Advice on IFA stuff

dunstonh

I am using Unbiased to find IFAs 
You may want to look at alternatives.  Most of the IFAs that I consider good no longer pay to be on Unbiased.  Once it moved to a lead generation site and upped its cost significantly, there wasnt a need for it for firms that were not desperate for business.  

Do people know of any other ways of finding an IFA? 
Google is a good source as that will often list the IFAs that are not paying to promote themselves.  You can compare those that appear via google with those on other marketing sites.   
PFS find an adviser is a free directory.  (advisers dont pay to be on there)
Adviserbook is another (again, no payment to be on there at this time)

Alexland

On advisorbook remember to filter on "Confirmed Independent"

Malthusian

- Are 60% equities enough to beat inflation? Maybe a better way of asking that is: can you beat inflation with a 6/10 risk level?

Maybe. It depends on what the other 40% is invested in and how lucky you get. Equities should return more than inflation because that's the point of them. Bonds could yield nil - AAA bonds yield virtually nil, and any yield above that requires accepting capital loss if there are defaults or interest rates increase. So when you average those two things out you are probably doing well to beat inflation.

Some portfolios would include commercial property in the 40%, which does add yield and capital growth but equity-like volatility (and fund closures for open-ended funds or dramatic drops in the share price for closed-end ones).

Some portfolios would cheat and include equities in the 40% while labelling them "capital preservation funds" or "alternatives" or similar.

You definitely can't beat inflation and expect to take 4%pa withdrawals for 50+ years without deplting the capital from a 60% equities portfolio.

- One guy said that he would stick half of it a VLS 60... I told him I knew what a VLS was and he proceeded to explain to me what is was (always slightly irritating lol). When I asked him why he said this was because it has "done very well in the past". I told him that I thought past success was not supposed to be an indication of future returns and he was like "yeah that's what all the disclaimers say..."

Run away.

- Should I just drop any IFA who has told me that they believe a 7-8% return (after inflation and costs) is doable?

Yes, but I think you may have inflation and costs the wrong side of the equals sign. 7-8% return after inflation and costs means 11-13% gross return. Any IFA predicting 11-13% returns is cracked.

You should not drop an IFA if they say that a 7-8% return is "doable" but you should if they rely on it and do not ask you to plan for the event that returns are more like the 5% MarkCarnage said.

The only problem with saying that we are in a low growth environment and "the maths for 8% do not work" is that experts have been saying this since the credit crunch, and since then equities have stubbornly persisted in returning 8-9%pa. (That's measured over the full economic cycle, 2007 peak to 2019 peak, not just the bull market.) That is however not an important problem. The reason you should base your plans on 5%pa at most is not because experts are terrific at predicting future stockmarket returns, but because it is better to be pessimistic and pleasantly surprised than optimistic and disappointed.

sixpence.

Malthusian said:

- Are 60% equities enough to beat inflation? Maybe a better way of asking that is: can you beat inflation with a 6/10 risk level?

Maybe. It depends on what the other 40% is invested in and how lucky you get. Equities should return more than inflation because that's the point of them. Bonds could yield nil - AAA bonds yield virtually nil, and any yield above that requires accepting capital loss if there are defaults or interest rates increase. So when you average those two things out you are probably doing well to beat inflation.

Some portfolios would include commercial property in the 40%, which does add yield and capital growth but equity-like volatility (and fund closures for open-ended funds or dramatic drops in the share price for closed-end ones).

Some portfolios would cheat and include equities in the 40% while labelling them "capital preservation funds" or "alternatives" or similar.

You definitely can't beat inflation and expect to take 4%pa withdrawals for 50+ years without deplting the capital from a 60% equities portfolio.

- One guy said that he would stick half of it a VLS 60... I told him I knew what a VLS was and he proceeded to explain to me what is was (always slightly irritating lol). When I asked him why he said this was because it has "done very well in the past". I told him that I thought past success was not supposed to be an indication of future returns and he was like "yeah that's what all the disclaimers say..."

Run away.

- Should I just drop any IFA who has told me that they believe a 7-8% return (after inflation and costs) is doable?

Yes, but I think you may have inflation and costs the wrong side of the equals sign. 7-8% return after inflation and costs means 11-13% gross return. Any IFA predicting 11-13% returns is cracked.

You should not drop an IFA if they say that a 7-8% return is "doable" but you should if they rely on it and do not ask you to plan for the event that returns are more like the 5% MarkCarnage said.

The only problem with saying that we are in a low growth environment and "the maths for 8% do not work" is that experts have been saying this since the credit crunch, and since then equities have stubbornly persisted in returning 8-9%pa. (That's measured over the full economic cycle, 2007 peak to 2019 peak, not just the bull market.) That is however not an important problem. The reason you should base your plans on 5%pa at most is not because experts are terrific at predicting future stockmarket returns, but because it is better to be pessimistic and pleasantly surprised than optimistic and disappointed.

Would this 5% include be before inflation and costs have been taken? Or after? I think you mean after which means that 2.5-5% per year seems a good estimation for a 5 or 6 out of 10 risk level.

  

What do people think about the 4% rule [https://www.cnbc.com/2017/04/19/the-formula-early-retirees-use-to-know-theyll-have-enough-money.html]. I am wondering what people think of it and also thinking that maybe what I should do, when I invest and decide to withdraw from this sum, is start of with 2.5-4% yearly withdrawals (if I need them) and see how it goes. See these paragraphs from the article:

 

“For now, though, my advice is to think of the 4% rule as a guideline, not a regimen to be followed slavishly. I think an initial withdrawal of 4% is reasonable. But if you’re really worried about running through your dough, you can start with a smaller amount, 3.5% or even 3%. If, on the other hand, you’ve got other resources to fall back on—a pension, lots of home equity, generous relatives—you might start with a bit more, 4.5% or even 5%.

 

Whatever percentage you start with, be flexible about future withdrawals. If the market takes a dive, you may want to forego boosting your withdrawal for inflation, or even reduce it a bit to give your nest egg a better chance to recover when the market rebounds. If your savings pot starts growing quickly because the market goes on a tear, you may use that as a chance to spend a little more and indulge yourself a bit.”

 

I guess it’s really about seeing how things go, in terms of the markets, and what my individual spending / earning needs are.

 

I was really convinced (based on earlier research and chats with IFAs) that a 7-8% rate per year to cover 4% income and inflation after costs was reasonable. I’ve been trying to fact check this because loads of people on here have said that’s wrong and D gave the 2.5% estimation. Found this article: https://www.investorschronicle.co.uk/2017/06/01/your-money/financial-planning/how-to-start-investing-with-C8Nx4dWUZnXwNIgfy3veCI/article.html

 

Here’s a quote which suggests higher growth is possible:

 

"£25,000 a year from a portfolio of £700,000 today is an absolutely reasonable aim," says Ben Yearsley, a director at Shore Financial Planning. "That level of income represents a yield on £700,000 of less than 4 per cent, and factoring in 10 years of potential portfolio growth, this couple could have a portfolio of over £1m in 10 years easily, meaning they could take an even larger income."

 

Maybe he means without inflation or costs though. So if we put inflation at 3% and costs at 2% that takes us down to 3%... Here he is saying 3.5%: Not trying to argue either way, just trying to figure out what’s what.

 

 

sixpence.

Sorry the formatting is weird. I miss the old layout, this one is tricksy.

Albermarle

Would this 5% include be before inflation and costs have been taken? Or after? I think you mean after which means that 2.5-5% per year seems a good estimation for a 5 or 6 out of 10 risk level.

2 to 2.5% after fees and inflation seems a good middle of the road kind of estimate to work with. Be prepared for less and hope for more.  

Malthusian

Would this 5% include be before inflation and costs have been taken? Or after? I think you mean after which means that 2.5-5% per year seems a good estimation for a 5 or 6 out of 10 risk level.

  Before. So 2.0 - 2.5% a year after inflation and costs.

What do people think about the 4% rule

Irrelevant for someone in their 30s. Death isn't going to come quickly enough to bail you out if you hit the vicious cycle of capital depletion, where supposedly safe 4% withdrawals turn into 8% withdrawals and 12% withdrawals and so on by the power of withdrawals and crashes combined.

"£25,000 a year from a portfolio of £700,000 today is an absolutely reasonable aim," says Ben Yearsley, a director at Shore Financial Planning. "That level of income represents a yield on £700,000 of less than 4 per cent, and factoring in 10 years of potential portfolio growth, this couple could have a portfolio of over £1m in 10 years easily, meaning they could take an even larger income."

If that couple invested in þe olde VLS 60% and took £25k a year, I reckon that they now have just under £650,000 (from some very quick fag-packet calculations). So Ben, how do you rate their chances of having over a million in seven years while withdrawing £25,000 a year now, given that this requires growth of about 10% a year after costs? "I don't give a crap, I was just giving a rentaquote for mugs who read retail investor comics, I suppose they'd better shut their eyes and pray for rain." Gee, thanks Ben.

To be clear, that's not actually a bad position to be in, still with 95% of your original capital after a 15% fall in the stockmarket. It would be far too early to say they need to stop their £25k a year withdrawals and live on baked beans until the panic is over. But it looks a lot different when you're actually in the middle of that position, rather than at the top of the market in 2017.

If I was going to try to live off the income from investments from my 30s, I would be considering something like starting at 3% withdrawals and increasing them in line with inflation only if the new withdrawals did not exceed 3% of the current fund value.

dunstonh

What do people think about the 4% rule

Ignore it.  It's based on flawed assumptions and aimed more at people in the final phase of their life.  

Remember that you are talking around 60% equities. Not 100% equities.

If I was going to try to live off the income from investments from my 30s, I would be considering something like starting at 3% withdrawals and increasing them in line with inflation only if the new withdrawals did not exceed 3% of the current fund value.

I would probably plan on 2.5% a few weeks ago) but where we are now could well be 3% without issue as long as the money hasn't already gone down in value with the drops.

I would be inclined to hold a larger cash pot to cater for negative years and use surplus years to replenish the cash pot.

I am sure Malthusian has come across this as well (as all advisers almost certainly have); people are prone to dipping into their investments after longer periods of growth years (some can't even wait that long before they do it).  "Oh its gone up 8%. I can draw out 5% as I only needed 3% for my income".  Or variations on that.   Or "it wont do any harm if I take out £x as its only a small amount".   And they repeat and repeat leaving nothing to average out the negative or nothing periods.   You are in your 30s and the temptation to dip into it has to be resisted until you know you have excess.

sixpence.

Albermarle said:

Would this 5% include be before inflation and costs have been taken? Or after? I think you mean after which means that 2.5-5% per year seems a good estimation for a 5 or 6 out of 10 risk level.

2 to 2.5% after fees and inflation seems a good middle of the road kind of estimate to work with. Be prepared for less and hope for more.  

Malthusian said:

 

If I was going to try to live off the income from investments from my 30s, I would be considering something like starting at 3% withdrawals and increasing them in line with inflation only if the new withdrawals did not exceed 3% of the current fund value.

Here are my responses (still struggling with the format so they are lost in the quote!):

Okay, thanks to the couple of people who have said that, or stuff along these lines. It's helpful. I think I can, as plan for 2.5% a year, as long as it is in line with inflation and doesn't exceed 2.5% of the current pot value. 
- I appreciate everyone pointing out that what this IFA (the one quoted) is saying isn't advisable. I am going to probe a bit with this one IFA who I quite liked (they are currently on annual leave so waiting for them to get back) and see why they said 8% after costs was possible. I am not sure why someone with a lot of success and experience would say something if it wasn't true? Perhaps they are corrupt, or maybe they are very good at what they do and have become arrogant and think they can beat the market? I think I can still learn quite a bit form speaking to IFAs who aren't good and thinking about it. 
- Spoke to IFA who when I asked her said "2.5% but I think we can do better" which I quite like.
- Also looking into career development but it's obviously quite difficult to think about the future right now with everything that's going on.
- If I really am estimating 2.5% is investing in stocks and shares actually better than buy to let, aside from - and I get that this is a big aside - the matter of diversity in which case it obviously wins every time. What would be the income + growth profit on a BtL in London worth about that much? I guess it would be the same or less after fees etc. 

sixpence.

Question: when I go to Adviserbook, for example, and fill out the criteria (independent, works in investments etc) over forty IFAs come up within 10 miles of where I live. How do I sort the wheat from the chaff at this stage? Or should I just go through and speak to all of them? Cheers.