Excessive or reasonable charges for managed SIPP?

[Deleted User]

Lokolo wrote: »

I decided my asset allocation before choosing my funds. In order to match my asset allocation I required 7 different funds. For reference this is my asset allocation (and I have no idea how to format on MSE even though I've posted thousands of times!)

UK Large Cap 14%
UK Small Cap 12%
Europe ex UK 20%
US All Cap 26%
Asia inc Jpn 10%
Emerging Markets 13%
Tech 5%

I suspect I could get the UK Large and Small cap in one fund, and maybe include the Europe as well. But overall it's fine for me.
I can see why you only rebalance every 5 years with only 3-4 ETFs, I'd be interested to know your asset allocation.

I think the OP putting £350k in one fund wouldn't be advisable unless it is a multi asset fund. And even then I'd have to seriously questioning it.

If it was me, I would have removed Tech too. a) it’s duplication for Apple and Google which you already have aplenty b) you are splitting by geography and then you have an industry sector. Seems inconsistent (and leads to duplication) c) 5% allocation is kinda meaningless and just ads complexity.

I have 35% US, 28% Canada (where I spend money), 20% other developed and 17% EM. I am probably a little high on the home market, but that’s how it was set up, has tax advantages and there would have to be a major reason to change. Higher EM than most, perhaps too high but it actually has done well and you do eke extra benefit from rebalancing.

I also have a fixed amount of approx 150k pounds allocated to fixed income (mostly short term government bonds) and cash, but that’s a separate pot.

For rebalancing I follow the 5/25 rule. My Google Sheet sends me an email when anything is out of whack. It’s very rare.

fred246

People should charge for what they do. If they charge £3600 that works out at 18 hours at £200 per hour. I think £200 is excessive. That would be 18 hours of work to check a portfolio. How can anyone take 18 hours to check a portfolio? Anyone charging a percentage is always trying to cover up profiteering.

[Deleted User]

menziesthefish wrote: »

That is purely subjective and can only be determined by the OP. It's a matter of 'value' rather than pounds & pence.

Again, this is purely subjective. How do you measure good or bad? Based on your other comments you seem to be suggesting that the IFA's only role is to consistently match or beat a given benchmark and that is the primary determinant of what you would consider 'success'. Given no-one can do this consistently I doubt any IFA would be willing to be measured on that basis - unless they advertise themselves as investment managers, in which case more the fool them!

I don't disagree that the OP could have achieved better returns for less cost elsewhere or taking the DIY approach, but he could equally have been charged an awful lot more and achieved far lower returns through a rogue IFA or poor DIY decisions. At the end of the day a 1% charge by the IFA is not 'excessive' IMO, which is the original question.

I think IFAs primary role, when dealing with investments, is to hold hand of those who can’t be bothered about their own and their family’s future and can’t read a book or two with readily available guidance.

I also think that any annual IFA charges for “managing” pension money are wrong. If you pay for a violin lesson, the teacher charges for his time even if you continue to get the benefit of what you’ve learnt. Same goes for lawyers and everyone else.

If IFA were to charge full amount for his time up front, at least it would be transparent: “I charge 10,000/h and portfolio set up will take a few hours. I take zero responsibility and have no incentive for your portfolio to do well, except to make it complex so that it looks like I’ve done something.”

And if you really want them to actually manage your money day to day and pay annual fees, at least their incentives should be strongly correlated with the benefit they bring. Say, 10% of the value by which they outperform a benchmark. And if they underperform then IFA should take a corresponding loss.

menziesthefish

I think IFAs primary role, when dealing with investments, is to hold hand of those who can’t be bothered about their own and their family’s future and can’t read a book or two with readily available guidance.

I don't think there's a need to be condescending. If you have 'read a book or two' and have single-handedly secured your and your family's future by making a fortune self-managing money, well done. Genuinely.

In reality though, most people (such as the OP) do not have time to dedicate to such things as they have busy working lives and would prefer to spend what little free time they have with their family, friends etc. It is the same reason that people pay for an electrician rather than learn how to install their own lights, or do their grocery shopping online so they don't have to spend hours fighting their way round the local supermarket on a busy Saturday with screaming kids. It's a matter of personal priority and valuing certain things more than others. It doesn't mean they 'can't be bothered', that's a little short-sighted.

I would also argue that the primary role of a good IFA, when looking after someone's investments, is behavioural management and education, not just 'hand-holding' as you put it. It's to stop the investor panicking when markets fall, or getting carried away when markets spike. Human nature is the biggest determinant of poor performance when self-managing investments; people's obsession with trying to time the market, pick the next 'big thing', follow the trends etc. All of things that make the big crashes so severe and the bubbles so big - though I'm sure you avoided all of those thanks to your books

Linton

An IFAs role should primarily be about the customer. Which specific investments are chosen is a relatively minor detail.



To invest sensibly you need to have an objective, and a viable strategy for getting there. This needs to be developed in the context of the customers financial, tax and personal situation, and their ability to understand and cope with risk.


Just starting off is difficult for many people. Count the number of posts we have had along the lines of "I have inherited £500K, what do I do with it" with no other information. From the replies in this thread it would seem many of the more vocal people here would say "put it all in VLS60, job done". But the job isnt done, it hasnt even been started. A good IFA should help the customer to develop and document objectives. The customer may well need advice as to what is and isnt realistic, omissions rectified - eg "what should happen regarding your spouse if you die early" and areas of uncertainty clarified.


Once both the IFA and the customer understand what is wanted then some strategy can be developed. The answer may be simply to leave the whole lot in cash - eg if the objective is to buy a house in 5 years time. To have any chance of meeting the objectives there may be a need for a high equity component in the investments. If so the customer will need to understand the risks involved. If these cannot be accepted there may be a need to hone or redefine the objectives - eg delay planned retirement. At the more detailed level there is the problem of tax. This could lead into consideration of the various containers in which investments can be held.



Then we can get to the point of selecting investments. Some people here apparently think the IFA should look for maximum return. This could be disastrous. A better aim is to chose those investments which together can provide the return required to achieve the objectives at minimum likelihood of failure. A fee system based on achieving returns above benchmark is clearly stupid.


Now we have the question of ongoing support. With the type of approach outlined above it is important to undertake regular checks that the progress continues to be compatible with meeting the objectives. Should things go off course possibly relatively small tweaks to the investments may be required, perhaps ongoing contributions increased, or it may be necessary to take a deeper look, possibly leading to change of objectives. Or the customer's circumstances may change making the original objectives inappropriate. One cannot simply passively ignore the investments for 20 years and hope it turns out all right.


Of course the IFA does not have "zero responsibility". If the customer suffers losses due to advice that can be shown to be inappropriate for the circumstances compensation can be claimed, which is why IFAs have high insurance costs.



Of course the process outlined here probably will not be justified for somone putting £5K/year into a pension they hope to take in 30 years time. For this type of investor I would agree that anything other than a simple multi-asset fund and minimal or zero advice is probably inappropriate. On the other hand, in my view for someone with a life-changing pot of money and no experience of serious money management working through an IFA is essential. To suggest that they would be better off simply reading a book and putting all the money in a tracker is totally irresponsible.

k6chris

Just to build on Linton's excellent post, the reason not to pay IFAs based on financal results is that is encourages excessive risk taking. If you want to reward me with a percentage of any growth above some benchmark, I am going to select a volatile portfolio of 'high risk - high return' investments that may indeed 'beat the market' - but may well tank. I could make a very nice living by 'reccommending' a variety of HR-HR portfolios to a number of different people, safe in the knowledge that a few of these will pay handsomely. My risk is spread - yours is not. Anyone want to pay me 10% for all market beating growth from a 100% Bitcoin recommendation??

Aegis

It's worth looking at the proposal's financial's as well. Take a £1 million portfolio and assume for the sake of argument that the IFA can squeeze an extra 1% a year out of the portfolio compared to the selected benchmark. On that basis, the 1% outperformance would be £10,000, and 10% of the outperformance would be £1,000. Advisers are not going to be keen to take on the risk of a £1 million portfolio for £1,000 a year guaranteed, let alone one where they have to pay money back if the portfolio underperforms a benchmark.

OldMusicGuy

Everything Linton says is what many of us recommend to people on here. Decide your objectives and understand your attitude to risk before you do anything. You don't need an IFA for that if you are prepared to do a bit of reading and thinking. I always say you should do that before consulting an IFA, based on my own experience.

My experience of using an an adviser to help me define a portfolio was not good. I am very risk-averse, so without understanding what risk really meant (and with no knowledge of investing), I would always tell an adviser I'm a 1 on a scale of 1 to 10. That meant the advisers made very poor investments for me because they did what I asked. Now I understand more about how investments and funds work, I would be more adventurous. My biggest mistake was not investing in more equity-biased funds in the first phases of my pension investments (which was 30 years ago).

So although a lot of people say "it's too complicated" or "I don't have time" I would always urge a different approach. This is one of the most important aspects of your life and you should make time to understand at least some of the basics. You can then decide if it makes sense for you to use an IFA or maybe you can go the whole hog like many of us do and DIY.

Regarding charging, I've said it before and I'll say it again. There is no downside for % age-based rates and I don't think that's right. I think a better charging model would be a flat rate servicing fee and then a %age of any gain they deliver compared to a benchmark portfolio. Thus they get a share of any over-performance but a flat fee if they under-perform.

shinytop

Regarding charging, I've said it before and I'll say it again. There is no downside for % age-based rates and I don't think that's right. I think a better charging model would be a flat rate servicing fee and then a %age of any gain they deliver compared to a benchmark portfolio. Thus they get a share of any over-performance but a flat fee if they under-perform.

wouldn't that just encourage the advisor to go high risk every time as there is still no downside for him/her; just an upside based on gambling with someone else's money.

I haven't got any better ideas though...

dunstonh

Regarding charging, I've said it before and I'll say it again. There is no downside for % age-based rates and I don't think that's right. I think a better charging model would be a flat rate servicing fee and then a %age of any gain they deliver compared to a benchmark portfolio. Thus they get a share of any over-performance but a flat fee if they under-perform.

Advisers are not responsible for the returns. The funds are. The IFA picks the funds but thats it. The primary objective of an investment recommendation is suitability. Not investment returns.

Growth periods outnumber negative periods. And with the increased risks, charges would need to increase overall for that model to work.

Plus, as already said, it would introduce bias towards higher risk investments.

We know that DIY investors tend to take more risk than advised investors and the recent thematic review by the FCA found too many DIY investors making bad decisions. So, it cannot be assumed that everyone can DIY and it cannot be assumed that everyone wants to DIY. If they do, then and can do it well then do it. If not, then there is nothing wrong with that.