Am I being over-charged by an IFA?

BarneyBear1510

Hi there I want to consolidate 3 work pensions. I've spoken to two different IFAs who charge very differently - one will charge £500 up front before they find the best pension to move into. the other one charges 3.5% of my pension pot. he's found me a very high-performing (even during the last year) ethical fund whichc he recommends. i have no idea what to do - 3.5% seems an awful lot - my thoughts are he *may* have done a lot of research to find this pension for me OR he could have had this up his sleeve anyway as a favoured pension. I probably sound like a bit of a numpty asking, but if you can offer any advice, I'd be really grateful. Thanks, 

naedanger

BarneyBear1510 said:

Hi there I want to consolidate 3 work pensions. I've spoken to two different IFAs who charge very differently - one will charge £500 up front before they find the best pension to move into. the other one charges 3.5% of my pension pot. he's found me a very high-performing (even during the last year) ethical fund whichc he recommends. i have no idea what to do - 3.5% seems an awful lot - my thoughts are he *may* have done a lot of research to find this pension for me OR he could have had this up his sleeve anyway as a favoured pension. I probably sound like a bit of a numpty asking, but if you can offer any advice, I'd be really grateful. Thanks, 

The reasonableness or otherwise of the percentage based fee will depend on the size of your pension pot.

But personally I would prefer the fixed fee, and I would also be a bit wary of a recommendation based on very high past performance.

TVAS

You have not told us the amount of the total transfer value.
You have not told us why you want to consolidate which is a poor reason for transferring and made worse by additional charges.
You have not said how old you are.
I can see you want an ethical fund so unlikely the current schemes have that fund choice option. 
It will probably be very hard to transfer to a cheaper fund because employer pensions although not much fund choice cover all the risk spectrum Low Medium High Adventurous however the fund charges can be as low as 0.10%.
Firstly ask yourself do you want an ethical fund at the expense of paying more charges up front and ongoing.
Why have you not googled for ethical pensions funds yourself?
3% is fair so 3.5% is not outrageous. 

The £500 upfront could be because the new plan recommended will be much more expensive than the current plans and therefore not justified. 

If you want to manage the investments yourself do not sign on for an ongoing advice fee (OAC) most advisers will try and charge you 1% p.a.

REMEMBER all adviser fees are negotiable. If you do sign for OAC and subsequently are not happy with the service you can write to the new provider and ask them to remove the charge from your plan.

https://www.ftadviser.com/regulation/2020/12/03/fca-warns-of-significant-advice-price-clustering/

BarneyBear1510

thanks for advice. i am 50 and want to consolidate as i have three previous work pensions but you raise some interesting points. the pot is around £100k.

Albermarle

Have you considered a more simple and cheaper step of consolidating two of the pensions into the third one .
Preferably the newest one /the one with most fund choice /lowest charges .
Are any of these pensions with a current employer ( as you need to keep that one ) or are you not currently contributing to a pension ( maybe retired ?)

dunstonh

Am I being over-charged by an IFA?

Being overcharged would be unlawful.    The IFA should only charge the rate you have agreed.

. i have no idea what to do - 3.5% seems an awful lot

It could be a lot. It could be cheap.  When figures are in percentage terms, they are pretty meaningless until they are turned into monetary terms.  3.5% could be cheaper than £500.

my thoughts are he *may* have done a lot of research to find this pension for me OR he could have had this up his sleeve anyway as a favoured pension.

All IFAs would know more or less what provider etc they are going to use before they run the research.    When you are doing the same things every day, changes do not tend to happen on a daily basis.  

 the pot is around £100k.

Providing it has no safeguarded benefits then the percentage figure is high.  2% would be more ballpark.   The £500 is very cheap.

REMEMBER all adviser fees are negotiable. If you do sign for OAC and subsequently are not happy with the service you can write to the new provider and ask them to remove the charge from your plan.

And i repeat again, that is not the way to do it.   

OldMusicGuy

You can consolidate DC pensions for nothing yourself (there may be some exceptions where there are guarantees involved). So you are paying a lot of money for something that may cost you nothing.

However, do make sure you understand why you are consolidating pensions. You don't have to do this. You can also consolidate into one of your existing pensions. Also make sure that you understand the difference between the fund choices in your existing pensions and those in the "new" pension.

Of course the fund recommended by the IFA is one he has up his sleeve. He may or may not have done a lot of research, you can't judge that.  The IFA makes their money by convincing you to pay them to transfer your pensions into a scheme and funds that they think are "better". 

What you should be thinking about if you are considering consolidating are:
- Are my current pensions inflexible at retirement (eg they may not offer drawdown)
- Are they expensive, especially compared to what an IFA will charge.
- Do they offer a good range of investment choices (some are very limited).

Just consolidating them does not mean they will perform any better.

JohnWinder

I’ll start out assuming your 3.5% advisor is a smart, diligent fellow whose extensive research has identified his recommended ethical fund that has performed very well. Note, I write ‘has performed very well’, not is ‘performing’ as you wrote. We can only know what its past performance is; the future performance might be different. And if there’s no ‘present’ performance, we should be careful of verbs in the present tense, lest they mislead. If there is a present performance how would we measure it?

I’ll assume that he, being a smart fellow, will think that you will be attracted to a fund that has performed very well, because that’s what most of us want in the future. But beware.

Firstly, you can get better returns with more risk usually, so are this fund’s returns because of extra risk, or the same risk with simply better securities? Secondly, there are some reasons, and some research, which suggests that good past performance is a poor predictor of future good performance. For a start, all investment products are required to carry that sort of warning, I think. Are we taking notice of it?

We don’t know whether you mean ‘very high-performing’ to be >6%/year returns (those are absolute returns), or whether you mean better than most other funds (those are relative returns). Do you know what he means?

Firstly, funds which substantially outperform most others need to be quite different from most others to achieve this, and being quite different exposes them to one day substantially under-performing most other funds. How would yours avoid that risk?

Secondly, research mentioned in this forum, or easily found elsewhere, shows that funds in the top performing group for the past several years commonly become the funds of the bottom performing group for the next several years. Are you ready to face that prospect with equanimity?

To be a very high-performing fund compared to others means it has to be actively managed. The research suggests that most actively managed funds become under-performing funds (compared to the market average) after periods of about 3-5 years. Will you hold your fund for more than 5 years?

There’s good reason to think that the annual expenses of a fund that you will pay is a better predictor of its future performance; the more expense, the worse the performance. Did he tell you how its expenses compared?

A knowledgeable advisor would know all that; it’s why they're educated and trained to a high level. So is he promoting a ‘very high-performing’ fund as a ‘come on’ to you, a sort of a non-promise that he won’t make but you’ll be allowed to make for yourself, or does he know something we don’t know?

If you need pointers to the research, let us know.

older_and_no_wiser

Another option mentioned earlier is to self invest into a DIY SIPP and transfer your separate plans into this free of charge. An example being Interactive Investor. They charge a flat fee of £9.99 a month for a SIPP which works out very reasonable on larger pension pots.

You will need to self manage the SIPP and decide where to invest the money as it will come into the account as cash. Most people here I'm sure would recommend a balanced multi asset fund like Vanguard LifeStrategy or HSBC Global Strategy. You can pick your own risk levels in each one. Of course, you can move funds around if you wish on a periodic basis - another advantage of a DIY SIPP.

As others have said, passive index trackers (or light touch managed) tend to be the way to go rather than actively managed funds. Be wary of advisors who promise the world. I would also say the percentages you quoted are very high. I was quoted around 0.65% from two local advisors I had initial conversations with recently and they were both reputable and talked candidly about different options without pushing any one strategy. 

Do you own research and then make a decision. I've been through this process recently and learnt so much via online resources.

[Deleted User]

Are you being overcharged?
Yes imo at 2%
Definitely at 3.5%
Wait, do you even need an IFA?

bostonerimus

3.5% and a well performing ethical fund...what is the fund? I certainly would never pay anyone 3.5% to pick a fund.