It's not you, it's me: taking a break from an IFA?

Snakey

So I've had an IFA now for about three years. It was really helpful at the start to get me a properly-done portfolio and to find out about assumptions professionals make when they're doing lifelong cash flow and so on. But I only need them for investment advice really - I find in our meetings I'm nodding along with what they say about tax planning, pension contributions etc rather than it being news to me.

Having noticed that they don't really make any changes to the selection of investments (I think one change in the whole three years) and been reassured that's normal, I'm wondering whether I'm using them as designed or whether it's more efficient all round to go away, let the portfolio ride, and come back when I have a change in personal circumstances.

I guess my questions are:

1. Say there's a massive overnight crash, do they leap into action and quickly re-jig my portfolio in a way that would never even have occurred to me, thus saving me hundreds of thousands (and so I should see the annual fee as an insurance policy)? Or are these portfolios built to ride out the ups and downs so they wouldn't even do that?

2. Assuming all the investments are the best possible ones at today's date, is the impact of not having a fund or two swapped out every couple of years in favour of a better one going to be greater than the cost of (let's say) four years' fees? Am I missing something about what's going on here? Is there a point at which the cumulative effect of maybe not having the best fund in every sector becomes a significant drag factor - if so, how long would that be?

Thanks for reading!

[Deleted User]

1. Some leap, others don’t. “Leaping” after a crash is very damaging to their clients’ financial health.

2. Swapping funds every two or three years shouldn’t be necessary in a well designed portfolio. Ongoing fees will have a significant effect. The charges apply not just to investment gains, but the original capital is reduced again and again and again ad nauseum.

SonOf

1. Say there's a massive overnight crash, do they leap into action and quickly re-jig my portfolio in a way that would never even have occurred to me, thus saving me hundreds of thousands (and so I should see the annual fee as an insurance policy)? Or are these portfolios built to ride out the ups and downs so they wouldn't even do that?

No. That is usually the worst thing you can do.

2. Assuming all the investments are the best possible ones at today's date, is the impact of not having a fund or two swapped out every couple of years in favour of a better one going to be greater than the cost of (let's say) four years' fees? Am I missing something about what's going on here? Is there a point at which the cumulative effect of maybe not having the best fund in every sector becomes a significant drag factor - if so, how long would that be?

We have had one fund representing the sector for about 10 years. However, that is currently being removed in the current reviews due to a change that is expecting significant outflows to occur. So, in isolation of the other holdings, that is one fund change in 10 years.

However, the weightings change every year. You tend to find the amount in each sector doesnt change significantly but there are periods when they do. Currently, there is no allocation to two sectors which did have allocations a few years ago. Plus, another sector is much heavier than it was several years ago at the expense of a different sector.

So, its less about the funds that are used but more about the weightings used as they reflect economic data over the cycle whilst retaining the portfolio within the target volatility range for the individual.

Is there a point at which the cumulative effect of maybe not having the best fund in every sector

How do you measure which fund is best? For some people, having a consistent third quartile performer could be the best option. A top quartile performer could be there (and often is) because of the increased risks being taken. Those risks may not be consistent with the risk level of the individual.

fred246

Snakey wrote: »

Having noticed that they don't really make any changes to the selection of investments.

You must have employed an inexperienced IFA. They normally make a few changes so they can justify charging a few thousand pounds for 10 minutes work.

Snakey

SonOf wrote: »

How do you measure which fund is best? For someone people, having a consistent third quartile performer could be the best option. A top quartile performer could be there (and often is) because of the increased risks being taken. Those risks may not be consistent with the risk level of the individual.

I suppose it's a bit circular isn't it: on the assumption that I trust the IFA to be making the best decisions for me and my risk level etc, if he would have swapped out a holding had he still been there then I must have a sub-optimal portfolio from that point on because I haven't swapped.

I guess the value, then, includes also the sectors and weightings that I'm not taking into account. (I can't recall them rebalancing for me, now I think about it - perhaps the proportions just haven't veered far enough away from the plan to do it yet.) I'm meeting them next week (which is what prompted my post) so I'll ask about these things and how often they're typically done.

beamyup

Just do it.

You may feel less of a "warm and fuzzy" feeling, but consider it rationally, that was just part of the sales pitch, not reality.

You will have to decide your own attitude to risk, (you did that already though of course). And you may decide to do a bit of "reading up" (not 100% necessary but will give you the warm and fuzzy feel back to some extent)

squirrelpie

I had an IFA to look after my investments a long time ago. He didn't take me out of tech stocks until after the dot.com bubble burst and lost me a lot of money. We went our separate ways and I've been managing my own investments since. They do OK. I expect there are IFAs out there who could do better but I've no idea how I would find one and I don't want to waste effort looking.

fjh

Could you go 'pay as you go' e.g just pay when you need help rather than ongoing % of your 'pot'?

Linton

Snakey wrote: »

I guess my questions are:

1. Say there's a massive overnight crash, do they leap into action and quickly re-jig my portfolio in a way that would never even have occurred to me, thus saving me hundreds of thousands (and so I should see the annual fee as an insurance policy)? Or are these portfolios built to ride out the ups and downs so they wouldn't even do that?

The ideal portfolio is one where you are not concerned about the ups and downs. To get somewhere near the ideal the IFA needs to understand what return in what timeframe you require and what level of fall would make you concerned. The job is then to choose the set of investments which will keep within the risk limit whilst still achieving your objectives (taking all charges into account). It may well be the case that your objectives are incompatible with the degree of risk you can accept. The IFA should explain this to you so you can lower your expectations.

Blindly going for maximum return is very poor investing. Selling out in a panic when a crash happens turns a paper loss into a very real one.

If you have the knowledge and experience to calculate the return needed to meet your objectives and create a portfolio that has a good chance of achieving this within your risk tolerance you should only need an IFA If there are complex circumstances. Otherwise, otherwise.

2. Assuming all the investments are the best possible ones at today's date, is the impact of not having a fund or two swapped out every couple of years in favour of a better one going to be greater than the cost of (let's say) four years' fees? Am I missing something about what's going on here? Is there a point at which the cumulative effect of maybe not having the best fund in every sector becomes a significant drag factor - if so, how long would that be?

Neither you nor an IFA can predict the future. So you need a portfolio that will have some resilience against a wide range of possibilities. The implication is that at most times you will not be achieving the maximum possible return. However neither will you achieve the worst possible return in a crash. All that matters is that you meet your objective in your required time frame.

The only time it should be necessary to change your portfolio is when the portfolio becomes inappropriate for your objectives. eg
- major external events make it unlikely your objectives will be achieved
- your objectives change
- the characteristics of a fund in your portfolio change
- the % allocations change because of significant changes in relative fund prices.

You or your IFA would need to monitor the situation and make the alterations when required.

Linton

squirrelpie wrote: »

I had an IFA to look after my investments a long time ago. He didn't take me out of tech stocks until after the dot.com bubble burst and lost me a lot of money. We went our separate ways and I've been managing my own investments since. They do OK. I expect there are IFAs out there who could do better but I've no idea how I would find one and I don't want to waste effort looking.

Possibly you are were being a little harsh. After all, if you had simply gone for a tracker you would have lost 50% of your money, at least temporarily. Supposing the IFA did have the powers of Nostradamus and sold off all your tech stocks a year before the crash would you have been happy as all your friends and colleagues laughed at you kissing out on all the growth.

The real mistake was to have been so highly invested in any single sector that a localised failure would cause serious problems. However, the market did make that mistake. One of the few fund managers who did see the dangers was sacked because of complaints from unit holders at missing out on the bonanza. Woodford was lucky in that his strategy was based on solid income generating companies which the tech startups certainly were not.

One important factor was that information on asset allocation was not readily available in 1999 but now there are the tools necessary to provide the necessary level of control.

wjr4

IFAs are not just investment managers. Your IFA should also be giving you advice for your long-term financial plans (mortgage, IHT, protection etc) and ensuring all investments etc are tax-efficient.