Excessive or reasonable charges for managed SIPP?

fronty

Hello,

In January 2016 I transferred my pension into a SIPP with Standard Life. I previously had a SIPP with Scottish Equitable and was managing it myself, but with a busy work life and the birth of my two kids I just found it impossible to do all the research and keep on top of it all, so I basically stopped managing it and it festered for a few years.

So I spoke to my IFA, they did a risk assessment and took the SIPP under management and added it to their "medium" portfolio. My IFA is PFM Associates, and on the whole I've been quite happy with them, they regularly review my SIPP and switch holdings according to the directives of their "investment committee". It's basically invested in around 15 funds with wide diversity.

Over the past 3 years my investment has grown by £63K, and is currently valued at £350K, however I have noticed some quite high fees being deducted and I am unsure if they are reasonable or not.

The charges are split between SIPP platform fees of approx. £100/month and "on-going advisor fees" of approx. £300/month. In total I see fees of approx. £450 being deducted on a monthly basis.

Over the past 3 and a bit years years the charges have amounted to approx. £16,700. Annually it's looking like around £5,700 is being taken in fees. So with a valuation of 350K this is working out around 1.6% PA. However I am only paying in £250/month gross at the moment, so it almost feels like my cash isn't being invested, it's just being taken in fees.

Now I appreciate that I have to pay to get a managed portfolio, and advice, but my SIPP is managed with a load of others and they switch us all in and out of funds as they see fit, I am not getting a personalised "discretionary" service.... so I am now wondering if the fees are justified.

I can't remember what they charge for this service but doing some quick maths it suggests it's 1% PA (350K portfolio, 3,600 PA in fees, you do the maths!), with the other 0.6% going to the SIPP provider. I'm not sure which bit of fees the fund management charges come out of.

So it feels like the IFA is charging around 1% for their management of my SIPP - does this sound reasonable? The problem is as my portfolio grows they are obviously going to take a larger and larger cut, so I am wondering whether I should switch to someone else. But then of course there's the old adage, "you get what you pay for"... a cheaper IFA might not produce as much growth... but I don't really know whether my IFA has done well or not at the moment, or whether their fees are reasonable or not.

Regardless I think I am in the wrong business!

Comments...?

Thanks,

Fronty

dunstonh

So with a valuation of 350K this is working out around 1.6% PA.

That's not bad as a total charge (platform, adviser, investments, and DFM). However, your later comments suggest you are not clear about the charges.

However I am only paying in £250/month gross at the moment, so it almost feels like my cash isn't being invested, it's just being taken in fees.

That is not a good way of looking at it as the fee is relative to the value of the fund. Not to your contributions.

Now I appreciate that I have to pay to get a managed portfolio, and advice, but my SIPP is managed with a load of others and they switch us all in and out of funds as they see fit, I am not getting a personalised "discretionary" service.... so I am now wondering if the fees are justified.

That is not correct. They will have multiple portfolios to suit different risk profiles and possibly time periods.

However, if they feel a portfolio for a risk profile and timescale is best then why would they want to do anything different for you? If their portfolio is best, then a different option for you would be second best.

I can't remember what they charge for this service but doing some quick maths it suggests it's 1% PA (350K portfolio, 3,600 PA in fees, you do the maths!), with the other 0.6% going to the SIPP provider. I'm not sure which bit of fees the fund management charges come out of.

I think you need to look at the fees again as they should be split as follows:
platform
adviser
investment fund
discretionary fund manager (which is vatable).

So it feels like the IFA is charging around 1% for their management of my SIPP - does this sound reasonable?

0.50% is the dominant figure used by IFAs. 1% is typical of smaller values. With your value, you ought to be looking for 0.5% as the target figure.

Regardless I think I am in the wrong business!

A common mistake for people not in business. What you pay is not pure profit. There are business costs to pay. These have been growing significantly over the years.

Alexland

fronty wrote: »

there's the old adage, "you get what you pay for"

Maybe - but with investments you also get to keep "what you don't pay for" and as your investments grow in size then it is possible to DIY invest for seriously low percentages. The more you know the less you pay.

Alex

BLB53

Worth exploring a DIY sipp? Would save a lot in fees over the coming xx years.

[Deleted User]

Typical forecasts for future real returns for a balanced portfolio, given current asset prices = 3%. 4% if it’s just stocks. If true, you are spending 40% to half of every pound you make on fees. In fact, you are spending this even when you are making losses. It’s a huge drag on your future retirement fund.

This is only worth it if you need hand holding and are unable to:

- read a couple of good books
- formulate your own strategy.
- write an investment policy statement
- stick to it.

Note that:
- One of the key bullets in your strategy should be cost control. This is the only element of future returns you can control.
- another element is simplicity. Should be very easy to manage. Hard to justify 15 funds in a SIPP, unless you need complexity as justification for high fees you are charging

In the end of the day you and your family are the only people who will suffer the consequences or enjoy the gains, so this isn’t really responsibility you can truely pass on to someone else.

And by the way, your SIPP has gained ~16% in 3 years. SWDA ETF (world market) returned this much every year (!) over the last 3 years - without ANY contributions. Costs 0.2% all in plus platform fee. Well diversified. I don’t know how much you have in fixed income, but given you have a young family, it shouldn’t be too much.

Alexland

Deleted_User wrote: »

Typical forecasts for future real returns for a balanced portfolio, given current asset prices = 3%. 4% if it’s just stocks.

Surely you mean nominal return? Given current asset prices a balanced portfolio should just about keep up with fees and inflation for the medium term.

https://www.vanguardinvestor.co.uk/articles/latest-thoughts/markets-economy/why-investors-prepare-for-lower-returns

Alex

[Deleted User]

Alexland wrote: »

Surely you mean nominal return? Given current asset prices a balanced portfolio should just about keep up with fees and inflation for the medium term.

https://www.vanguardinvestor.co.uk/articles/latest-thoughts/markets-economy/why-investors-prepare-for-lower-returns

Alex

Your link is showing predicted ranges from one source, but sure... Take your pick. The point is that real returns could be low and hence controlling costs is even more important. My fees are neither here nor there - around 10 basis points in total - but inflation is important.

Alexland

Deleted_User wrote: »

Your link is showing predicted ranges from one source, but sure... Take your pick.

Are there any reputable sources that having looked at current asset valuations would expect a portfolio constrained by a 40% bond allocation to achieve an average return of 3% above inflation? Sure that's a reasonable long term rate if starting from historic average valuations but people need to be realistic on what's going to be achievable in the medium term. In terms of how we get there will it be a smooth grindy path or more volatile - who knows?

Deleted_User wrote: »

My fees are neither here nor there - around 10 basis points in total

I don't see how a retail customer can hold a diversified portfolio for circa 0.1% fees? I was pleased when I managed to get my two pensions under 0.25% total each including fund manager and platform costs.

Alex

EdSwippet

Alexland wrote: »

I don't see how a retail customer can hold a diversified portfolio for circa 0.1% fees? I was pleased when I managed to get my two pensions under 0.25% total each including fund manager and platform costs.

Depending on what you are happy to hold, fees of circa 0.1% per year are entirely possible. It probably requires fully committing to the rationale of 'passive' investment, though. Also, a laser focus on finding and using the most cost-effective platform for your usage pattern.

My Interactive Investor SIPP costs me 0.11% per year, all in. Of this, nearly half is the £210/year annual platform and SIPP charges. My ISA and trading accounts, held at a different provider, both come in at 0.08%. It helps that I only trade at most once or twice a year.

All are sufficiently globally diversified by market cap and held in HSBC index trackers. The fund charges range from 0.06-0.08% (UK, US, EU ex-UK, all the larger holdings) to 0.21-0.24% (Japan, Pacific, these being the smaller holdings). The SIPP holds 40% in gilt funds with a 0.15% charge, which is what pushes its weighted total slightly above 0.1%.

Alexland

Sorry I don't understand the maths on the above. If the SIPP platform charge is nearly half of the 0.11% total then that would be 0.05% platform and 0.06% for the weighted average fund manager costs?

40% of the SIPP allocation is in a gilt fund with a fee of 0.15%? So the gilt fund alone has a fee equivalent to 0.06% of the total balance? Which would mean the 60% equity funds would have to have a zero fee? But they don't as they are at least 0.06%?

Even if the 60% equities were all 0.06% then with the gilt fund the total weighted fund cost would be 0.10% and the total pension would be at least 0.15%?

Alex

[Deleted User]

My situation is different. Most of my assets are in Canada. The broker charges zero for the privilege of having an account. Buying ETFs is free. Management expense ratios vary from 0.04% (VTI), 0.06% (XIC) to 0.1% (VPL) or 0.12% (VW0). I use Norbert’s gambit if I need to move between currencies, which costs 0.01% for a typical transaction value. Withholding taxes on dividends and a few other bits and pieces add a few basis points here and there.

Funds in the UK are being held within two separate pension schemes. They cost me more than I like but make up around 10% of the total portfolio. I will be moving them to either II or AJ Bell; haven’t quite decided.

Fixed income costs me lots, mainly in taxes, because it’s all in taxable accounts. I didn’t count it as part of the investment portfolio, perhaps it’s cheating. It’s more of a safety net than investment and is relatively small - designed to last 5 years if all goes pearshaped.

Still, once your total annual cost is below 50 bp, it’s tolerable. Anything near 1% is just wrong.