Are IFA fees reasonable?

staggered

thegentleway said:

If you like the IFA you've found but not his fees, why not ask him if he'll do piece work: i.e. you pay him to make recommendation for investments and you impletment it and manage it. Gives you piece of mind your portfolio is suitable for your risk tolerance but you don't have to pay expensive implementation and ongoing costs.

Thanks, I think that's what I'd ideally be looking for - he recommends where to invest (for a more reasonable fee) and I deal with the mechanics of it.

I've made appointments with a couple more IFAs next week to see what they offer.  If nothing else, it might improve my bargaining position with the original IFA.

Michael121

dunstonh said:

thegentleway said:

If you like the IFA you've found but not his fees, why not ask him if he'll do piece work: i.e. you pay him to make recommendation for investments and you impletment it and manage it. Gives you piece of mind your portfolio is suitable for your risk tolerance but you don't have to pay expensive implementation and ongoing costs.

Not sure that will work.   For example, the portfolio we use for ongoing servicing clients is different to what we would use for transactional clients.    This follows FCA guidance.     So, I suspect it would be similar with other advisers.
Also, most portfolio spreads from adviser firms are fluid and not rigid.  So, that juts gets you the current quarter weightings and research but not changes in the future.

Why would two people with the same risk appetite and time horizon, living in the same country with the same goals get a different portfolio based on if they pay ongoing charges.

dunstonh

Michael121 said:

dunstonh said:

thegentleway said:

If you like the IFA you've found but not his fees, why not ask him if he'll do piece work: i.e. you pay him to make recommendation for investments and you impletment it and manage it. Gives you piece of mind your portfolio is suitable for your risk tolerance but you don't have to pay expensive implementation and ongoing costs.

Not sure that will work.   For example, the portfolio we use for ongoing servicing clients is different to what we would use for transactional clients.    This follows FCA guidance.     So, I suspect it would be similar with other advisers.
Also, most portfolio spreads from adviser firms are fluid and not rigid.  So, that juts gets you the current quarter weightings and research but not changes in the future.

Why would two people with the same risk appetite and time horizon, living in the same country with the same goals get a different portfolio based on if they pay ongoing charges.

Clearly, they are not identical if one is looking for a one-off piece of advice and the other is looking for ongoing servicing.  So, the advice needs to match the different needs.  You also haven't considered knowledge, understanding and behaviour as they would need to be the same too.

Portfolios need adjustments.  Rebalancing, weighting changes, fund switches etc.    An IFA can put that in place on day one based on current research and data but without ongoing reviews, the individual is not going to be supplied with that ongoing data.

The EU directive, MIFID, required investment recommendations to be within the understanding and capability of the individual.     So, putting someone paying on a one-off basis into a portfolio that needs ongoing reviews and maintenance would not be considered suitable unless you are satisfied they have the ability, understanding and willingness to do that for themselves.        So, typically, you would use something like a multi-asset fund for those transactional clients.  you would not use a portfolio where ongoing work is required.

There is also the commercial reality.  That data, due diligence, research etc that is carried out on an ongoing basis needs to be paid for by the adviser firm on an ongoing basis.   If a new governance report is issued that recommends that investors in that fund should come out of it then those paying for ongoing servicing will get pulled out.   Those that are not paying for ongoing servicing would be left in it.    For example, our research provider issued a governance report back in September 2017 saying that it would not be suitable to use Woodford income due to its long list of illiquid assets which are not suitable for UK equity income fund.   An adviser firm that had Woodford income in their portfolios, would have removed all the ongoing servicing clients.  They would not have removed the transactional clients who would be left in a fund that ended up failing in 2019. 

Michael121

dunstonh said:

Michael121 said:

dunstonh said:

thegentleway said:

If you like the IFA you've found but not his fees, why not ask him if he'll do piece work: i.e. you pay him to make recommendation for investments and you impletment it and manage it. Gives you piece of mind your portfolio is suitable for your risk tolerance but you don't have to pay expensive implementation and ongoing costs.

Not sure that will work.   For example, the portfolio we use for ongoing servicing clients is different to what we would use for transactional clients.    This follows FCA guidance.     So, I suspect it would be similar with other advisers.
Also, most portfolio spreads from adviser firms are fluid and not rigid.  So, that juts gets you the current quarter weightings and research but not changes in the future.

Why would two people with the same risk appetite and time horizon, living in the same country with the same goals get a different portfolio based on if they pay ongoing charges.

Clearly, they are not identical if one is looking for a one-off piece of advice and the other is looking for ongoing servicing.  So, the advice needs to match the different needs.  You also haven't considered knowledge, understanding and behaviour as they would need to be the same too.

Portfolios need adjustments.  Rebalancing, weighting changes, fund switches etc.    An IFA can put that in place on day one based on current research and data but without ongoing reviews, the individual is not going to be supplied with that ongoing data.

The EU directive, MIFID, required investment recommendations to be within the understanding and capability of the individual.     So, putting someone paying on a one-off basis into a portfolio that needs ongoing reviews and maintenance would not be considered suitable unless you are satisfied they have the ability, understanding and willingness to do that for themselves.        So, typically, you would use something like a multi-asset fund for those transactional clients.  you would not use a portfolio where ongoing work is required.

There is also the commercial reality.  That data, due diligence, research etc that is carried out on an ongoing basis needs to be paid for by the adviser firm on an ongoing basis.   If a new governance report is issued that recommends that investors in that fund should come out of it then those paying for ongoing servicing will get pulled out.   Those that are not paying for ongoing servicing would be left in it.    For example, our research provider issued a governance report back in September 2017 saying that it would not be suitable to use Woodford income due to its long list of illiquid assets which are not suitable for UK equity income fund.   An adviser firm that had Woodford income in their portfolios, would have removed all the ongoing servicing clients.  They would not have removed the transactional clients who would be left in a fund that ended up failing in 2019. 

Interesting. I was just curious how that worked, your last point is a great example of why someone might want to go down that route.  

wjr4

Personally I think the initial charge is way too high! I’d never dream of charging a client that amount for a simple ISA transfer! 

Langtang

eskbanker said:

ZingPowZing said:

Their aim is not to maximise your investments but to manage your expectations.

To be fair, anyone going to an IFA under the impression that the adviser's role is to maximise investments needs to have their expectations managed....

That's interesting (no, really), as I had assumed quite the opposite. Why spend c£5k pa for no increase in returns. Just my, uneducated, assumption. I hate to ask this question, but why pick an (I)FA if they're not going to get better results than you could?

dunstonh

Langtang said:

eskbanker said:

ZingPowZing said:

Their aim is not to maximise your investments but to manage your expectations.

To be fair, anyone going to an IFA under the impression that the adviser's role is to maximise investments needs to have their expectations managed....

That's interesting (no, really), as I had assumed quite the opposite. Why spend c£5k pa for no increase in returns. Just my, uneducated, assumption. I hate to ask this question, but why pick an (I)FA if they're not going to get better results than you could?

The primary objective of any IFA recommendation is suitability.  Making sure what the person is recommended is suitable for them. Their objectives, the risk profile, their behaviour pattern, their capacity for loss, knowledge and understanding. 

IFAs are qualified on portfolio building methods and investment selection.  They are also required to carry out due diligence and research.  Although realistically, that sort of data is bought in nowadays as it's difficult to meet modern audit requirements in-house.   That means the knowledge is there and the ability is there but its secondary to suitability.

You could pick a portfolio that does better than an IFA portfolio.  There is a thread created today where someone says they pick funds based on their performance.  That basically means they are picking the highest risk funds in their sector.     That person probably doesn't understand risk.     That means their investments are unlikely to be suitable.  So, an IFA portfolio may be lower risk.  That means there is a very good chance the unsuitable investments will perform better in growth periods than the IFA recommended investments.    However, what happens in a period when we have 2 or 3 negative years on the markets and the higher risk stuff drops more than the tolerance of the individual?   They sell to cash and bleat that they will never invest in the stockmarket again.     Many people have come across those types.

You could have a lot of knowledge yourself and DIY.  And DIY well.   You could have little or no knowledge and get lucky.  Or you could make a pigs ear of it.      It is not very different to most jobs where some DIY and some use a professional.

Forget FAs.  They cannot give best advice.  They can only give advice on their product range and most FA product ranges are expensive and not great quality.

Langtang

dunstonh said:

Langtang said:

eskbanker said:

ZingPowZing said:

Their aim is not to maximise your investments but to manage your expectations.

To be fair, anyone going to an IFA under the impression that the adviser's role is to maximise investments needs to have their expectations managed....

That's interesting (no, really), as I had assumed quite the opposite. Why spend c£5k pa for no increase in returns. Just my, uneducated, assumption. I hate to ask this question, but why pick an (I)FA if they're not going to get better results than you could?

The primary objective of any IFA recommendation is suitability.  Making sure what the person is recommended is suitable for them. Their objectives, the risk profile, their behaviour pattern, their capacity for loss, knowledge and understanding. 

IFAs are qualified on portfolio building methods and investment selection.  They are also required to carry out due diligence and research.  Although realistically, that sort of data is bought in nowadays as it's difficult to meet modern audit requirements in-house.   That means the knowledge is there and the ability is there but its secondary to suitability.

You could pick a portfolio that does better than an IFA portfolio.  There is a thread created today where someone says they pick funds based on their performance.  That basically means they are picking the highest risk funds in their sector.     That person probably doesn't understand risk.     That means their investments are unlikely to be suitable.  So, an IFA portfolio may be lower risk.  That means there is a very good chance the unsuitable investments will perform better in growth periods than the IFA recommended investments.    However, what happens in a period when we have 2 or 3 negative years on the markets and the higher risk stuff drops more than the tolerance of the individual?   They sell to cash and bleat that they will never invest in the stockmarket again.     Many people have come across those types.

You could have a lot of knowledge yourself and DIY.  And DIY well.   You could have little or no knowledge and get lucky.  Or you could make a pigs ear of it.      It is not very different to most jobs where some DIY and some use a professional.

Forget FAs.  They cannot give best advice.  They can only give advice on their product range and most FA product ranges are expensive and not great quality.

Thanks once again for your reply, I can always count on you. I agree completely with what you say (we have decided to go the IFA route when my wife's inheritance comes through, although we haven't chosen or met with one yet...) and my reply wasn't to denegrate what IFAs do, more to pick up on what @eskbanker said regarding that not being an IFA's job.

I would indeed make a pigs ear of it. Try as I might (and I have tried) over the last few weeks and months, I just cannot get my head around things. I'm not going to beat myself up about it, there is an option.

JohnWinder

staggered said:

I also have in mind that, over the course of 10 years, a 0.75% fee will add up to around £15,000 so saving £1,500 on initial costs for an inferior service isn't vfm.

Strange, when I use an online compound interest calculator, and started with your £180k, and then grew it at 3%/year for 15 years (you said 10-20 years), with or without adding a modest extra monthly contribution yourself, I got a £30,000 difference in the final figure compared with 2.25%/year return (allowing for the 0.75%/year fee). I assumed 3%/year real return (5%/year nominal return with inflation at 2%/year). So that's £30k lost to that one fee, in today's pounds.

Which helps explain why a lot of people choose to do it themselves. And counter-intuitively perhaps, they can be expected to do as a good a job as many professionals, with a bit of nous and a few days or weeks of background reading. Don't underestimate the effect of costs.

[Deleted User]

dunstonh said:

Langtang said:

eskbanker said:

ZingPowZing said:

Their aim is not to maximise your investments but to manage your expectations.

To be fair, anyone going to an IFA under the impression that the adviser's role is to maximise investments needs to have their expectations managed....

That's interesting (no, really), as I had assumed quite the opposite. Why spend c£5k pa for no increase in returns. Just my, uneducated, assumption. I hate to ask this question, but why pick an (I)FA if they're not going to get better results than you could?

The primary objective of any IFA recommendation is suitability.  Making sure what the person is recommended is suitable for them. Their objectives, the risk profile, their behaviour pattern, their capacity for loss, knowledge and understanding. 

IFAs are qualified on portfolio building methods and investment selection.  They are also required to carry out due diligence and research.  Although realistically, that sort of data is bought in nowadays as it's difficult to meet modern audit requirements in-house.   That means the knowledge is there and the ability is there but its secondary to suitability.

You could pick a portfolio that does better than an IFA portfolio.  There is a thread created today where someone says they pick funds based on their performance.  That basically means they are picking the highest risk funds in their sector.     That person probably doesn't understand risk.     That means their investments are unlikely to be suitable.  So, an IFA portfolio may be lower risk.  That means there is a very good chance the unsuitable investments will perform better in growth periods than the IFA recommended investments.    However, what happens in a period when we have 2 or 3 negative years on the markets and the higher risk stuff drops more than the tolerance of the individual?   They sell to cash and bleat that they will never invest in the stockmarket again.     Many people have come across those types.

You could have a lot of knowledge yourself and DIY.  And DIY well.   You could have little or no knowledge and get lucky.  Or you could make a pigs ear of it.      It is not very different to most jobs where some DIY and some use a professional.

Forget FAs.  They cannot give best advice.  They can only give advice on their product range and most FA product ranges are expensive and not great quality.

Short form: Peace of mind.
Financial Advisers offer reassurance. Enhancing the performance of your investments would be the undertaking of the fund managers (you'll be paying them in addition) but the final responsibility is always yours alone.