Independent Financial Advisors

[Deleted User]

Audaxer said:

Deleted_User said:

Linton said:

Your rant against the charging mechanism seems to display a surprising lack of understanding how markets work.  IFAs like other professionals require a certain amount of income to make the job worthwhile.  But if it is too lucrative more people will set up as IFAs and competition will drive prices down.  This is independent of how the charges happen to be calculated or expressed.

A major problem is that many people, especially those not used to dealing with lawyers or accountants want to know in advance how much the charges will be.  Saying £n an hour sounds like a licence for unlimited charging with work expanding to fill the wallet as required. A far more acceptable way is a simple formula based on known numbers.  Of course the IFA could say my charges are £X/hour and I will quote 8 hours for this job therefore the charge is £8X or he/she could say my charge for this size pot is X% of pot.  The amounts of money in both cases could be the same.

Expressing the charging as a % of pot has a great social advantage is that it enables people with smallerr pots to get advice when it would otherwise not be profitable to provide it.  You see this with lawyers charging per hour making legal assistance unavailable to many people.  It of course also assists the IFA by expanding the market for his/her services

2. In the real world UK advisors charge people with smaller pots such high percentage that its downright harmful. Even then they are only really interested in wealthy clients. 

I agree that is a serious problem. If you have investments of say under £50k and are not knowledgeable enough or interested enough to DIY, your only option is a large company that are not Independent Financial Advisors that will charge you a fortune. 

Yes, but its so much better now than it used to be with regards to retirement investment. The solutions they need to figure out are very simple and information is readily available. 

[Deleted User]

Linton said:

Deleted_User said:

NottinghamKnight said:

Percentage figures, especially<1% look minor to many people, and certainly far less than say £200 an hour when presented to a client. 

The issue here is that we are not saying “it will cost you 5% of 1 million pound house value”. Thats a one off number most can understand.  The issue is that IFAs are charging 1% or 0.5% on the same money again and again and again, costing people hundreds of thousands which is much harder to understand. And the service is hand holding. Often advice is counterproductive because the interests are misaligned.  

So you arent complaining about the initial work but rather an ongoing charge?

Surely the ongoing charge is a retainer to ensure availability of support when and if required.  I may pay £120/year for a security system  maintenance contract which is a lot more than 1% of the initial cost.  Year after year the technician does nothing except check the system is working, which it always has been, and perhaps hoover some dust off the control unit.  Am I being conned? £120 for 10 minutes work! Should I do it myself and save the £120? 

Back to IFAs - if you dont have the ongoing relationship what happens when you need further help.  eg a major crash which seriously worries you as you dont know how to handle it,  perhaps you receive a life changing  inheritance or maybe you are approaching retirement and you want to review your investments.  You would have to find an IFA who is available and willing to take up your situation. I assume the first thing the IFA will have to do is to go through a full fact find, with the associated new customer fee.

You can make the choice, deal with situations when they arise or pay an ongoing contract  - just like the maintenance of the security system.  There is one difference though between an IFA and a security system maintenance contract.  Should you not take up the IFAs ongoing offer choosing to manage your investments yourself, if thing go wrong possibly years later you still have the option to sue for bad advice.  I dont think you would get very far with trying to get compensation from the security system company in equivalent circumstances.

Security system needs to be able to provide security assistance 24/7. Its an action. As is maintenance, You are paying for someone to do something.

Financial advisors should be setting up portfolios which can be run on autopilot, requiring zero action. You would be paying for someone to do nothing. I agree that hand holding during crashes is a service but information on how much hand holding costs should be way more transparent.

Audaxer

Deleted_User said:

Audaxer said:

Deleted_User said:

Linton said:

Your rant against the charging mechanism seems to display a surprising lack of understanding how markets work.  IFAs like other professionals require a certain amount of income to make the job worthwhile.  But if it is too lucrative more people will set up as IFAs and competition will drive prices down.  This is independent of how the charges happen to be calculated or expressed.

A major problem is that many people, especially those not used to dealing with lawyers or accountants want to know in advance how much the charges will be.  Saying £n an hour sounds like a licence for unlimited charging with work expanding to fill the wallet as required. A far more acceptable way is a simple formula based on known numbers.  Of course the IFA could say my charges are £X/hour and I will quote 8 hours for this job therefore the charge is £8X or he/she could say my charge for this size pot is X% of pot.  The amounts of money in both cases could be the same.

Expressing the charging as a % of pot has a great social advantage is that it enables people with smallerr pots to get advice when it would otherwise not be profitable to provide it.  You see this with lawyers charging per hour making legal assistance unavailable to many people.  It of course also assists the IFA by expanding the market for his/her services

2. In the real world UK advisors charge people with smaller pots such high percentage that its downright harmful. Even then they are only really interested in wealthy clients. 

I agree that is a serious problem. If you have investments of say under £50k and are not knowledgeable enough or interested enough to DIY, your only option is a large company that are not Independent Financial Advisors that will charge you a fortune. 

Yes, but its so much better now than it used to be with regards to retirement investment. The solutions they need to figure out are very simple and information is readily available. 

Yes, but previously most people would have their pot converted to an annuity at retirement. While drawdown is now a better option in most cases, the majority of the public (not people on this forum) would not want to, or be interested in, DIYing their investments. So if they have a relatively small pot and want/need to find an advisor, they would probably have to pay relatively high costs for that service.

OldMusicGuy

Linton said:

Surely the ongoing charge is a retainer to ensure availability of support when and if required.  I may pay £120/year for a security system  maintenance contract which is a lot more than 1% of the initial cost.  

The big difference is that you know how much you are paying for the ongoing service as it is a fixed annual fee. The IFA model is more like the cost of maintenance for the security system being based a percentage of the value of your house, or a percentage of the value of the contents in it. The level of service is the same, but you will have to pay more for it based on external factors that have nothing to do with the effectiveness of the security system.

IMO the best way for IFAs to charge for the value they actually deliver is to charge on an hourly basis or offer fixed price annual services with differing levels of service. IFAs are NOT investment managers and IMO do not deserve to be remunerated as if they were. They are just like accountants or lawyers.  

[Deleted User]

Audaxer said:

Deleted_User said:

Audaxer said:

Deleted_User said:

Linton said:

Your rant against the charging mechanism seems to display a surprising lack of understanding how markets work.  IFAs like other professionals require a certain amount of income to make the job worthwhile.  But if it is too lucrative more people will set up as IFAs and competition will drive prices down.  This is independent of how the charges happen to be calculated or expressed.

A major problem is that many people, especially those not used to dealing with lawyers or accountants want to know in advance how much the charges will be.  Saying £n an hour sounds like a licence for unlimited charging with work expanding to fill the wallet as required. A far more acceptable way is a simple formula based on known numbers.  Of course the IFA could say my charges are £X/hour and I will quote 8 hours for this job therefore the charge is £8X or he/she could say my charge for this size pot is X% of pot.  The amounts of money in both cases could be the same.

Expressing the charging as a % of pot has a great social advantage is that it enables people with smallerr pots to get advice when it would otherwise not be profitable to provide it.  You see this with lawyers charging per hour making legal assistance unavailable to many people.  It of course also assists the IFA by expanding the market for his/her services

2. In the real world UK advisors charge people with smaller pots such high percentage that its downright harmful. Even then they are only really interested in wealthy clients. 

I agree that is a serious problem. If you have investments of say under £50k and are not knowledgeable enough or interested enough to DIY, your only option is a large company that are not Independent Financial Advisors that will charge you a fortune. 

Yes, but its so much better now than it used to be with regards to retirement investment. The solutions they need to figure out are very simple and information is readily available. 

Yes, but previously most people would have their pot converted to an annuity at retirement. While drawdown is now a better option in most cases, the majority of the public (not people on this forum) would not want to, or be interested in, DIYing their investments. So if they have a relatively small pot and want/need to find an advisor, they would probably have to pay relatively high costs for that service.

Annuity is an important part of a retirement solution, more important now that the bond coupon is below inflation. Its an insurance against longevity, becoming better value than bonds if you live to late 80s. Allows you to enjoy better income in early years because you dont have to be so conservative. Apart from that, as we age the probability of erring when managing money goes up and annuity is a good way of mitigating that risk. Should be at least considered as part of a fixed income portion of your portfolio.  

And DIYing isn’t necessary these days. Buying a multiattribute solution isn’t any more “DIYing” than buying a car. Yes, it has many components, but its not like you are making it from scratch. 

DT2001

 1. Lack of transparency in the current charging model.
It can and will change. We’ve already seen massive improvements in transparency in the industry over my life time. This particular change will be enforced sooner or later either by the government or by the public/industry. For example, advisors could be required to provide an illustration showing the impact proposed charges could have on the pot at the time of retirement. People would find it helpful to know the impact of advisor costs on their pots could easily amount to 300k. 

Transparency - how did you get a figure of "easily £300k"? I ran a quick worksheet on the following assumptions:-
1. £30k starting salary at 30
2. 5% increase p.a.
3. 2% fee going into fund and 1/2% p.a.
4. 20% of income into pot
5. 2% growth after fees and 2.5% without any fees
6. At 65 £100k difference
7. The DIYer will do the same as the IFA and no ingoing fees
It is about a 15% difference on a pot of £700k which is a considerable sum but offsetting that will be presumably some ingoing fees and possibly some higher fees. If you need any ad hoc advice.
In addition, as I proposed before, there are ways of mitigating the compound effect - I work an extra hour p.w. to cover the fees.
I concentrate on what I think I am better at. 

Any illustration you suggest may end up like the annual pension statements from Standard Life, Aviva etc

I know 2 recently retired IFA's and neither seem to be living the high life so assume they only made a reasonable living so maybe their charges overall are not unreasonable.
Turning to OMG's point maybe the option for hourly or annual fee would be a move forward. I am happy with an annual fee as I can run things past my IFA anytime and I know that he regularly spend time checking on our portfolios. Being self employed with variable income and ever changing plans I think we get value by can see that others like my mother do not.
I am also aware that the system of hourly charging does not always work in your favour. I assisted a friend with probate recently and in the papers were the invoices for an uncle and included £200 per hour for writing to utility companies. Annual statements of fees are provided however people have to read them.

Silvertabby

ZingPowZing said:

NottinghamKnight said:

I don't really understand the radically opposed opinions. I don't use an IFA but they may be valuable for some, the qualifications required aren't too onerous compared to most professions but then we have rampant grade inflation in all areas. Most professional services would be charged on he basis of a fixed fee for a defined scope of work, or at hourly rates to a budget estimate; percentage charging is fine for a rough idea but is now outdated for most professions including architects, engineers, solicitors, accountants etc Percentage figures, especially<1% look minor to many people, and certainly far less than say £200 an hour when presented to a client. Transactional advice would be good for may investors but the lack of certainty in income won't meet the financial requirements of most advisers, and it would appear to be rarely on offer from what is reported on the boards.

Maybe. 
But what is your justification for your position that pension freedoms should never have been allowed, Nottinghamknight?

The Pension Freedoms were only ever intended to apply to DC schemes, at a time when poor value annuities seemed to be the only option for many.  

I expect the originators of Pension Freedoms never gave a thought to DB pension fund members because, hey, why on earth would a DB member want to change to DC?

The tabloids didn't help.  The small print may have said that the new rules only applied to DC funds, but the headlines implied that everyone could get their hands on lots of lovely dosh. Now.  Hence floods of calls to the LGPS (for one) from both deferred and current members, many of whom expected that 'their' money would just be paid into their bank accounts.

The rules re having to take financial advice weren't passed just to annoy those few who are perfectly capable of dealing with their own finances, they were passed to help safeguard those who are not.  

[Deleted User]

DT2001 said:

 1. Lack of transparency in the current charging model.
It can and will change. We’ve already seen massive improvements in transparency in the industry over my life time. This particular change will be enforced sooner or later either by the government or by the public/industry. For example, advisors could be required to provide an illustration showing the impact proposed charges could have on the pot at the time of retirement. People would find it helpful to know the impact of advisor costs on their pots could easily amount to 300k. 

Transparency - how did you get a figure of "easily £300k"? I ran a quick worksheet on the following assumptions:-
1. £30k starting salary at 30
2. 5% increase p.a.
3. 2% fee going into fund and 1/2% p.a.
4. 20% of income into pot
5. 2% growth after fees and 2.5% without any fees
6. At 65 £100k difference
7. The DIYer will do the same as the IFA and no ingoing fees
It is about a 15% difference on a pot of £700k which is a considerable sum but offsetting that will be presumably some ingoing fees and possibly some higher fees. If you need any ad hoc advice.
In addition, as I proposed before, there are ways of mitigating the compound effect - I work an extra hour p.w. to cover the fees.
I concentrate on what I think I am better at. 

Any illustration you suggest may end up like the annual pension statements from Standard Life, Aviva etc

I know 2 recently retired IFA's and neither seem to be living the high life so assume they only made a reasonable living so maybe their charges overall are not unreasonable.
Turning to OMG's point maybe the option for hourly or annual fee would be a move forward. I am happy with an annual fee as I can run things past my IFA anytime and I know that he regularly spend time checking on our portfolios. Being self employed with variable income and ever changing plans I think we get value by can see that others like my mother do not.
I am also aware that the system of hourly charging does not always work in your favour. I assisted a friend with probate recently and in the papers were the invoices for an uncle and included £200 per hour for writing to utility companies. Annual statements of fees are provided however people have to read them.

The IFA won’t be interested if you are starting with nothing. For smaller funds the fees are higher. If you are a 35 yo and you have 100k to invest and are adding 10k per year for 30 years with 8% money weighted return then you will end up with 2.139 million. 

Lets forget up front fees. If the advisor charges 1% and the funds he buys for you achieve the same return then you will end up with 1.705 million. Thats 434k less.
If the advisor charges 2% up front and 0.5% per year then you will end up with 1.891M.  That’s 248k less. 

That’s the impact of advisor’s costs on your pot. Advisor gets less in his pocket. Firstly, there is the impact of compounding. Secondly, he has costs. Like insurance against you suing him because he screwed up. You need to cover the cost of him potentially being negligent, dumb, a bit of a crook or incompetent. So, not surprised the advisors are not living “high life”. Nor should they. To get qualified as an IFA you need to pass a 4 months course like this https://www.blackburn.ac.uk/course-details/EC683F/cii-diploma-in-regulated-financial-planning-modules-r01-r06. They are far, far less qualified than accountants. The focus of this course is on marketing and regulations. Those are not the things that are needed for wise investing. You can learn more by reading a few books by the best of the best.  That’s your time though. Might well be worth more than 300k to you. Although frankly, you should read a couple of books anyway so you can understand his advice, evaluate it and make an informed decision. 

Him “checking on your portfolio” is a waste of time. What is it for? To rebalance? A multiasset fund does it for  you for a fraction of the cost.  To mess with your investments? That does more harm than good. If you are self employed and your income varies you still need to put away as much as you can whenever you can. Does that piece of info need an advisor? If your plans change... Well, thats something that shouldn’t happen often. And if it does, presumably you know how they changed. 

Malthusian

Deleted_User said:

Security system needs to be able to provide security assistance 24/7. Its an action. As is maintenance, You are paying for someone to do something.

The vast majority of clients want their adviser able to provide advice - not 24/7, but at least during office hours. They want to be able to ring up their adviser - or for their adviser to ring them - to talk about changes to tax relief or their new job or the recent downturn in the markets without having to commit to a bill of hundreds or thousands of pounds first.

Your argument is that most security firms are doing nothing for their money because hardly anyone ever breaks in.

Financial advisors should be setting up portfolios which can be run on autopilot, requiring zero action.

*ring ring* "Good morning, Mordko Financial Planning?"

"Oh, hello, this is Mrs Miggins. I was reading in the news that the markets were doing really badly because of the rona thingy and I wondered if I should be doing anything about the investment you set up for me so I don't lose it all?"

"What are you bothering me for, you daft old bat? We set up your portfolio on autopilot so it requires zero action."

"But I'm really w..."

"I can look at it again if you want but it will cost you £500 as a minimum fee and if you waste my time too much I'll start charging by the hour. Thank you, come again. *click*"

The fundamental reason why ad-valorem fees are the dominant pricing model is because advisers mostly prefer to charge according to what the majority of potential clients want, not according to how people who don't value advice think they should not pay for their no advice.

[Deleted User]

Malthusian said:

Deleted_User said:

Security system needs to be able to provide security assistance 24/7. Its an action. As is maintenance, You are paying for someone to do something.

The vast majority of clients want their adviser able to provide advice - not 24/7, but at least during office hours. They want to be able to ring up their adviser - or for their adviser to ring them - to talk about changes to tax relief or their new job or the recent downturn in the markets without having to commit to a bill of hundreds or thousands of pounds first.

Your argument is that most security firms are doing nothing for their money because hardly anyone ever breaks in.

Financial advisors should be setting up portfolios which can be run on autopilot, requiring zero action.

*ring ring* "Good morning, Mordko Financial Planning?"

"Oh, hello, this is Mrs Miggins. I was reading in the news that the markets were doing really badly because of the rona thingy and I wondered if I should be doing anything about the investment you set up for me so I don't lose it all?"

"What are you bothering me for, you daft old bat? We set up your portfolio on autopilot so it requires zero action."

"But I'm really w..."

"I can look at it again if you want but it will cost you £500 as a minimum fee and if you waste my time too much I'll start charging by the hour. Thank you, come again. *click*"

The fundamental reason why ad-valorem fees are the dominant pricing model is because advisers mostly prefer to charge according to what the majority of potential clients want, not according to how people who don't value advice think they should not pay for their no advice.

The best advice the IFA can give when someone is calling about market turbulence is “bug off”. Do nothing and carry on is the best approach in most circumstances.  Is handholding a worthwhile service worth massive amounts of money? I don’t know but like you say its up to the people who need handholding to decide.  

You have no basis to say that the clients want this charging model.  We know many IFAs want it because its popular among them. So popular, they put clients money into platforms only accessible through advisors so its harder to just take over the portfolio you paid a fee to set up. 

The clients don’t get to decide.  At least not based on transparent information. If they were given options with clear illustrations of the impact the fees will have, it would be a different matter.