Pensions. Is an IFA really worth it?

BritishInvestor

cfw1994 said:

It is very easy to suggest “what if your Vanguard doesn’t manage to do as well as an IFA could?” with a knowing wink, suggesting IFAs will always “beat the market”,whereas the majority probably won’t.

I'm always interested to see examples of portfolios that "beat the market" given that I have visibility of a large number of offerings from numerous providers. 
The latest fad is to have a concentrated portfolio loaded with US large-cap/tech stocks, and as these tended to perform reasonably well in the recent downturn, investors have taken this as a cue that it's the holy grail, great returns with limited downside. 

cfw1994

BritishInvestor said:

cfw1994 said:

It is very easy to suggest “what if your Vanguard doesn’t manage to do as well as an IFA could?” with a knowing wink, suggesting IFAs will always “beat the market”,whereas the majority probably won’t.

I'm always interested to see examples of portfolios that "beat the market" given that I have visibility of a large number of offerings from numerous providers. 
The latest fad is to have a concentrated portfolio loaded with US large-cap/tech stocks, and as these tended to perform reasonably well in the recent downturn, investors have taken this as a cue that it's the holy grail, great returns with limited downside. 

Have you watched Lars’ videos?
https://www.kroijer.com

BritishInvestor

cfw1994 said:

BritishInvestor said:

cfw1994 said:

It is very easy to suggest “what if your Vanguard doesn’t manage to do as well as an IFA could?” with a knowing wink, suggesting IFAs will always “beat the market”,whereas the majority probably won’t.

I'm always interested to see examples of portfolios that "beat the market" given that I have visibility of a large number of offerings from numerous providers. 
The latest fad is to have a concentrated portfolio loaded with US large-cap/tech stocks, and as these tended to perform reasonably well in the recent downturn, investors have taken this as a cue that it's the holy grail, great returns with limited downside. 

Have you watched Lars’ videos?
https://www.kroijer.com

Yes (and I've spoken to Tim Hale, Vanguard, Dimensional, Abraham (re Betafolio) et al at length). These (including Lars) are people I respect.
That's one group - the evidence-based camp. The other camp is the one I was referring to where "magic" exists. The majority of investors still love a bit of magic!!

Linton

IvanOpinion said:

Thrugelmir said:

IvanOpinion said:

BritishInvestor said:

IvanOpinion said:

t8769 said:

I have a simple savings requirement, not a huge amount of money to invest.
Just need a pension, and to invest other finds in a mix of high, med and low risk.
Could I do this myself  or is it worth paying an IFA?
Would they get higher returns to make their fees worthwhile?
Nothing complicated about my requriements.

Thanks

The honest and simple answer is ... yes you can do this yourself.  Very easily.
If you don't have a lot of confidence then you could simply go with something like Vanguard lifestrategy (20, 40, 60, 80., 100 depending on your attitude to risk, your age etc.) or the HSBC Global strategy equivalents.  You say it isn't a huge amount so you could set up a SIPP on the Vanguard web site - that should keep costs low.  Others have mentioned other alternatives.

As far as risk is concerned go to various sites and go through their risk calculators and see how you fair.  They ask pretty much the same questions an IFA would so you will get the same answer.  You just need to interpret it correctly (I am sure some on this board would help).

Finally, you ask, will an IFA get higher returns.  The answer is that there is absolutely no guarantee of that.  If you pick a multi-asset or balanced fund that suits your risk assessment you should be able to sleep fine at night, knowing that the fund managers are doing the work - you do not need to pay the costs of an intervening salesman.

I am not dissing IFAs, they offer many services that those that require complex and detailed advice will benefit from.  But to make the analogies used earlier a bit more realistic

Can you change the timeclock on your boiler or would you pay an electrician?

Can you reconcile your credit card statement or would you pay an accountant?

Can you set up a few plant pots or would you pay a builder?

In all the above cases there is nothing wrong with paying someone to do it, but you don't have to and there is no guarantee that they will do a better job.

"They ask pretty much the same questions an IFA would so you will get the same answer."
A discussion around risk, is, or should be, far more than just a questionnaire
"you do not need to pay the costs of an intervening salesman."
I'd hope a typical adviser does a tad more than "sell funds"

And yet in any dealings I have had with all IFAs the questions were pretty much the same as online questionnaires

In a far wider context with person to person one has a far more informed discussion. An hour or two of time can be invaluable in the longer term. As peoples comprehension levels differ. Depending upon on their understanding of the topic. Online questionnaires are too easy to skim through. People rarely read pages and pages on screen. 

Too easy to be dismissive too quickly of what is on offer if one looks hard enough. 

I used the analogy a while back that IFAs are were IT was 25-30 years ago.  In those days we deliberately used obfuscation and misdirection telling our customers that they did not understand what was going on and that is why they had to come to a specialist and pay me big bucks to do it for them.  It made me a lot of money.  Nowadays I have met 10 years olds that have selected the parts and built their own computers and you can buy ready to go systems off the shelves in supermarkets.  The information to so this is out there and most people now have the confidence to do this by themselves.  Some still look for advice from specialists though and some old die-hard IT people still insist that Joe Average cannot do it for themselves.  But, overall the IT market has evolved, the specialists have moved to meet much more complex needs.

The personal financial services market is about 25 years behind.  The information is out there and 'supermarkets' sell pretty much anything an investor needs allowing people to select the 'parts' and built their own portfolios.  However some old diehard advisors still try to use obfuscation insisting that Joe Average cannot do the job just as well for themselves using 'off the shelf parts.  Those that have the confidence can use advice freely available to assemble the end product (a portfolio) just as well, and sometimes better, than any IFA.  However the real specialists will evolve and move to meet the more complex financial needs.

Years ago I would have charged someone to look and sort out their computer, nowadays I mostly just do it for friends but occasionally would look at a friend of a friends computer for nothing more than a few beers.  In another few years personal financial services will have caught up and the high fees currently being charged for setting up and "managing" portfolios will be a thing of the past.  Most of the 'supermarkets' already offer pre-made portfolios to suit many risk profiles (not unlike many IFAs who also have their preferred pre-made up portfolios).

I spent much of my working life in software for engineering design and my experience is very different.....

Perhaps the most important part of the project was discussing the requirements with the customer,  Initially the customers often would not really know what they wanted at least to the level needed to write the software and may well have been inconsistent in their wishes or unrealistic in their expectations. They gained from you in having to think carefully about situations they had not considered helped by your experience in analysing requirements in a logical way.   You as the developer gained as you did not initally understand the customer's environment and circumstances.  Without this understanding it is likely that you would come up with a sub-optimal product.  

The hardware was pretty irrelevent although it did set the limits of what was practical and what was not and some was more suitable than others.  If the customer did not already have an appropriate computer system they would have to buy pne. You got no kick-backs from the manufacturers so it was simply a matter of finding something at the right price that could do the job.

Having started using the system the customer discovered new things that they wanted to do.  Or perhaps their environment changed leading to new requirements or changes  to existing ones.    And over time the hardware/operating systems changed, became obsolete or better options became available.  You were best placed to implement resultant software changes having the background in the customer's business and knowledge of the software.

All of this was some time ago.  Now people may question why one should pay a software developer a large amount of money when everything is available for next to nothing.  Do the calculations in Excel or even better LIbreOffice which is free. There are plenty of simple web page creation tools etc etc.  However I think that misses the point.  The skill lies in creating something that matches requirements, which tools you use for implementation is a secondary matter.  It is important not to confuse the two.  Yes if the needs are simple, there is an existing product that does the job or the job to be done is not very important then the customer can fairly safely put something together.  However if failure could threaten the business or success lead to major new markets perhaps it iwould be prudent to hire an expert.

What may clinch that argument would be if the software developer's work was legally regulated, the developer could not personally gain from supplier back-handers and that failure to produce something appropriate for the customer would be covered by a compensation scheme.  However, perhaps as your experience may indicate, that is not the situation in IT.

BritishInvestor

Linton said:

IvanOpinion said:

Thrugelmir said:

IvanOpinion said:

BritishInvestor said:

IvanOpinion said:

t8769 said:

I have a simple savings requirement, not a huge amount of money to invest.
Just need a pension, and to invest other finds in a mix of high, med and low risk.
Could I do this myself  or is it worth paying an IFA?
Would they get higher returns to make their fees worthwhile?
Nothing complicated about my requriements.

Thanks

The honest and simple answer is ... yes you can do this yourself.  Very easily.
If you don't have a lot of confidence then you could simply go with something like Vanguard lifestrategy (20, 40, 60, 80., 100 depending on your attitude to risk, your age etc.) or the HSBC Global strategy equivalents.  You say it isn't a huge amount so you could set up a SIPP on the Vanguard web site - that should keep costs low.  Others have mentioned other alternatives.

As far as risk is concerned go to various sites and go through their risk calculators and see how you fair.  They ask pretty much the same questions an IFA would so you will get the same answer.  You just need to interpret it correctly (I am sure some on this board would help).

Finally, you ask, will an IFA get higher returns.  The answer is that there is absolutely no guarantee of that.  If you pick a multi-asset or balanced fund that suits your risk assessment you should be able to sleep fine at night, knowing that the fund managers are doing the work - you do not need to pay the costs of an intervening salesman.

I am not dissing IFAs, they offer many services that those that require complex and detailed advice will benefit from.  But to make the analogies used earlier a bit more realistic

Can you change the timeclock on your boiler or would you pay an electrician?

Can you reconcile your credit card statement or would you pay an accountant?

Can you set up a few plant pots or would you pay a builder?

In all the above cases there is nothing wrong with paying someone to do it, but you don't have to and there is no guarantee that they will do a better job.

"They ask pretty much the same questions an IFA would so you will get the same answer."
A discussion around risk, is, or should be, far more than just a questionnaire
"you do not need to pay the costs of an intervening salesman."
I'd hope a typical adviser does a tad more than "sell funds"

And yet in any dealings I have had with all IFAs the questions were pretty much the same as online questionnaires

In a far wider context with person to person one has a far more informed discussion. An hour or two of time can be invaluable in the longer term. As peoples comprehension levels differ. Depending upon on their understanding of the topic. Online questionnaires are too easy to skim through. People rarely read pages and pages on screen. 

Too easy to be dismissive too quickly of what is on offer if one looks hard enough. 

I used the analogy a while back that IFAs are were IT was 25-30 years ago.  In those days we deliberately used obfuscation and misdirection telling our customers that they did not understand what was going on and that is why they had to come to a specialist and pay me big bucks to do it for them.  It made me a lot of money.  Nowadays I have met 10 years olds that have selected the parts and built their own computers and you can buy ready to go systems off the shelves in supermarkets.  The information to so this is out there and most people now have the confidence to do this by themselves.  Some still look for advice from specialists though and some old die-hard IT people still insist that Joe Average cannot do it for themselves.  But, overall the IT market has evolved, the specialists have moved to meet much more complex needs.

The personal financial services market is about 25 years behind.  The information is out there and 'supermarkets' sell pretty much anything an investor needs allowing people to select the 'parts' and built their own portfolios.  However some old diehard advisors still try to use obfuscation insisting that Joe Average cannot do the job just as well for themselves using 'off the shelf parts.  Those that have the confidence can use advice freely available to assemble the end product (a portfolio) just as well, and sometimes better, than any IFA.  However the real specialists will evolve and move to meet the more complex financial needs.

Years ago I would have charged someone to look and sort out their computer, nowadays I mostly just do it for friends but occasionally would look at a friend of a friends computer for nothing more than a few beers.  In another few years personal financial services will have caught up and the high fees currently being charged for setting up and "managing" portfolios will be a thing of the past.  Most of the 'supermarkets' already offer pre-made portfolios to suit many risk profiles (not unlike many IFAs who also have their preferred pre-made up portfolios).

I spent much of my working life in software for engineering design and my experience is very different.....

Perhaps the most important part of the project was discussing the requirements with the customer,  Initially the customers often would not really know what they wanted at least to the level needed to write the software and may well have been inconsistent in their wishes or unrealistic in their expectations. They gained from you in having to think carefully about situations they had not considered helped by your experience in analysing requirements in a logical way.   You as the developer gained as you did not initally understand the customer's environment and circumstances.  Without this understanding it is likely that you would come up with a sub-optimal product.  

The hardware was pretty irrelevent although it did set the limits of what was practical and what was not and some was more suitable than others.  If the customer did not already have an appropriate computer system they would have to buy pne. You got no kick-backs from the manufacturers so it was simply a matter of finding something at the right price that could do the job.

Having started using the system the customer discovered new things that they wanted to do.  Or perhaps their environment changed leading to new requirements or changes  to existing ones.    And over time the hardware/operating systems changed, became obsolete or better options became available.  You were best placed to implement resultant software changes having the background in the customer's business and knowledge of the software.

All of this was some time ago.  Now people may question why one should pay a software developer a large amount of money when everything is available for next to nothing.  Do the calculations in Excel or even better LIbreOffice which is free. There are plenty of simple web page creation tools etc etc.  However I think that misses the point.  The skill lies in creating something that matches requirements, which tools you use for implementation is a secondary matter.  It is important not to confuse the two.  Yes if the needs are simple, there is an existing product that does the job or the job to be done is not very important then the customer can fairly safely put something together.  However if failure could threaten the business or success lead to major new markets perhaps it iwould be prudent to hire an expert.

What may clinch that argument would be if the software developer's work was legally regulated, the developer could not personally gain from supplier back-handers and that failure to produce something appropriate for the customer would be covered by a compensation scheme.  However, perhaps as your experience may indicate, that is not the situation in IT.

Spot on. Mirrors my experience as a software developer ( in a previous life).

Thrugelmir

cfw1994 said:

It is very easy to suggest “what if your Vanguard doesn’t manage to do as well as an IFA could?” with a knowing wink, suggesting IFAs will always “beat the market”,whereas the majority probably won’t.

Which market are you referring too?  What are you benchmarking performance to and over what time frame? 

Why Vanguard?  Do actively managed passive Vanguard funds always beat the "market"? 

Conversation is deviating away why some people should seek advice. Not just about investing ones money. 

Linton

BritishInvestor said:

cfw1994 said:

It is very easy to suggest “what if your Vanguard doesn’t manage to do as well as an IFA could?” with a knowing wink, suggesting IFAs will always “beat the market”,whereas the majority probably won’t.

I'm always interested to see examples of portfolios that "beat the market" given that I have visibility of a large number of offerings from numerous providers. 
The latest fad is to have a concentrated portfolio loaded with US large-cap/tech stocks, and as these tended to perform reasonably well in the recent downturn, investors have taken this as a cue that it's the holy grail, great returns with limited downside. 

Have you looked at the Great British Invest-off threads where a range of active and passive portfolios have been submitted and followed over what is now 3 years?  You may find it enlightening.

It seems to be me that people are missing the whole point of serious investing.  "Beating the market" is irrelevent.  What is important is to achieve an objective both regarding time and return,  That requires control of the risk level and returns of your investments. Any IFAs who focus on beating the market are simply not doing the job they are paid for.  Anyone who goes to an IFA with that aim is going to be disappointed, though perhaps the IFA would get them to see the wider picture assuming he/she  was willing to take them on in the first place.

The term "beating the market" is highly questionable anyway.  I hold a globally diverse growth portfolio based on active funds with only 40% US which is split 50% large companies and 50% small. Which market am I invested in?  How do I compare my returns with "THE market"? If I were able to put together a set of trackers that held the same allocation presumably the returns would  be very similar. What does that prove?

Linton

Thrugelmir said:

cfw1994 said:

It is very easy to suggest “what if your Vanguard doesn’t manage to do as well as an IFA could?” with a knowing wink, suggesting IFAs will always “beat the market”,whereas the majority probably won’t.

Which market are you referring too?  What are you benchmarking performance to and over what time frame? 

Why Vanguard?  Do actively managed passive Vanguard funds always beat the "market"? 

Conversation is deviating away why some people should seek advice. Not just about investing ones money. 

Excellent points:
 - Vanguard Life Strategy 100 has underperformed the FTSE World Index every year for the past 5 years.
 - Choosing funds in my view is probably the least important reason to consult an IFA.  What is important is to help the customer get their objectives clear and to choose an appropriate financial management strategy, an asset allocation, and investment environments for achieving them taking into account tax and the law.

IvanOpinion

Albermarle said:

It is an interesting analogy with the IT world but there is a flaw in the argument . In the world of investments, pensions etc the level of knowledge of the general public remains  woeful , even amongst educated people . The large majority would not have a clue what a fund supermarket was or have the faintest  idea how to start constructing a portfolio. Many do not even realise their pensions are invested .

I don't disagree, but my point here is that it is the financial market itself that is deliberately trying to make itself confusing and difficult to navigate (which is where IT was 25-30 years ago).  There is too much of 'you need a an IFA to do this for you', when they don't

I will reiterate that there are many many things that an IFA is a valuable/necessary resource, but setting up a portfolio should pretty much be a give away to entice business - not something that they can take a percentage off every year.  Sample portfolios should really be a loss leader - albeit there are some who will still need/want advice.

IvanOpinion

BritishInvestor said:

IvanOpinion said:

Thrugelmir said:

IvanOpinion said:

Thrugelmir said:

IvanOpinion said:

BritishInvestor said:

IvanOpinion said:

t8769 said:

I have a simple savings requirement, not a huge amount of money to invest.
Just need a pension, and to invest other finds in a mix of high, med and low risk.
Could I do this myself  or is it worth paying an IFA?
Would they get higher returns to make their fees worthwhile?
Nothing complicated about my requriements.

Thanks

The honest and simple answer is ... yes you can do this yourself.  Very easily.
If you don't have a lot of confidence then you could simply go with something like Vanguard lifestrategy (20, 40, 60, 80., 100 depending on your attitude to risk, your age etc.) or the HSBC Global strategy equivalents.  You say it isn't a huge amount so you could set up a SIPP on the Vanguard web site - that should keep costs low.  Others have mentioned other alternatives.

As far as risk is concerned go to various sites and go through their risk calculators and see how you fair.  They ask pretty much the same questions an IFA would so you will get the same answer.  You just need to interpret it correctly (I am sure some on this board would help).

Finally, you ask, will an IFA get higher returns.  The answer is that there is absolutely no guarantee of that.  If you pick a multi-asset or balanced fund that suits your risk assessment you should be able to sleep fine at night, knowing that the fund managers are doing the work - you do not need to pay the costs of an intervening salesman.

I am not dissing IFAs, they offer many services that those that require complex and detailed advice will benefit from.  But to make the analogies used earlier a bit more realistic

Can you change the timeclock on your boiler or would you pay an electrician?

Can you reconcile your credit card statement or would you pay an accountant?

Can you set up a few plant pots or would you pay a builder?

In all the above cases there is nothing wrong with paying someone to do it, but you don't have to and there is no guarantee that they will do a better job.

"They ask pretty much the same questions an IFA would so you will get the same answer."
A discussion around risk, is, or should be, far more than just a questionnaire
"you do not need to pay the costs of an intervening salesman."
I'd hope a typical adviser does a tad more than "sell funds"

And yet in any dealings I have had with all IFAs the questions were pretty much the same as online questionnaires

In a far wider context with person to person one has a far more informed discussion. An hour or two of time can be invaluable in the longer term. As peoples comprehension levels differ. Depending upon on their understanding of the topic. Online questionnaires are too easy to skim through. People rarely read pages and pages on screen. 

Too easy to be dismissive too quickly of what is on offer if one looks hard enough. 

I used the analogy a while back that IFAs are were IT was 25-30 years ago.  In those days we deliberately used obfuscation and misdirection telling our customers that they did not understand what was going on and that is why they had to come to a specialist and pay me big bucks to do it for them.  It made me a lot of money.  Nowadays I have met 10 years olds that have selected the parts and built their own computers and you can buy ready to go systems off the shelves in supermarkets.  The information to so this is out there and most people now have the confidence to do this by themselves.  Some still look for advice from specialists though and some old die-hard IT people still insist that Joe Average cannot do it for themselves.  But, overall the IT market has evolved, the specialists have moved to meet much more complex needs.

The personal financial services market is about 25 years behind.  The information is out there and 'supermarkets' sell pretty much anything an investor needs allowing people to select the 'parts' and built their own portfolios.  However some old diehard advisors still try to use obfuscation insisting that Joe Average cannot do the job just as well for themselves using 'off the shelf parts.  Those that have the confidence can use advice freely available to assemble the end product (a portfolio) just as well, and sometimes better, than any IFA.  However the real specialists will evolve and move to meet the more complex financial needs.

Years ago I would have charged someone to look and sort out their computer, nowadays I mostly just do it for friends but occasionally would look at a friend of a friends computer for nothing more than a few beers.  In another few years personal financial services will have caught up and the high fees currently being charged for setting up and "managing" portfolios will be a thing of the past.  Most of the 'supermarkets' already offer pre-made portfolios to suit many risk profiles (not unlike many IFAs who also have their preferred pre-made up portfolios).

What's applicable for you may not be suitable for others. Broad brush painting offers no value.  

We used to say that in IT, we will build something specific to your needs.  It was mostly BS, we had a very limited choice of 4-5 systems and you can guarantee that one of those was the perfect system no matter who turned up.  The buyer could even tinker with them with a small number of additional parts (or upsells as we called them - often through obfuscation). Those broad brush strokes provided great solutions in 90% of cases.

Similarly with investments, the supermarkets offer pre-built portfolios. fund managers offer ready made balanced funds and IFAs offer their own pre-built portfolios.  You can guarantee that one of those pre-built portfolios will suit whatever buyer turns up at the door ... maybe an odd tinker here or there (again based on obfuscation).  The broad brush strokes will provide great solutions in 90% of cases.

There is no guarantee, no matter how customised you make it, that it will be better than any other sensible off-the-shelf solution.  In fact over customisation can actually make things worse - but hey, the more complicated you made it the more I could charge to maintain it.  

I can only comment on the retirement planning space, but >90% of the value add an adviser should bring is unrelated to investments and portfolio creation so I'm not sure why you are focusing on that - that problem was "solved" at least a decade ago.

That said, left to their own devices I would estimate that 99% of the general population make sub optimal investment choices. If you showed someone one fund manager that had generated 20% annual returns and one fund manager that had generated 10%, the vast, vast majority would flock to fund manager 1 without understanding why his returns were so much better. You only have to look at the bestselling fund lists to see evidence of this.

I agree with you about planning advice, as long as it can be charged as a service rather than a percentage of a portfolio.  That is exactly the sort of thing where I suggest IFAs bring a huge amount of value.

'Sub-optimal' isn't exactly a quantifiable term so I can only assume that your reference to 99% could also encompass IFA decisions as well (although I would say that on average 50% of individuals/IFAs will under perform).  All most people really need is a good quality mixed asset fund (as often suggested on this board) or a ready made portfolio.  You only have to look at another thread on this board to see a portfolio that, even when I looked at it I thought "wow mate you have made a bit of a mess of that", only to find out they had been paying an IFA to construct the portfolio.  There are good and there are bad.

I would probably agree with you on your 10/20 analogy but to me that is like saying somebody would buy a faster computer without understanding their own needs ... I see this many times.  There will always be those that take time to inform themselves and those that like to rely on others (for many reasons).  There is nothing wrong with best selling fund lists, no more so than there is anything wrong with best selling computer lists - they show what people are buying.

I have recently found that IFAs only want to talk to me if I am willing to give them a percentage of my overall portfolio - something I am not willing to do (because for years I pretty much got nothing for it ... I blame myself for that, I took my eye off the ball).  But yet they have the knowledge to give me the advice I seek but, so far, have only been interested by holding my portfolio to ransom rather than accept an hourly rate.  Fortunately I have got some great advice from several posters on this board (with exactly the sort of information I was after).