IFA fees to manage Pension - worth it?

Traktor_4

Seeking views on whether it is worth paying an IFA 1% annual fee to manage a consolidated pension portfolio?  
I'm told the industry average management fee is between 0.5% - 1.5% of the total asset value.
With a pot valued at £800K - an annual management fee of £8K seems excessive; albeit with an active fund management platform model in place (not low cost index tracker product).   The pension is currently in two 'lifestyle' products; with a discounted management fee (0.3% )from a major provider; negotiated by my previous employer.   
Not looking to draw on pension for at least another 10 years.  Is it common that the IFA management fees pay for themselves in annual gains?
Thanks

wjr4

There’s so many threads about this already. 

Albermarle

wjr4 said:

There’s so many threads about this already. 

and often they degenerate into a pro and anti IFA 'debate' ................
OP - 1 % for a £800K pot is double normal . When you say active fund management , what do you mean by that . Is the IFA delegating the investment management to some one else who needs to be paid as well ? In which case 1 % in total looks more normal.

OldMusicGuy

Like wjr4 said, just search in this forum and you will find many threads about this topic with plenty of views pro and anti.

Traktor_4

Thank - apologies - I will search the threads again.
IFA is using a platform and has several active fund packages based on risk profile.

dunstonh

I'm told the industry average management fee is between 0.5% - 1.5% of the total asset value.

I disagree.   However, that could be down to your wording.  For example, for IFAs,  it is between 0% (no ongoing service) and 1% with 0.5% being the most common.      For funds, it is around 0.1% to 2.5%.

With a pot valued at £800K - an annual management fee of £8K seems excessive; albeit with an active fund management platform model in place (not low cost index tracker product).  

Using trackers would still have management decisions.  e.g. how much do you put in Japan equity, how much in US equity etc.    Nowadays, you frequently see hybrid models that combine active and passive.  It's less common nowadays to see full active.   Tends to be mainly salesforce FAs that do that.   Nowadays, you tend to look for the bottom line to be around 0.8% to 1.5% (risk can have an influence on cost as specialist or higher risk funds to be more expensive).  e.g. IFA 0.5%, platform 0.25%, OCF total 0.4% sort of ballpark  (Your value could get less than 0.25% on platform charge but talking ballpark).

Is it common that the IFA management fees pay for themselves in annual gains?

Yes.   However, there are a number of times that it doesn't.     For example, an IFA that is in control of the investment strategy will usually be cheaper than an IFA that passes the investment strategy to a DFM (the DFM has their own layer of charges).  In the case of DFM, the IFA has absolutely no involvement in the investment strategy, rebalancing, purchases/sales etc.  So, if you are paying an IFA for ongoing investment management and not much else and a DFM is being used, then you are not getting good value.  

IFA is using a platform and has several active fund packages based on risk profile.

using a platform is the norm nowadays. There are only a handful of providers left that do it the old way.   The word "packages" concerns me.  That could suggest DFM is being used.  But it could easily just be phrasing.   Investing is very much about opinion.   You will get some that favour trackers only. Others that favour hybrid but increasingly less that favour fully active.  I am in the hybrid camp of both active and passive depending on which is best.     

The most important thing an IFA does is make sure what you have is suitable for you.   IFAs are not investment managers.  Even those that pick the funds and the weightings are not investment managers.   The weightings data is usually bought in from external companies and the fund research and due diligence carried out by third parties. The IFA pays for that information and then puts it together to give you suitability, structure and process.  (an advisory IFA pays for the data and you pay the IFA.  A discretionary IFA/DFM ses you pay the DFM fees on top of the IFA charge - some IFAs will discount their own charge on that method but many do not)

cfw1994

Be sure to understand the TOTAL FEES.   
The IFA may charge x%, any DFM y%, & the funds themselves will likely have an AMC% (annual management charge).
If you can keep that TOTAL below 1%, that is perhaps okay.   We sometimes read of that total number reaching 2%, which is pretty awful (IMHO).
Also: do be aware that those fees are taken *regardless* of performance, & will be charged even if that 800k drops to 700k!!

Is it common that the IFA management fees pay for themselves in annual gains?

dunstonh clearly feels it is a very confident "yes" with one caveat.   
I'd suggest it is actually VERY hard (perhaps impossible) to know.  The only way to really compare would be to "show your workings", & the only time I've ever seen that happening is retrospectively, using preferred portfolios (20:20 hindsight!)     

Our company uses Aviva: a Group Personal Pension plan.   It has a choice of 80 funds (with some default profiles), with pretty low AMCs (range from 0.23% to 1%, but most funds below 0.5%), & of course there are no other fees to pay. 
Over the long term (10-30 years), keeping costs low can save a lot of money - plenty of articles on the long term effects of costs - example here.

The caveat to DIY is more about confidence and understanding than any especially magical beans.

[Deleted User]

Well, it's a £150 a week, so your financial adviser charge may be in the same ballpark as your supermarket and petrol bill or your council-tax, water charge, broadband and mobile bill combined. 

On a brighter note, you could be taking care of these for your appointed financial adviser so - swings and roundabouts.

Thrugelmir

Traktor_4 said:

Seeking views on whether it is worth paying an IFA 1% annual fee to manage a consolidated pension portfolio?  

Do you require advice just to manage the portfolio itself or for broader reasons? 

[Deleted User]

“With a pot valued at £800K - an annual management fee of £8K seems excessive”

Rewind the clock 10 years back to Jan 1 2011.  Imagine you invested 8k on that day into an index.  Lets say S&P 500.  That year it returned just 2.1%. So your money turns into 8168.  

On 1st of Jan 2012 add 8168 to your pot.  You have the total of 16,336.  In 2012 market returned 16%. So your money pot turned into about 19000.  Add 8k x 1.021 x 1.16 = 9475.

You get my drift.  Carry on until 2021. I am guessing your pot will be worth at least 160K but likely quite a bit more.  Thats the real cost to your portfolio of the 1% IFA charge over 10 years, not counting other charges.  Because you need to account for the lost opportunity of what that 1% could have earned you.  This is only worth it if both of the following conditions are true:

1. You are completely clueless about investments and incapable of reading a few books.
2. Your IFA is good, which is far from certainty. One thing is certain: he does not prioritize your best interests. 

JohnWinder

So, the question is whether £8k each year is a bit rich for an advisor overseeing a pension fund with only 2 all-in-one funds, in accumulation. Nothing to do with fund managers, platforms, managers who construct portfolios et al. Re-write that, if I'm wrong. Might help to know what the 'life-style' products are, but can we assume they're retirement date type or 'life strategy' type funds, diversified stock and bond funds with/without some less liquid real estate, infrastructure or the like plus cash?

At £200/hour it still looks like about 35 hours/year more than would be necessary, leaving £1000/year for a report or two.

dunstonh said:

Using trackers would still have management decisions.  e.g. how much do you put in Japan equity, how much in US equity etc.   

Using trackers need have no yearly management decisions if the original choice was suitable. Changing market conditions don't necessitate an investment strategy review, short of war or the like; changes in personal circumstances do.  Changing market conditions might prompt a review and changes, but it wouldn't be necessarily wise without a crystal ball.

dunstonh said:

Is it common that the IFA management fees pay for themselves in annual gains?

Yes.   However, there are a number of times that it doesn't.    

Or, to say the same, in different words: 'No. However, there are a number of times that it does.' I guess we're talking about a fee of 1%/year resulting in a return more favourable by 1%/year than obtainable without an on-going advisor fee.

dunstonh said:

The most important thing an IFA does is make sure what you have is suitable for you.   IFAs are not investment managers.  Even those that pick the funds and the weightings are not investment managers.  

And perhaps this points the way we should be heading: a decent fee for some knowledgeable advice about a suitable investment given the circumstances, and choosing the investment product(s). A one time fee for a one time need. When a new need arises we go back to the advisor for another one time fee, might be in 6 months time or more likely 5-20 years time. We'll skip the £8k/year when it's unnecessary and worse, risks messing with something that started out right.