IFA ongoing fee..Why pay?

Jaynishriya

SonOf wrote: »

Fees have to be higher than costs in all walks of life otherwise there is no point.

That’s the modelling assumption the authors of the article use to demonstrate their point, why the market exists, because investors’ trust they place on managers drives a wedge between fees and costs. The point being that fees may well be considerably higher than costs in some scenarios. In this case, without trust, fees may well fall down to costs and the market will cease to exist, as you say, there would be no point.

bowlhead99

Jaynishriya wrote: »

That’s the modelling assumption the authors of the article use to demonstrate their point, why the market exists, because investors’ trust they place on managers drives a wedge between fees and costs.

So in other words, there is a market for advisory services because investors would prefer to trust someone else to figure out what to do and arrange for them to do it, than research and implement a solution themselves.

This is like the fact that some people would prefer to trust a taxi driver to get them from A to B rather than select and rent or buy their own car and learn how to drive and read a map. Or trust a mechanic to inspect and maintain the moving parts on their car, or a plumber to install and maintain a central heating system or toilet, or someone to do their doctoring or dentistry. The preference to pay money rather than DIY is why the market for all of those things exists.

In all types of business services there is - as you say - a 'wedge driven' between the cost to the practitioner of providing the service and the fee charged for the service, because if customers only valued the service at what it cost the practitioner to provide it, nobody would be willing to provide it, and the customer would have to do the task himself.

Some of the tasks might feel more 'expensive' if the customer did them themselves, like buying or leasing a car just to take a monthly trip to the shops, or buying a torque wrench and handbook just to do an adjustment to your engine once every few years, or educating oneself about all relevant financial concepts and deeply researching the market for suitable investment products just to open an account and click 'buy'. Whereas the practitioners could effectively have a lower cost base because the car, the torque wrench and guidebook or the financial education and research costs could be shared among multiple customers. The economies of scale help to lower the underlying cost so that the 'wedge between cost and fees' does not feel so high.

The point being that fees may well be considerably higher than costs in some scenarios. In this case, without trust, fees may well fall down to costs and the market will cease to exist, as you say, there would be no point.

Fees will always need to be higher than the cost base or there would be no point.

If you are Vanguard you can make pennies per thousands of pounds managed and have enough to run the business when you are looking after literally trillions of pounds. However, Vanguard wouldn't send someone round to your house for a cup of tea and a chat about your specific personal circumstances and issue you specific regulated financial advice, for pennies.

If the customers only want to pay pennies, they won't get 'advice' - because there's no point for someone to deliver that to them in exchange for mere pennies. Which is fine, for those customers who are happy to DIY.

Likewise if customers only want to pay pennies for asset class selection and selection of specific financial instruments within those asset classes, they will end up using a passive-based solution bought off the shelf. If the customer paid a lot more than pennies for a bespoke solution they may be disappointed when a passive solution marketed as 'medium ish' risk produced better returns because its asset allocation favoured a particular set of economic conditions. However in another set of conditions they might be pleased with themselves and think it was worth paying the premium of £15k extra fees to avoid an extra £40k of unwanted losses delivered by the 'off the shelf' solution. People's views will be coloured by their actual results.

Of course, it is important to think 'long term' rather than look at some short run period. In the long term, keeping costs down is sensible, as well as being allocated to the right things at the right time - or at least, allocated broadly so that you are always in some of the right things at the right time even if you are also in some of the wrong things. For plenty of big markets, there are good trackers available, while for other markets, the tracker solution is less adequate.

[Deleted User]

As someone completely uninterested in the industry up to the time when I had to choose what to do with a DB pension, my priority was to avoid a scam. I had to use advisers. It quickly became apparent that the industry is paranoid about avoiding potential future claims against advice, that parts of their process, like risk-profiling, are largely bogus and came to the conclusion that their place as industry middle-men means their advice may not coincide with a client's best interests, let alone add value to his fortune.

NeilCr

I guess - like everything else - you are going to get good and bad IFAs

Personally, I have had good experience of IFAs. My current one is very good. Like lisyloo says she is active and reviews every three months. She is very accessible and I have had a decent return on my investments. She is, also, pretty good with handling my anxiety! As I said earlier in another thread they were pulling people out of Woodford many months ago

I am with lisyloo - I don't want to have to do anything so am okay about paying the ongoing fees. I understand the counter arguments but we have to do what we are most comfortable and happy with.

There is probably, also, something about our own selection processes in there.

[Deleted User]

NeilCr wrote: »

I guess - like everything else - you are going to get good and bad IFAs. My current one is very good. Like lisyloo says she is active and reviews every three months. She is, also, pretty good with handling my anxiety!

I am with lisyloo - I don't want to have to do anything so am okay about paying the ongoing fees. I understand the counter arguments but we have to do what we are most comfortable and happy with.

There is probably, also, something about our own selection processes in there.

Yes, that's true. Many people self-identify as "unlucky" and would take £9 for £10 rather than choose heads or tails.
But it is a lot easier to manage personal investments than many believe: I have sold only one stock this year, and bought two. I don't kid myself that I can value an investment more accurately than professionals, I don't have to: I just look at the price on the stock market. But then over 90% of my investments are concentrated in a handful of companies, only 7% in managed funds. I'd be wary of an adviser who was regularly trimming, sometimes for no better reason than a stock may have performed too well and needs to be sold to re-balance a portfolio.

coyrls

ZingPowZing wrote: »

But then over 90% of my investments are concentrated in a handful of companies

Crikey and this is your pension?

bigadaj

ZingPowZing wrote: »

Yes, that's true. Many people self-identify as "unlucky" and would take £9 for £10 rather than choose heads or tails.
But it is a lot easier to manage personal investments than many believe: I have sold only one stock this year, and bought two. I don't kid myself that I can value an investment more accurately than professionals, I don't have to: I just look at the price on the stock market. But then over 90% of my investments are concentrated in a handful of companies, only 7% in managed funds. I'd be wary of an adviser who was regularly trimming, sometimes for no better reason than a stock may have performed too well and needs to be sold to re-balance a portfolio.

Good grief!

bostonerimus

SonOf wrote: »

It is not a great example of IFAs making it more difficult as it is a regulatory requirement following MIFIDII.

...and I was making a point about jargon.

bostonerimus

NeilCr wrote: »

She is, also, pretty good with handling my anxiety!

I think this is the best argument for an IFA. The actual mechanics of personal financial management can be done inexpensively by anyone with some basic common sense. However, the psychological side of things can be difficult. I can see how an IFA could be a good "hand holder" and offer reassurance.

LHW99

I think also many of us may reach a stage in life some time after retirement, when even if we had been very happy to DIY / self-manage when younger, feel that it would be preferable to allow a qualified professional to take on the task. At that point we may well be happy to pay the fees, rather than risking making a significant error due to some "senior moment"