - live a life too!) - a good sounding rule of thumb is to aim to put half your age in % terms (so try to get 15%+ at your age).

Silver66

Thanks OldMusicGuy and cfw1994.

Cfw1994, I've just been on the phone to Aviva to ask about their charges. They said that I would need to speak to a financial adviser before opening a personal pension (they wouldn't take pension applications directly from customers, but only through a financial adviser) and the minimum fee for the advice, if I do go ahead and open an Aviva pension, would be £500. During the initial conversation with the adviser, I would be able to find out how much any on-going fees for advice would be.

I'm not yet confident or informed enough to be a self-investor. I'm trying to work out how much pension providers seem to charge on average, but so far, none have given me a specific figure, except for the company that my friends use. It's difficult when you don't know how much you might be paying.

dunstonh

They work with a company that charges 0.75% annual management (the fund is actively managed and investments switched if necessary, and you also get free ongoing financial advice on any topic from independent advisers) but you also have to pay 3% initial adviser charge on every lump sum that you pay into the pension. This pays for an adviser to work out where best to invest it.

That sounds more like transactional advice than ongoing advice.

i.e. they have no obligation to provide any ongoing advice and probably only officially do it each time there is a top up. Chances are they are using simple investments (such as multi-asset funds) that do not require ongoing servicing.

I've found out that many providers offer a slightly lower annual management charge, if you choose your own investments, and you don't have to pay for advisers unless you want to.

So do other providers through advisers. For example, you can get 0.34% easily with an adviser for a transactional case.

I'm wondering whether or not it works out better in the long term to pay for an adviser to help you decide where to invest. I'm a completely inexperienced investor, and will obviously read up on it as much as I can, but I'm sure that a trained financial advisor would make better choices than me, and my pension might grow more in the long term. But I'd be 3% down from the beginning.

Investment choices are opinion. Our model portfolio has been beating some of the frequently mentioned multi-asset funds on this board for a number of years. However, these cost more and there is no guarantee it will continue. Its a choice you decide. Despite that, we still put plenty of people in simple multi-asset funds as not everyone is suited to the more advanced portfolio methods.

but I'm sure that a trained financial advisor would make better choices than me, and my pension might grow more in the long term. But I'd be 3% down from the beginning.

Your IFA may not charge 3% per transaction.

I'm wondering whether it works out better in the long-term to pay the financial adviser fees upfront, which seem quite high to me, but possibly worth it for future pension growth?

If you can get 0.34% with an upfront charge than that is going to end up cheaper than 0.75% with no upfront charges. However, if you can get 0.34% on DIY basis then you save the upfront charge.

If you want a bespoke portfolio with greater growth potential then most of these have higher ongoing charges.

I've also spoken with a few friends (some also older & now retired), & none of the stories of IFAs/advice I have heard have really filled me with a warm fuzzy feeling.

How many of them saw a genuine IFA? Over half the people who see an FA/sales rep think they are seeing an IFA. Most consumers can't tell the difference and IFAs get tarnished with the actions of sales agents. Plus, the world today is very different to years ago. 20 years ago you had over 200,000 advisers, IFAs, agents, reps etc. Today there is just over 20,000. Advice has moved on a lot. Far less sales people types nowadays.

AnotherJoe

Silver66 wrote: »

My friends are really happy with the service they've had from this provider, and their fund has grown a lot. I'm shopping around to see how other pension providers work, and what their charges are.

There's a company that comes up on here quite often, with quite high fees, and their customers are also often reportedly "really happy with the service they've had" but the problem with that is, they've got nothing to compare it with. They arent seeing that they've likely lost multiple £10ks and maybe £100k's compared to low cost funds and simple advice instead of switching every five minutes.

They would likely have had double the growth, with competent DIY or an independent IFA not using in house funds only.

So, it is of course possible that your friends have had outstanding performance and arent with a company like that. Its more likely though, they are just too uneducated about investments to know how much they are bleeding out every year, year on year. Someone here the other day took badly to being told that their 40% growth (which to be fair was the result of not very good DIY) which they though was pretty good and up to that point were "very happy with" , would have been 100% had they just gone for boring index funds.

Linton

Making good returns when the markets are rising as has been the case for most of the past decade is easy. You dont need an IFA for that, though of course an inexperienced investor can go horribly wrong. The hard part is avoiding losing more when prices fall then you are prepared to accept. The danger is that you are panicked into selling the lot in a vain attempt to minimise your losses. An IFA can propose investments that suit your temperament and circumstances.

The second area where an IFA can be extremely valuable is that they should look at your overall situation. There may well be financial opportunities or dangers that you had not considered.

In both cases the gain could be very much higher than any costs. There are far more important aspects to investing than the % in charges.

Silver66

Thanks everyone.

I’m so out of my depth here, I really don’t know what to do. Can anyone recommend a way forward? I’ve been researching this for weeks, and still haven’t made progress. Even when phoning the different pension providers, they can’t tell me straight up, in numbers, what their charges are, which makes it very difficult to compare them and make a decision.

dunstonh

Even when phoning the different pension providers, they can!!!8217;t tell me straight up, in numbers, what their charges are, which makes it very difficult to compare them and make a decision.

Modern pensions can invest in 30,000 different investments. Each having its own level of charges. So, whilst is pretty easy to say what the provider charge is, its difficult to say what the investment charge is without knowing the investments you are going to use. Providers also have to be very careful. They can talk facts but they cant offer opinion or advice. So, if you are being a bit wishy washy, they cant really be wishy washy back.

The EU also made it more complicated in respect of charges as investment charges now have to be shown in three figures. OCF, Transaction charges and other charges. Those are investment specific.

Some pension providers will be mono charged. i.e they have one set charge and no other charges (charges are often tiered based on value). Others will have a menu of charges for all sorts of events. It will depend on the type of investments you use as to which will be best. It will also depend on your level of research.

You can make it as complicated as you like or as simple as you like. There are contracts available to cater for both and all those in between.

Prism

Silver66 wrote: »

Thanks OldMusicGuy and cfw1994.

Cfw1994, I've just been on the phone to Aviva to ask about their charges. They said that I would need to speak to a financial adviser before opening a personal pension (they wouldn't take pension applications directly from customers, but only through a financial adviser) and the minimum fee for the advice, if I do go ahead and open an Aviva pension, would be £500. During the initial conversation with the adviser, I would be able to find out how much any on-going fees for advice would be.

I'm not yet confident or informed enough to be a self-investor. I'm trying to work out how much pension providers seem to charge on average, but so far, none have given me a specific figure, except for the company that my friends use. It's difficult when you don't know how much you might be paying.

Aviva absolutely do allow you to open a pension up without an advisor and their platform and fund charges for doing so are clear (I use them). However doing so that way does make you a self-investor which you say you do not want to be.

AnotherJoe

Silver66 wrote: »

Thanks everyone.

I’m so out of my depth here, I really don’t know what to do. Can anyone recommend a way forward? I’ve been researching this for weeks, and still haven’t made progress. Even when phoning the different pension providers, they can’t tell me straight up, in numbers, what their charges are, which makes it very difficult to compare them and make a decision.

They can tell you what the charges are, indeed they are on their websites, once you know how you will invest and what type of pension.


At the moment your question is not dissimilar to saying "I want to buy a car without specifying the make, model, or the finance,but when i phone up dealers and ask how much , they can’t tell me straight up, in numbers, what their costs are.


First step, get educated about the sort of pension you'd want, same as if you were deciding what car to get. Once you know that, then you can determine charges.