IFA/DIY pension conundrum

Prism

Fees are secondary to an overall good result. The lowest fees do not necessarily a better result. When there are two identical products or services then you should look to the lowest fee but things are rarely that simple. For example a platform that charges slightly more may have a better customer service or is more reliable when it comes to payments. A fund that charges more may have an investment strategy that you prefer. A reasonably priced IFA may help you put together a better investment plan than you would do yourself. Of course all of these are maybe's so only you can decide what is important.

As a quick comparison my overall charges are around 1% made up of about 0.15% platform and 0.85% fund fees. I don't use an IFA but I wouldn't be against another 0.5% if I felt I needed advice. Others may be critical of my decision to pay such a high amount on fees but investing is all about opinion and I don't believe that cheap always equals best.

cfw1994

True....but if the total fees approach 2% or more, and in particular if moving in (or across to an IFAs control) take 3-6% “initial fee”, then those investments would have to do very well compared with lower costs ones.....

It is a balance, I agree: my BG American fund charges 0.74%, whilst other choices start at 0.23% in our Aviva work scheme....I’d be a lot richer if I’d paid 0.74% on the whole lot, I can tell you 

JohnWinder

Prism said:

Fees are secondary to an overall good result. The lowest fees do not necessarily a better result.

No, but: 'Price is one of the best predictors of a fund's future returns. That’s because a fund’s costs come right off the top of its total return.' https://www.morningstar.com.au/learn/article/investing-basics-key-factors-for-evaluating-m/204511

The lower the price the better the returns, in general. And why not? We know the lowest fees are usually in passive funds, and that active funds underperform a comparable index after 5 years in the majority, in general across sectors/countries. The high fee funds are battling against that and the effect of high fees on performance. Truly, you're likely to get what you don't pay for in a managed fund.

0.5%/year in extra fee results in 9% less after 20 years. The time factor is important; if your horizon is short, it doesn't matter much.

[Deleted User]

cfw1994 said:

True....but if the total fees approach 2% or more, and in particular if moving in (or across to an IFAs control) take 3-6% “initial fee”, then those investments would have to do very well compared with lower costs ones.....

It is a balance, I agree: my BG American fund charges 0.74%, whilst other choices start at 0.23% in our Aviva work scheme....I’d be a lot richer if I’d paid 0.74% on the whole lot, I can tell you 

Not a meaningful comparison.  If you want to invest in a fund which plays on momentum, why not just invest in momentum stocks directly?  You’d be even richer.  You could have been 100% in Gamestop and multiplied your fortune by more than an order of mag in about a week. 

While momentum plays have worked very well over the last decade, its not going to be the case forever.  Comparing apples and pears is not a reasonable approach.  Nor is comparing returns in a high risk aggressive fund with something that isn’t. 
With regards to paying ongoing IFA charges, they provide good value if you know nothing and the IFA is good.  Neither condition is a given. 

Prism

JohnWinder said:

Prism said:

Fees are secondary to an overall good result. The lowest fees do not necessarily a better result.

No, but: 'Price is one of the best predictors of a fund's future returns. That’s because a fund’s costs come right off the top of its total return.' https://www.morningstar.com.au/learn/article/investing-basics-key-factors-for-evaluating-m/204511

The lower the price the better the returns, in general. And why not? We know the lowest fees are usually in passive funds, and that active funds underperform a comparable index after 5 years in the majority, in general across sectors/countries. The high fee funds are battling against that and the effect of high fees on performance. Truly, you're likely to get what you don't pay for in a managed fund.

0.5%/year in extra fee results in 9% less after 20 years. The time factor is important; if your horizon is short, it doesn't matter much.

I was not referring solely to fund fees. Nobody should look at fees first or else you would simply find the cheapest fund in the world and put everything in it. First comes understanding of your desired risk level so you don't do something daft during a crash or try chasing past returns - an IFA might help with that or do it alone. Then asset allocation for your desired strategy - growth, income, drawdown, wealth preservation plus tax issues. Only then would you look at funds and the various fees of those funds. As I said, not the primary focus but not to be ignored.

Linton

Prism said:

JohnWinder said:

Prism said:

Fees are secondary to an overall good result. The lowest fees do not necessarily a better result.

No, but: 'Price is one of the best predictors of a fund's future returns. That’s because a fund’s costs come right off the top of its total return.' https://www.morningstar.com.au/learn/article/investing-basics-key-factors-for-evaluating-m/204511

The lower the price the better the returns, in general. And why not? We know the lowest fees are usually in passive funds, and that active funds underperform a comparable index after 5 years in the majority, in general across sectors/countries. The high fee funds are battling against that and the effect of high fees on performance. Truly, you're likely to get what you don't pay for in a managed fund.

0.5%/year in extra fee results in 9% less after 20 years. The time factor is important; if your horizon is short, it doesn't matter much.

I was not referring solely to fund fees. Nobody should look at fees first or else you would simply find the cheapest fund in the world and put everything in it. First comes understanding of your desired risk level so you don't do something daft during a crash or try chasing past returns - an IFA might help with that or do it alone. Then asset allocation for your desired strategy - growth, income, drawdown, wealth preservation plus tax issues. Only then would you look at funds and the various fees of those funds. As I said, not the primary focus but not to be ignored.

Exactly.  And finally when choosing funds at the very end of the investment process the primary criterion is what funds best fit together to provide your desired allocation.  As far as I am concerned charges like past performance are a tie breaker, nothing more.

In any case in general the funds I chose do not have a comparable index tracker as they are chiosen for their particular characteristics.

Ref:

 'Price is one of the best predictors of a fund's future returns. That’s because a fund’s costs come right off the top of its total return.' https://www.morningstar.com.au/learn/article/investing-basics-key-factors-for-evaluating-m/204511

Its always worthwhile checking references quoted to justify a point of view - this one comes from a staff writer's advertorial for Morningstar's facilities.

[Deleted User]

Morningstar is a highly reputable source of information. They are the ones keeping fund managers honest.  Before Morningstar information available to investors was very limited and highly misleading, starting from fund names and all the way up to fund composition, costs and returns. Morningstar improved situation dramatically. 

Linton

Deleted_User said:

Morningstar is a highly reputable source of information. They are the ones keeping fund managers honest.  Before Morningstar information available to investors was very limited and highly misleading, starting from fund names and all the way up to fund composition, costs and returns. Morningstar improved situation dramatically. 

Morningstar is a highly reputable source of fund information. That doesn’t make its journalists authoritative sources on investment theory. As far as I know Morningstar has not carried out original research in this area.

DT2001

JohnWinder said:

Prism said:

Fees are secondary to an overall good result. The lowest fees do not necessarily a better result.

No, but: 'Price is one of the best predictors of a fund's future returns. That’s because a fund’s costs come right off the top of its total return.' https://www.morningstar.com.au/learn/article/investing-basics-key-factors-for-evaluating-m/204511

The lower the price the better the returns, in general. And why not? We know the lowest fees are usually in passive funds, and that active funds underperform a comparable index after 5 years in the majority, in general across sectors/countries. The high fee funds are battling against that and the effect of high fees on performance. Truly, you're likely to get what you don't pay for in a managed fund.

0.5%/year in extra fee results in 9% less after 20 years. The time factor is important; if your horizon is short, it doesn't matter much.

The next line on that article says 
‘You can use Morningstar to check a fund's price and see whether it's a good deal relative to other funds that invest the same way.’
I interpreted that to mean when comparing funds offering similar components then price is very important not a general assessment that cheaper funds will perform better

[Deleted User]

Linton said:

Deleted_User said:

Morningstar is a highly reputable source of information. They are the ones keeping fund managers honest.  Before Morningstar information available to investors was very limited and highly misleading, starting from fund names and all the way up to fund composition, costs and returns. Morningstar improved situation dramatically. 

Morningstar is a highly reputable source of fund information. That doesn’t make its journalists authoritative sources on investment theory. As far as I know Morningstar has not carried out original research in this area.

Is this authoritative enough for you?  https://www.sec.gov/investor/alerts/ib_fees_expenses.pdf

Would have thought  vendors suggesting that costs don’t matter because of market volatility are liable to be sued by their customers. Personally,  would not touch any snake oil salesman with a barge pole.  

Are there other important factors  in investing? Sure. But anyone claiming costs are lost in the noise goes directly against basic maths.