Are IFA fees reasonable?

lescarp88

@dunstonh, would you agree that a low cost Vanguard world tracker does represent the wisdom of the crowd. The investor gets the colllective wisdom of the market for a very low fee. Very tough to beat mathematically.

Lars Kroijer suggests to use a very low cost total world tracker for the risk on part of a portfolio. He used to run a multi million (billion?) hedge fund. 
No need for a third party to charge the customer extra fees - whether it's adviser fees, platform fees, or transactions costs shifting between funds.

Your value as an IFA would appear to be in guiding investor behaviour. Nothing wrong with charging for that, if that's what people want or need. 

There is no definitive answer to which investment plan is right or wrong, it's opinion based. 

But one thing we do know is your extra costs are negative expected value for the investor. If you haven't the foggiest idea what that means either, this points to your probable demise. 

apb123

I would just put it into 40,60,80 Vanguard Life strategies, depending on your stage in life. Maybe drip feed it in over a year. The charges you quote there will eat up any investment gains. The fee for Vanguards platform is 0.15%.

I am always astonished that people use IFA's. They don't have some amazing knowledge, and using a simple global tracker almost always will beat any recommendation they would make.

Prism

Why has a post about IFA fees turning into one about active vs passive funds? Is the implication that IFAs can't/won't use passive funds? When it comes to asset allocation then somebody has to select it, whether that be Vanguard with their Lifestyle range, or HSBC or an IFA or individual selecting their own funds. You can do it yourself, or pay a fee to the fund manager to give you a generic allocation or pay a fee to an IFA to create a personalized allocation - all fair choices from what I can see.

The whole 90% of active funds fail to beat their benchmark is an interesting stat but not especially relevant to how an individual performs since it isn't easy to measure and unless you somehow take each investors personal goals into mind, can't be measured. And as far as I known there are no published statistics on how IFA individual sector portfolios compare, both performance and risk level, against a multi-asset approach.

dunstonh

@dunstonh, would you agree that a low cost Vanguard world tracker does represent the wisdom of the crowd. The investor gets the colllective wisdom of the market for a very low fee. Very tough to beat mathematically.

The average consumer in the UK is considered to be cautious.   So, a global tracker in isolation would be a missale for the majority of investors.

A global tracker is viable and I have recommended one plenty of times.  However, it's weightings are not necessarily ideal and people may prefer different weightings.  It is very easy to adjust the weightings to your preference and still be the same cost as a global tracker.

But one thing we do know is your extra costs are negative expected value for the investor. If you haven't the foggiest idea what that means either, this points to your probable demise. 

But charges are not the primary consideration.   They are secondary.   Where and how you invest is the primary consideration.     If charges were primary, no-one would invest as they would stay with cash.     

You do seem to be mixing up passive vs active with services an IFA provides.  Passives make up between 70-90% of our conventional portfolios (non ESG).   

dunstonh

apb123 said:

I would just put it into 40,60,80 Vanguard Life strategies, depending on your stage in life. Maybe drip feed it in over a year. The charges you quote there will eat up any investment gains. The fee for Vanguards platform is 0.15%.

I am always astonished that people use IFA's. They don't have some amazing knowledge, and using a simple global tracker almost always will beat any recommendation they would make.

If that works for you then great.   However, what if the IFA portfolios have a consistent track record of beating the equivalent VLS?

Too many people pray at the church of Vanguard and refuse to accept that viable alternatives exist that could be just as good or better.   An IFA is doing exactly what Vanguard is doing with VLS.   Selecting funds to fit IA sectors using weightings that have been professionally researched and based on data and opinion.     So, why is it good when Vanguard does it but not good when an IFA does it ?(or by definition any other person or company as there are plenty of alternatives to VLS which could be considered better).     

There are plenty of DIY investors doing exactly the same as well.   And beating VLS in the process.    

NeilCr

apb123 said:

I would just put it into 40,60,80 Vanguard Life strategies, depending on your stage in life. Maybe drip feed it in over a year. The charges you quote there will eat up any investment gains. The fee for Vanguards platform is 0.15%.

I am always astonished that people use IFA's. They don't have some amazing knowledge, and using a simple global tracker almost always will beat any recommendation they would make.

I am always astonished that people only see things through their own eyes

I started using an IFA when my mum died and I inherited a considerable amount of money. I had no idea what I was doing at all with investments. Over the years (and another inheritance) I have had good service from the two IFAs I have used and the investment return has been fine for my needs. I don't want to spend my (any) time DIYing and I trust my IFA. I am also quite a worrier and I would, likely, make a wrong decision if there was a crash/fall in a particular investment.

I, completely, get folks have other views and that's all good. But, for quite a lot of people using an IFA is the right choice for them. 

Albermarle

I am always astonished that people use IFA's. They don't have some amazing knowledge, and using a simple global tracker almost always will beat any recommendation they would make.
As a poster on a pensions forum , you/we are very unlikely to be representative of the general public , who probably think a global tracker was something that monitored airplane movements or similar. I think we all know friends and colleagues who are clueless/ disinterested /labouring under numerous misunderstandings in this area. Even if you attempt to help them the advice often falls on stony ground. Not just about specific investments , but tax relief, inflation issues, how much to save for retirement etc 
Am I saving enough into my pension to live well in retirement? | This is Money

lescarp88

@dunstonh,

a). The reference to Vanguard Global Allcap is merely to highlight a suitable option for the risk-on part of a portfolio, rather than suggsting a 100% equities allocation. 

b). The global equities market is the collective intelligence of every retail fund, hedge fund, and trader in the market? A cheap global tracker buys you that minus the big fees. It's an interesting idea that a regional IFA tweaks these allocations to an optimal bespoke allocation. I'd suggest that doing so would represent dumb money. What insider information or edge do you have against the collective intelligence of the market?

c) Yes, where and how you invest is important. In other words - asset allocation. But this is not rocket science. There's a danger of trying to reinvent the wheel with tweaking and fiddling, which might not be needed.

I disagree with your assertion that  "If charges were primary, no-one would invest as they would stay with cash."

It's quite possibly human nature to want to "have a go" at trying to time or outsmart the market. Thankfully, there's no need to pay excessive charges for investing.

I'm not mixing up passive vs active with services an IFA provides.  If passives do make up between 70-90% of your conventional portfolios, then you're turning a low cost investment in to an unecessarily costly one.

JohnWinder

Prism said:

Why has a post about IFA fees turning into one about active vs passive funds? Is the implication that IFAs can't/won't use passive funds?

Scrolling back I can see it might have been me. Guilty as charged, your honour. And then I look further, and it's 'j' accuse'.

But I wonder if it has to do with justifying charges in the minds of the clients. What if an advisor chooses a single fund, like VLS60, or just a diversified equity tracker and a safe bond tracker, or most complex of all that bond fund and splits the equities into currency hedged and unhedged?  All those funds would be about the cheapest available. Now the client might be wondering 'how can they be any good being the cheapest?', 'don't you get what you pay for with investing?' - not a happy camper.

Worse than that, the advisor says 'we're not going to look at these funds for another ten years, because whatever usually happens won't change our strategy until at least 2031, unless WW3 breaks out (then we can mess with it)'. This clashes with the client's idea that having good returns is likely associated with hard work, since most other aspects of life are like this. Some call it the 'conjunction fallacy' - hard work gives better results than almost no work.

And worst, the advisor recognising the conjuction fallacy and knowing the performance history of active and passive funds and that simple is about as good as complex (certainly cheaper), decides to charge her client very little. Now what does the client think? 'How can she be any good charging a quarter of most of the others? I'm out of here.'.

Is that part of the link between advisor fees and the agonising over active/passive?

Addendum:

I guess this doesn't help quieten the baying pack when fees are mentioned:

'As part of its report, the Financial Conduct Authority (pdf) said that the asset-management sector boasts a hefty average profit margin of 36%. That’s better than just about every other industry in the country, from oil to software to pharma companies.'

https://qz.com/1017165/fund-managers-fees-arent-often-justified-by-performance-and-weak-competition-is-to-blame/

dunstonh

b). The global equities market is the collective intelligence of every retail fund, hedge fund, and trader in the market? A cheap global tracker buys you that minus the big fees. It's an interesting idea that a regional IFA tweaks these allocations to an optimal bespoke allocation. I'd suggest that doing so would represent dumb money. What insider information or edge do you have against the collective intelligence of the market?

What makes you think that the tracker has the best global allocations?    The tracker matches the market weightings but the market weightings may not be desirable.  When the US does well, global trackers will do better.  When the US does badly, global trackers will do worse. Throw in exchange rate movements with that. 
It is not an interesting idea at all that weightings are tweaked.    Vanguard do it.  It has been done for generations.  
The data supplier is one of the largest in the country and used by institutional investors as well as advisers firms.  They decide the weightings just as Vanguard decide the weightings on VLS.

c) Yes, where and how you invest is important. In other words - asset allocation. But this is not rocket science. There's a danger of trying to reinvent the wheel with tweaking and fiddling, which might not be needed.

But you are implying that only a global trackers allocation is going to give the best returns and everything else will not.

I'm not mixing up passive vs active with services an IFA provides.  If passives do make up between 70-90% of your conventional portfolios, then you're turning a low cost investment in to an unecessarily costly one.

If the bottom line gives the potential for better returns then it is money well spent.