IFA Ongoing Fees

segovia

This is probably a stupid question, but .......

Why do IFA's charge an ongoing fee, typically 0.5% of the investment which seems to be an industry norm?

And how long does this relationship normally last, assuming I move into drawdown mode in a few years time, I'll still have a balance of the pot to manage. At what point does the relationship normally cease?

Assume a 400K pot over a 5 year period with a growth avg of 5% PA IFA fees would be circa £11,000.00 which is 13% of the profit on the fund. Obviously, if the rate of return is higher the % of the profit is lower.

J

Malthusian

segovia wrote: »

This is probably a stupid question

Nope.

Why do IFA's charge an ongoing fee, typically 0.5% of the investment which seems to be an industry norm?

Because regulated advice has value. If there is an ongoing relationship the IFA is required to review the client's position and the suitability of whatever has been recommended at least annually, and this has a cost to them and a benefit to the client. If however you don't want an ongoing relationship, there is nothing stopping you from paying on a transactional basis as and when you ask for advice.

And how long does this relationship normally last, assuming I move into drawdown mode in a few years time, I'll still have a balance of the pot to manage. At what point does the relationship normally cease?

When you no longer perceive any value in advice, or when you would prefer advice from a different IFA, or are dead.

Assume a 400K pot over a 5 year period with a growth avg of 5% PA IFA fees would be circa £11,000.00 which is 13% of the profit on the fund. Obviously, if the rate of return is higher the % of the profit is lower.

It's not a % of the profit though, it's a % of the fund. IFAs do not charge performance fees and if they did it would be a rip off.

IFAs provide advice; investment growth comes from the investment.

lisyloo

Well mine offers me advice on managing the investments which are skills I don’t have.

If you’re happy to take All the decisions yourself regarding investment and tax legislation then don’t pay an IFA, it’s easy enough to DIY these days (apart from the limited situations where your are forced to legally take advice).

The relationship can last as long as you want e.g. I expect to keep invested (to a gradually lesser extent) throughout retirment.

Yes you are correct it’s a lot of money.
I think my IFA is worth it and you haven’t mentioned avoiding large losses.
If you don’t then DIY and don’t pay the fees.

fred246

IFAs used to get you to sign a contract to buy products. On the last page they would have a list of commissions. The first few years were enormous like 30%. They would then continue indefinitely. So one product would provide the IFA an income for life. IFAs liked this income for life for doing nothing. Trail commission is still being paid. When selling on commission was banned IFAs were upset so found this new way of being paid continuously for doing very little.

beamyup

fred246 wrote: »

IFAs used to get you to sign a contract to buy products. On the last page they would have a list of commissions. The first few years were enormous like 30%. They would then continue indefinitely. So one product would provide the IFA an income for life. IFAs liked this income for life for doing nothing. Trail commission is still being paid. When selling on commission was banned IFAs were upset so found this new way of being paid continuously for doing very little.

Earlier than that (in the mid to late 1980's) there was no transparency at all and fees were even higher, the first 2 years of premiums (100%) then 7-10% per year was common.

The people who sold these products (some of them) are now FA or IFAs, and of course in a few cases still getting the annual commission (not so many now!)

OldMusicGuy

IFAs charge an ongoing fee on portfolio value because that's the way they work. You can also pay for one-off transactional advice, which is also typically based on portfolio size but not ongoing. So you could pay an IFA to advise you on setting up a portfolio but then not pay for ongoing advice.

Or you could read these books, check out the Monevator website and create a simple portfolio to reduce the IFA fees to nothing:

Investing Demystified by Lars Kroijer
DIY Simple Investing: A Guide to Simple but Effective Low Cost Investing by John Edwards

There's no way of knowing if IFAs are providing any quantifiable value or not in terms of investment performance. It's all down to personal preference.

Prism

Its a similar choice that people make when going for a 0.75% OCF active fund vs a 0.25% passive fund. No right or wrong way - just a choice. Does a 0.5% fee get you better results - only in hindsight will you know.

segovia

beamyup wrote: »

Earlier than that (in the mid to late 1980's) there was no transparency at all and fees were even higher, the first 2 years of premiums (100%) then 7-10% per year was common.

The people who sold these products (some of them) are now FA or IFAs, and of course in a few cases still getting the annual commission (not so many now!)

A frightening thought, I took out my personal pension in the 80's, the IFA has long gone, moved into another industry. I wonder if he has been receiving a commission for the past 30 years

lisyloo

OldMusicGuy wrote: »

There's no way of knowing if IFAs are providing any quantifiable value or not in terms of investment performance. It's all down to personal preference.

I think it’s possible to build virtual portfolio and track the diy investments one would have made and compare it with the IFA portfolio.

Someone on here was telling me they use a vanguard passive funds.

Why is it not possible to compare a passive investment with my IFA portfolio figures?

cfw1994

lisyloo wrote: »

Well mine offers me advice on managing the investments which are skills I don’t have.

If you’re happy to take All the decisions yourself regarding investment and tax legislation then don’t pay an IFA, it’s easy enough to DIY these days (apart from the limited situations where your are forced to legally take advice).

The relationship can last as long as you want e.g. I expect to keep invested (to a gradually lesser extent) throughout retirment.

Yes you are correct it’s a lot of money.
I think my IFA is worth it and you haven’t mentioned avoiding large losses.
If you don’t then DIY and don’t pay the fees.

I understand how many won’t feel they have the knowledge to DIY....
....but how does your IFA help you avoid large losses?

Or do you just mean they can (with your profiling!) chose to invest you in lower risk funds?

To my knowledge, IFAs never reimburse for any losses in holdings....

OldMusicGuy

lisyloo wrote: »

I think it’s possible to build virtual portfolio and track the diy investments one would have made and compare it with the IFA portfolio.

Someone on here was telling me they use a vanguard passive funds.

Why is it not possible to compare a passive investment with my IFA portfolio figures?

You could do that to at least give you some comparison of relative performance. And if you could do that, why doesn't the IFA base their charges on how they outperformed a benchmark portfolio? Because they don't have confidence in their ability to consistently outperform anything and they want to maximize the income out of you based on an outdated charging model.

I've suggested that approach before, because we've had IFAs on here extolling the virtues of their custom portfolio over things like Vanguard. Will they put their money where their mouth is? No.

I personally hate charging models based on things like a portfolio percentage where there is no downside for the service provider, only upside for them, regardless of how "valuable" the advice is. Which is why I prefer not to use an IFA.