Advice on IFA stuff

sixpence.

Hello

I am in the very fortunate position where I have been gifted about 700K. I posted a thread on this a while ago [https://forums.moneysavingexpert.com/discussion/6046202/question-re-700k-investment] and I found all of the comments massively helpful. Since then I have done some research (read some books, Googled stuff, did a cheap course on investing, talked to people etc). The main pro-active thing I have done is start to research, speak with, and meet with IFAs. I am keen to invest the money soon, but I want to do it in a way that is considered and smart as this is obviously a big responsibility / opportunity.

I have only been using unbiased to meet IFAs because I don’t know anyone who can give a personal recommendation. I have tried asking several people but no luck.

Brief summary about me and my goals: 30 years old. For reasons I won’t go into, I was not able to work during my twenties. I want to use the money for passive income – either through drawdown growth or income funds – using stocks and shares. I am happy to to put the money away for 3-5 years at least. My goal is to get 8% return per year on average, exclusive of costs. I will use 4% of this for income and the rest to cover inflation. I feel comfortable with a 5 or 6 /10 risk level. All of the IFAs I’ve spoken to so far (about four in total) say that this is achievable, bar one who was said it was overly ambitious. That person seemed quite young and inexperienced though.

So far I have met two IFAs, spoken to a few on the phone, and emailed several. Here are some questions. Feel free to answer all or none of them. All comments that intend to be helpful will be greatly appreciated. As I said in my last thread, I am in the position where I don’t really have anyone in my personal life who I can talk to about this, and anyone who I might doesn’t know anything about S&Ss and is obsessed with the idea of investing in property (silly them, in my humble opinion).

1. Some of the IFAs use a wealth management company. Here is an example of one of the wealth management companies that one of the IFAs uses [https://www.lgtvestra.com/en/about-us/lgt-vestra/]. Curious to know what people think of this particular company and also the idea of using a wealth management company. I suppose that it adds a layer of divarication (more cooks) but it also adds a layer of cost!
2. Re costs: fees vary from 1.4% to 2.5% with the (seemingly) most competent and experienced IFA coming up at 2.25%.
3. The IFAs have started sending me preliminary plans. These seem to be standard procedure at this stage to see if we might work together. The problem I am countering is that I am not sure how to tell how decent these reports are. This is obviously an issue of ignorance on my part. Does anyone have any tips for how to review them? The first one included a break down of what funds will be in the portfolio, asset allocation, equity allocation, and currency. I have only read through once, but any advice on what to look for in a second / third read through would be very helpful. I’ll try again and maybe reread through some notes I have on what makes a good fund. Maybe if I work out if the top 5-10 funds are appropriate that will be a good initial indication.
4. Before I pick which IFA to work with, is it worth hiring someone to review their plan and see if it’s good? A second pair of eyes. I think the problem is that I’m a layperson who has done some research, so my knowledge is very limited. Some good advice I got is that I should be able to explain the investment to a friend and have it make sense.
5. This is obviously a really great thing but I’m also finding it overwhelming. I really badly want to make the right decision. I know there’s a lot to be said for just sticking it all in a VLS 60 but I am not sure that will be diverse enough (I am familiar with how diverse the VLS model, don’t you worry). I also think I need someone to help me with tax stuff etc. 

Thanks. I appreciate any help with this!

SP

 

Linton

Some specific points....
1) Planning on 8% return is in my view over ambitious especially with your moderate risk level. Much better to plan for something rather less.  You need to set your expectations on the low side if you want to avoid living your life stressed over every fall in the markets. Taking an income of 3.5% of your initial pot increasing with inflation is considered likely to be sustainable in the long term.
2) You should not be focussing on the detailed choice of funds. Everyone will have different ideas and to be honest, assuming that it isn’t foolish or outside your risk comfort range, will not make a very great difference. More important is a clear overall strategy and a broad view on the issues. For example, in your case tax may need careful consideration.
3) I suggest you avoid Wealth Managers and the like. Best to go for a small scale local personally recommended IFA who knows his/her business and with whom you can relate. Do not consider one of the expensive national companies with their plush offices and glossy brochures. £700k sounds an enormous amount of money, but it really isn’t in the overall scheme of things. A small local advisor should be more than capable of handling it. From the little you have said so far I rather like your young and inexperienced guy who was prepared to tell you what you might not have wanted to hear.

sixpence.

Okay, so:
Re 1: you think 3.5% income and then maybe 3% to cover inflation would be good. So 6.5% average per annum?
Re 3: she really didn't seem to know what she was talking about. I'm not just adverse to her because she suggested my plan was overly ambitious, she seemed quite salesy etc. She also worked for a big company and had just started there. I am speaking to an individual IFA today who seems good. Why would you avoid Wealth Managers? Because of the extra cost.

Linton

3.5% in the context of providing a steady income would normally mean 3.5% of your initial pot, £24.5K/year, increasing with inflation, rather than 3.5% of whatever your pot happened to be at the time. The key objective in constructing the portfolio is to provide a steady income at minimum risk whilst equity values are fluctuating, possibly wildly at times.  The average return is only part of the equation, not a predefined target.
It would be better to think in terms of return above inflation rather than a simple sum of drawdown and an arbitrary inflation coverage. You do not want say 5 years of 10% inflation to destroy your long term future.

A Wealth Manager is a second level of cost which should not, in my view, be necessary in your circumstances.

Alexland

Drawing 3.5% after paying platform, investment and advice costs on a medium risk investment from age 30 seems very risky to me. It's hard to see how a balanced risk investment will deliver much more than inflation at current valuations (stocks just got cheaper but bonds went up again). Often we talk about safe withdrawal rates in terms of the money not being fully depleted over a retirement period. But the OP is looking for this pot to last roughly twice as long? I was only planning to draw around 3% rising with inflation from age 58 onward and that's with lower costs.

dunstonh

Why would you avoid Wealth Managers?
It is a generalisation....
In general, firms that use the tagline "wealth manager" tend to be more expensive, restricted in their offering (including IFAs clinging on to the IFA tag rather than FA) and use DFMs for everyone (advisory is usually cheaper than DFM).    The use of a DFM can be suitable but it does make the adviser job easier.   Yet you pay the extra.  Not the adviser.

Drawing 3.5% after paying platform, investment and advice costs on a medium risk investment from age 30
I have seen actuarial guidance that 3.5% is fine from 65 but it should drop to 3% from 55.   I haven't seen it modelled earlier than that but inflation is going to need to be factored in to a higher level.    I would be inclined to quote figures around 2.5% at that age as a sensible draw rate.  If it ends up being better you have the extra to draw.  It is unlikely to be worse but you should always plan at the lower end rather than plan at the higher end.

8% return is just silly to use in planning.   

sixpence.

I am confused. The VLS 60 averages 7-8% growth per year so that was where I got this stat from. I was thinking 3.5-4% to live off and then the rest would cover the inflation of the pot. Have I greatly overshot with this estimate? In the last thread I posted here, I felt like everyone said this was reasonable... 

Alexland

You are looking at a period of time in which both equities and bonds have both been growing very nicely helped by reducing interest rates not a full economic cycle. As a result valuations have become stretched (in particular bond valuations) which will affect their ability to compound in future years. Vanguard's own 10 year outlook is that global equities will return around 4.5% and global bonds will return around 1% which would give a weighted average return of around 3% pa for a 60/40 allocation before deducting fees. Shares have gone down a bit since this was published but bonds have gone up so it's not going to make a huge difference to this outlook for a balanced investor.

https://www.vanguard.co.uk/adviser/adv/articles/research-commentary/markets-economy/global-outlook-summary-2020

dunstonh

I am confused. The VLS 60 averages 7-8% growth per year so that was where I got this stat from. 
VLS60 has only ever existed in a growth period (until now).  It was created after the credit crunch when markets fell 43%.  You need to average out the negative and nothing periods over a longer period than the VLS has existed.

 I was thinking 3.5-4% to live off and then the rest would cover the inflation of the pot. 
Broadly speaking, going back to the year 2000, you would expect 60% equities, using trackers only, to be around 5.34% p.a. in terms of past performance.    So, take 2.5% off for inflation and you have 2.84%.  Take the platform charge off and you are at 2.5% (rounded).

For reference, the 5.34% is the average annualised performance of our asset allocation model for our medium risk-long term portfolio weightings since 2000.   It uses sector averages for each area on a discrete annual basis (not the actual returns received but sector average returns).    As trackers give an average performance on a discrete basis, that is a pretty close guide to what you would have seen.  That model has 63% equities.  So, very close to VLS60.   

Malthusian

All of the IFAs I’ve spoken to so far (about four in total) say that this is achievable, bar one who was said it was overly ambitious. That person seemed quite young and inexperienced though.

This suggests that the first three IFAs anticipated being retired and on the beach by the time you started to run out of money when your target of getting 8% growth from a fund in drawdown proved overambitious. The younger IFA thought they'd still be around to deal with the consequences.

Returns are generally expected to be lower than in previous years so experience may be a hindrance if someone is putting too much weight on the returns they personally experienced in the past. (Albeit we don't actually know anything about growth rates in the future. Assuming they'll be lower than in the past is reasonable based on the law of diminishing returns, and it's better to be pessimistic and pleasantly surprised than optimistic and disappointed.

For all we know someone will invent the next steam engine / Internet in 2030 which will re-catalyse global economic growth, however it's inherently impossible to know that in 2020, because if we did know that such a thing could be invented in 10 years, we'd be throwing all our money at inventing it now. If we don't know how to go about creating the next black swan, the same lack of information prevents us knowing when it will arrive.)

4% is generally considered to be a realistic target for living off a portfolio, however this is usually from the perspective of someone in their 60s who can accept the possibility that the capital will be depleted over time. You are much younger so you don't really want the capital to be depleting at all. Because as soon as capital depletion starts you enter a vicious cycle, where formerly conservative 4% withdrawals suddenly become 8% and 12% withdrawals that rapidly deplete the fund to nothing (or force serious belt-tightening).

People in their 60s can afford to start falling into that vicious circle in their 80s and 90s, people in their 30s cannot afford to start falling into it in their 50s and 60s.

Remember that you cannot use growth rates for a fund in accumulation as a guide to the rate of growth or safe withdrawal you can expect from a fund in decumulation. You are either going to be selling shares at the bottom of the market to fund your income, or keeping a large amount in cash to ensure you dont need to, or a combination. Both options reduce your return, either through pound cost ravaging or cash drag.

sixpence.

Ugh I am feeling a bit worried now that these three IFAs who I got from unbiased and seemed very good were taking me for a bit of a ride OR they thought I was happy with the wealth depleting overtime (which I'm obviously not!). Okay so do people agree with Dunstonh that 2.5% (with costs and inflation covered) is a realistic figure? 

I don't think the IFAs were messing me about though. I am actually not entirely sure how trusting to be of people in this situation. I think I assumed that most IFAs would be acting with integrity, with a few bad eggs, as with all professions. Have I been naive? Maybe I need to make my intentions clearer to the IFAs that have made proposals to me and see what they say.

So I have spoken to five IFAs in total (all off unbiased) and 4/5 have said that 7-8% is reasonable with 6/10 risk. Are they just trying to get me on as a client?