Investing our children's inheritance in a managed portfolio

rainyday8

Our two kids (aged 6 and 9) were lucky enough to inherit 150,000 each when my mum passed away last year.  We currently live overseas and so our options for investing in the UK are actually quite limited.

We have been working with an IFA who has proposed an onshore bond wrapper which seems sensible for tax and administrative reasons.

We were literally about to sign a proposal to invest this money into a managed portfolio which focused on sustainable investments.  The fees (including IFA, Fund Manager and platform were totaling about 1.2% pa which we were happy with.  (I should add that for our own investments we use a much cheaper index based approach but had been persuaded that 'we needed experts to manage our kids money' because of our responsibility as trustees).

At the last minute it appears that there are a further 0.88% of 'underlying charges'.  Basically transaction charges for the activity that the portfolio manager will conduct on the individual funds (holding fees, performance fees and exit fees for each of the 20 or so funds within the portfolio).  These also appear to be variable based on the activity the portfolio manager will conduct and therefore out of our control.  I have asked to know what the fee parameters are that we are agreeing to and nobody seems to know.

I am shocked beyond belief that there is an extra 0.88% to pay and that I am expected to sign up for something that will change over time with no control from ourselves.  To make matters work this seems to have taken our IFA by surprise too, and he initially tried to 'hide' these charges by reducing this own fees.

If this normal for a managed portfolio?

Am I better off going back to a low cost portfolio of index based funds that I can manage myself within the onshore bond wrapper?

I'm feeling despondent,  and sick to death of the smoke and mirrors in Financial Services.

Another_Saver

You don't need experts to manage your money, that's nonsense, this behaviour is very shady and you should never sign anything as vague and potentially unlimited.
The only reason you would need an IFA is because of not living in the UK while managing this money.
Try contacting your current investment provider to ask what they could do for your kids.

dunstonh

We were literally about to sign a proposal to invest this money into a managed portfolio which focused on sustainable investments.  The fees (including IFA, Fund Manager and platform were totaling about 1.2% pa which we were happy with.  (I should add that for our own investments we use a much cheaper index based approach but had been persuaded that 'we needed experts to manage our kids money' because of our responsibility as trustees).

Offshore bonds can be whole of market as well.  So, if you prefer a passive or hybrid approach rather than fully active then you can instruct the IFA on that basis.  Much the same as to whether you want ESG investments (ethical / responsible etc)

At the last minute it appears that there are a further 0.88% of 'underlying charges'.  Basically transaction charges for the activity that the portfolio manager will conduct on the individual funds (holding fees, performance fees and exit fees for each of the 20 or so funds within the portfolio).  These also appear to be variable based on the activity the portfolio manager will conduct and therefore out of our control.  I have asked to know what the fee parameters are that we are agreeing to and nobody seems to know.

Transaction charges and incidental charges are a relatively new measure brought in by an EU directive called MIFIDII.    They have always been there but they are charges suffered by the fund and not the individual investor.  For example, a property fund has to pay for maintenance, repairs etc.   The fund pays for that work.     Or a specialist fund that develops smaller companies may put one of their specialists into a company to boost growth and therefore returns.  The costs of that are paid out of the fund.   As shares are bought and sold, there are dealing costs that the fund has to pay.

MIFIDII required the costs paid for by the fund but not covered by the OCF to shown on a pro-rata basis back to the investor.  Hence the transactions costs and incidental costs.   

There are also quirks with this measure as it can include an element of profit and loss.     Most of us would agree that profit and loss should never be shown as a charge but unfortunately, the method the EU created cant avoid it.  This is why some funds can have a negative charge.

On the whole, most investors largely disregard the transaction charge and incidental charge columns.

I am shocked beyond belief that there is an extra 0.88% to pay and that I am expected to sign up for something that will change over time with no control from ourselves.  To make matters work this seems to have taken our IFA by surprise too, and he initially tried to 'hide' these charges by reducing this own fees.

It should not be taking any IFA by surprise as the charges disclosure requirements have been in place for several years and IFAs should be showing them on their own reports.   This is an embarrassment in either understanding or communication.

If this normal for a managed portfolio?

You need to differentiate between managed funds and managed portfolio.   A managed portfolio means the investment funds within it are controlled and adjusted but the funds could all be passive and not managed or a combination.       All portfolios are managed to varying degrees.

All funds have transaction charges.  Some funds will have high transaction charges due to their very nature. Some have low ones due to their very nature.   

Am I better off going back to a low cost portfolio of index based funds that I can manage myself within the onshore bond wrapper?

Will you be able to arrange a DIY offshore bond?     You can give the IFA an instruction to use passive funds if that is what you prefer.  However, you should not let transaction charges dictate how you invest.   

I'm feeling despondent,  and sick to death of the smoke and mirrors in Financial Services.

There are no smoke and mirrors here.   Transaction charges were designed to increase transparency.   Despite its flawed methodology, it is useful information but not a reason to eliminate an investment option.   

For me, the issue is not transaction charges but the fact your adviser didn't have a clue about them.

Sebo027

@rainyday8
UK expats are constantly preyed upon by "financial advisers." Many products offered claim to offer a tax efficient vehicle or "wrapper" in the form of an offshore bond through a firm in Jersey, Cyprus, Malta or wherever. Often these products are laced with opaque fees which eat into the performance of your investment. Google "Friends Provident" and "DeVere Group" for such examples or take a read here: 
https://www.expertsforexpats.com/expat-financial-advice/offshore-investment-bonds/
And listen to this:
https://www.youtube.com/watch?v=AO6EG8hyRzo
You can open an account with a trading platform that accepts expat investors. 
https://brokerchooser.com/broker-reviews
@dunstonh - Are you able to recommend a reputable firm / IFA?

rainyday8

Hi,
Thanks for your advise.  It was the onshore bond that we were looking at since the will trust and other trustees are in the UK.  Plus I had heard the horror stories about offshore bonds and their fees.
We have our own investments on the Saxobank platform and are very happy but I don't think that they offer the 'wrapper' I have been told I need.  So we were looking at Transact.  Any opinions on them? 

Maybe I will end of with an onshore bond on Transact filled with ETFs.......although my IFA of course thinks that would be highly irresponsible of me!

dunstonh

UK expats are constantly preyed upon by "financial advisers." Many products offered claim to offer a tax efficient vehicle or "wrapper" in the form of an offshore bond through a firm in Jersey, Cyprus, Malta or wherever. Often these products are laced with opaque fees which eat into the performance of your investment. Google "Friends Provident" and "DeVere Group" for such examples or take a read here: 

It is important to note that in many other countries, the qualifications were much lower or even non-existent.  Ex pat locations were frequently targetted by sales companies using low skilled, low qualified staff outside of the UK regulatory system.  When the first stage of qualifications came in during 1994/5, those that could not make the grade were frequently recruited to work in the middle east, Malaysia and Spain to go full sales mode.
The product that they used should not be mistaken for UK regulated products or products designed to be retailed in the UK.

@dunstonh - Are you able to recommend a reputable firm / IFA?

Most IFAs are small localised firms with a handful of adviser.      That means it is a bit like asking me if I can recommend a local butcher to you.     You can often help yourself by avoiding the nationals/regionals and those that use the phrase "wealth management" in the name or tagline.   This is not to do with issues about suitability but about cost.

  So we were looking at Transact.  Any opinions on them? 

Priced to attract larger portfolios and not smaller ones.   Profitable (unlike many) and the software is good.   All wrappers available.  Possible to get lower priced but not many can match its software.   Family linking also available (so combined values of all family portfolios dicate the pricing band for all).  Full whole of market investments.

DireEmblem

With them inheriting that sum at 6 & 9, why are you looking to invest in bonds, why not just chuck it in a global equity tracker, and watch it bob up and down over the next 10-15 years(hopefully more up than down).

rainyday8

Hi there totally agree, the 'onshore bond' is just the wrapper.  In theory I can fill it with a variety of investments (whether index linked trackers, managed portfolios, individual stocks or anything else).  

My understanding is that the 'bond' is just a 'wrapper' just makes the reporting (for trust and tax purposes) easier as it is viewed as one entity rather than a selection of individual things.

Malthusian

I would be interested to hear the rationale for using an onshore bond. If you were in the UK an onshore bond would be tax inefficient as the insurance company will pay basic rate tax on your behalf on income and gains, whereas in the UK the children would almost certainly have no tax to pay on unwrapped bare trust investments.

It may well be different where you are - in particular, not all countries have the annual allowances for income and gains that the UK system does. I can see how using an onshore bond would make sense if it saves the children from having a tax bill on their investments in their own country (not just reduced tax but reduced hassle) . That said, what happens when they want to take the money out?

0.88%pa sounds extremely high for transaction charges. Either a) you are investing a lot of money in esoteric investments which are expensive to acquire and hold, or b) the fund managers are churning their holdings a lot, or c) the figure is nonsense, like a lot of disclosure forced upon investors by MIFID. (Experts have called MIFID the world's worst regulation for a reason.)

a) could be bad or good, it's impossible to say without knowing more about what you are actually investing in, b) would be unequivocally bad, and c) would mean there is nothing to worry about. Impossible to know which it is from the outside, or even which is more likely, without knowing what the actual investments are going to be.