Are IFA fees reasonable?

sevenhills

Prism said:

Why has a post about IFA fees turning into one about active vs passive funds? .

Surely the main advice that an IFA can bring is about income tax, inheritance tax, pension tax relief, etc once you get to the point of whether you should invest in biotech, EVs, the Far East or a World tracker it's anyone guess.

lescarp88

@Alan_P_2, it helps the OP greatly to see that an IFA struggles to provide added value compared to a simple multi asset solution.
Nothing generic about the questions posed. The IFA was challenged and floundered to offer a coherent response, bar selectively quoting earlier replies out of context. 

https://monevator.com/financial-advisors-swindlers-and-leeches/

AlanP_2

But you haven't shown that an IFA struggles to provide added value compared to a simple multi-asset solution, all you have done, and all you can do is offer your opinion.

The IFA has stated that they use simple multi-asset solutions when suitable, so is theirs not as good as the ones you are favouring? 

The only other person to use an IFA that has responded on here was positive about the experience. 

My in-laws are in their 80s and have used an IFA for nearly 30 years. I have no idea what they pay or what they are invested in or what their returns are, but I do know that it is almost certainly a better option than the stick to cash approach which is where they were before and still would have been. 

For some people using an IFA is absolutely the correct thing to do. 

Out of interest how many of the contributors to this thread have actual, personal experience of using an IFA to base their views on? 

I haven't used one, apart from for DB pension transfer required advice, so have no personal evidence on whether they add value or not. 

lescarp88

An IFA does and will continue to provide added value compared to an off the shelf multi asset product. Why? Because their involvement creates a tailwind. An extra hurdle to overcome. This isn't my personal opinion, it's in plain sight and a common sense deduction. 
Yes, an IFA using a simple multi-asset solution when suitable is perfectly reasonable. But wait, the IFA takes their slice of the investment pie. This WILL impact the net return.
Maybe they use a MA solution when the 'research' software hits a glitch, but they've gotta do something, haven't they? 

JohnWinder

dunstonh said:

If that works for you then great.   However, what if the IFA portfolios have a consistent track record of beating the equivalent VLS?
There are plenty of DIY investors doing exactly the same {putting together their own VLS-type mix} as well.   And beating VLS in the process.    

In which case one might go with a IFA portfolio, but do they have a consistent record of beating an equivalent (risk level) portfolio after costs? And if it's not all such IFA portfolios with that track record, how was one to know which ones would achieve that, 20 years ago when we started out investing? And for those portfolios which have, how do we know they (or which of them?) will continue to outperform after costs for the next 20 years? It seems impossible to know if one is choosing a 'winner' compared to a VLS, or a 'loser' however satisfactory a 'loser' might turn out to be. That is 'the problem'.

Likely some people would be happy to have had a 'loser' if all the losers turned out to be good enough for their needs anyway, and not worry that they'd missed better, easily achievable VLS returns and not had a good 'win' that might also have resulted from avoiding VLS.

I guess the second para is saying: 'if plenty of DIY investors can beat VLS, then so can paid advisors'. Not sure it gets us past 'the problem' however.

Thrugelmir

lescarp88 said:

@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 retail investor is in themselves the market. Not an idle bystander.  If "Lars Kroijer suggests " and everyone follows his advice. Where's the wisdom. Little more than a herd of sheep following each other. Which simply pushes money into the same pool of stocks and drives prices upwards. In 2025 in the post Covid era there'll be a new easy to digest book (written with hindsight) that will become the bible for the next generation. The S&P 500 the grandfather of the passive movement would have provided a better return than a world tracker. The message has become progressively become more distorted and diluted as the myths are embellished on social media. 

JohnWinder

Thrugelmir said:

  If "Lars Kroijer suggests " and everyone follows his advice. Where's the wisdom. Little more than a herd of sheep following each other. Which simply pushes money into the same pool of stocks and drives prices upwards. I

If every investor on the planet buys the same global tracker holding all stocks and nothing else, then they're either using money from selling other equity holdings (pushing those prices down commensurately), or they're putting new money into equities which will make prices rise regardless of how they invest the equity money. So now we've got every investor fully in the same global tracker: new money is invested and all prices go up; money is taken out for other purposes and prices go down. How is all that different from what happens now with money movement and price changes?

lescarp88

@Thrugelmir, Lars Kroijer is a highly respected former hedge fund manager. It's fair to assume his suggestions may be informed by useful experience, if not the definitive answer.
If we're just talking about the equities part of a portfolio, wisdom of the crowd refers to the colllective intelligence of every market participant. Active traders, hedge funds, pension funds, institutional investors, etc. Very difficult to beat without an edge.
That's the argument for choosing a low cost "passive" investment portfolio. 
Your assertion that the retail investor "is the market" is not wholly true. They are one piece of the pie providing the colllective "wisdom" which informs the current market price. 
Your post sounded confident that prices have been pushed up. That might suggest you've found an elusive 'edge' and can short the market or will not be investing in equities for now. Although I suspect neither is true. 

JohnWinder

Well, it seems like there might be an issue, and we're not the only ones agonising over it.

'Some passive strategies amplify market volatility, and the shift has increased industry concentration, but it has diminished some liquidity and redemption risks. Finally, evidence is mixed on the links between indexing and comovement of asset returns and liquidity.'

Anadu, Kenechukwu, Mathias Kruttli, Patrick McCabe, and Emilio Osambela (2020). “The Shift from Active to Passive Investing: Potential Risks to Financial Stability?,” Finance and Economics Discussion Series 2018-060r1. Washington: Board of Governors of the Federal Reserve System, https://doi.org/10.17016/FEDS.2018.060r1.

'For equities, comovement {of returns} effects have declined significantly since 2001'.

Thrugelmir

lescarp88 said:

@Thrugelmir, Lars Kroijer is a highly respected former hedge fund manager. It's fair to assume his suggestions may be informed by useful experience, if not the definitive answer.

The book was first published in 2013. Written and compiled well before. Lars Kroijer is just one of very many people in the investment field with an opinion. Possibly his views are shaped by the fact that his hedge fund lasted just 6 years before being wound up. Events subsequently were certainly unforeseen by him.  US investors have been advised to hold a mix of US and International shares plus bonds for some considerable time.  Unlike UK investors the fund splits require them to take far less currency exposure risk.