IFA charges and portfolio risk

BG88

Hi All,

Is an Aggregated total recurring charge of 1.52% (Product charge 0.18%, Advisor service charge 0.65% & Investment management charge 0.69%) on the high side for £550k pot (ISA,GIA & SIPP)?  Would be for a medium risk portfolio with approx. 15 funds.  Don't think that would make a difference? 

 Also, would it be wise to liquidate a low-risk portfolio to move to a medium-risk portfolio when you are round about retirement age (62)?  This is the advice I have currently been given. Logic being I intend to be invested for the rest of my life and will most likely not need to touch the money for the 8 - 9 years.  Bit nervous to change strategy at this age and to have to buy back into the market when everything is nearly at all time highs.

any thoughts appreciated

bostonerimus

While I think it's often necessary for people going into retirement to keep a portfolio with some risk and potential for growth as they will likely be retired for 20 or 30 years, you seem to have things a little back to front. It's usual to have a riskier portfolio during your working years as you have income to buy assets if they go down and time for them to recover their value. I think you need to chose a risk/return profile now that matches the size of you pot, your need for income and your tolerance for losses.

As far as the fees go if we assume a starting 3% annual drawdown the you will be spending 50% of your income on financial fees. That sounds like a lot of money to me...on a 550k pot that will be just over 8k a year leaving you with 8k to spend.

Albermarle

1.5% in total is probably in the middle ground. We see charges on this forum of over 2% , especially when the IFA delegates the actual investing strategy to a Discretionary Fund Manager ( DFM) who also have a fee.
On the other hand it seems possible to get it down to around 1 %, if the advisor charge is 0.5% ( for a sum over £500K) and the investment charges are kept down by mainly using low cost trackers rather than actively managed funds.
So maybe your 1.52% could be squeezed down .

 Also, would it be wise to liquidate a low-risk portfolio to move to a medium-risk portfolio when you are round about retirement age (62)?
The obvious question is why are you in a low risk portfolio in the first place ? Conventional guidance is to be in a medium/high risk when you are younger and then medium risk portfolio from say mid Fifties onwards, and stay like this as you retire/go into drawdown.( unless the plan is to buy an annuity )
If you were in low risk for a reason, then that reason may still stand ?

dunstonh

Is an Aggregated total recurring charge of 1.52% (Product charge 0.18%, Advisor service charge 0.65% & Investment management charge 0.69%) on the high side for £550k pot (ISA,GIA & SIPP)? 

I would probably prefer to see the IFA charge at 0.50% on a £550k pot but it's a small bit.    Fund charges of 0.69% (which would include TC & IC for an IFA/provider disclosure and not OCF alone) is reasonable for a fully active portfolio or an ESG portfolio but high for a hybrid portfolio (typically in the 0.2x%-0.3x% range) or passive portfolio (0.1x% ballpark).     Have you given any instructions/opinions on the investment style are you are looking for?    

Would be for a medium risk portfolio with approx. 15 funds.  Don't think that would make a difference? 

Fund count wouldn't affect the charges.

 Also, would it be wise to liquidate a low-risk portfolio to move to a medium-risk portfolio when you are round about retirement age (62)?

Usually, people reduce their risk as they got older rather than increase their risk.   
Risk adjustments are usually based on your knowledge, behaviour, capacity for loss and when funds are going to be needed.      So, whether it is wise or not is very much an individual thing and not something anyone can give a broad yes or no to.

However, being too low risk can actually create more risks in the long term.   Inflation risk and shortfall risk can be greater risks to you than a sensible investment risk level. 

The amount you are holding back in cash can influence it is as well.  For example, someone with £100,000 in cash and £400k in a medium-risk portfolio is taking less than risk than someone with £10k cash and £390k in a cautious risk portfolio.

Will you be holding a sufficient cash pot back?   Are you able to think of your overall spread of savings and investments as a collective level of risk or would you always view the investments in isolation and struggle to think of them holistically?

Bit nervous to change strategy at this age and to have to buy back into the market when everything is nearly at all time highs.

Most markets are not at all-time highs but at similar levels to what they were a decade ago.    However, when you look at the history of all the different stockmarkets, the majority are pretty much pushing all-time-highs for most of the existence.   Todays all time high could be a low point compared to 10 years time.   Only time can tell us if a point in history was a high point or not.   We cannot tell today if its high or not.      

A single notch move up the risk scale isn't going to be the difference between going from cautious to gung-ho.  It may only be an extra 10% in the equity content.

    

BG88

Thanks all for the comments.

To give a bit of context:  Only started investing approx. 5 years ago after receiving an inheritance. Started from a low base of knowledge so IFA thought it would be reasonable to set up a portfolio with something in the region of 55% equities and a mix of UK & overseas fixed interest.  Also, have a Pru onshore investment bond. Retired a few years ago and have been living off a small DB pension and occasionally dipping into savings for bigger items.  Mortgage paid off. Will get a full state pension.

 After a recent review and a new risk questionnaire, it was felt that my tolerance for risk, understanding of the potential for loss, timescale & current cash flow {+100k & plus small DB pension which covers most of my fixed costs} made a medium risk portfolio a more suitable fit ( 75%ish equities). Just becoming increasingly aware that my plan charges are going up despite having more invested and the feeling that I am having to basically start my portfolio again to move up the risk scale. Worry if there is a significant crash that I may not have the timescale to recover.

  I do trust my IFA and believe the portfolio they have constructed would do the job it is designed for.  Always nice to get a second opinion though . I really don't have the knowledge or confidence to manage a portfolio of this size on my own.   

Some of the funds selected:
 

ASI Global smaller companies

BG Japanese B

BG Managed B

CFP Buffetology

JPM Asia Growth
Royal London Sustainable World
Rathbone Bond
T Rowe Price Global Focus

Would there be a CGT implication for selling everything to immediately reinvest it? Would ISAs still be valid if you sell and buy within it?  Assume so.

dunstonh

Some of the funds selected:

Some of those funds are in my own portfolio and are very good but cost more than passive options.  However, they have consistently outperformed cheaper passive options.   So, it is important not to get too hung up on costs where the extra cost is justifiable.  

 Just becoming increasingly aware that my plan charges are going up despite having more invested and the feeling that I am having to basically start my portfolio again to move up the risk scale. Worry if there is a significant crash that I may not have the timescale to recover.

Charges are a percentage of your value. So, they will go up if you have more but the charges are the same pro-rata to the value.

Changing a portfolio to match a revised risk profile does not mean starting again.   Usually the same funds are held (bar one or two changes depending on where you are moving from or to on the scale).  It is the weightings that get adjusted.

Would there be a CGT implication for selling everything to immediately reinvest it?

On the GIA, potentially yes.   By would would you need to sell everything immediately? 

Would ISAs still be valid if you sell and buy within it? 

Yes.  You need to be asking your IFA these questions.  The IFA must make you aware of potential negatives and cost issues when changing an investment strategy or risk profile.    This should happen before the transaction takes place.     The IFA will not mention potential negatives if they do not apply to you.

bostonerimus

I would call 75% equities high risk rather than medium risk, but it sounds as if it might well be ok for your situation as you have guaranteed income from a DB and SP and can ride out any down markets as you do not need to make regular withdrawals for living expenses. However, if you are not comfortable with the change and you have enough income and a working portfolio right now I don't see the need for change. Personally I'm not a fan of portfolios with fund numbers in the double digits and I don't like that you are giving up 1.5% of your annual gains, but those are my biases and you sound as if you are doing ok, just don't be pushed into a situation that makes you in any way uncomfortable. Remember you are in charge and are paying the bills to you should get what you want.

Albermarle

Started from a low base of knowledge so IFA thought it would be reasonable to set up a portfolio with something in the region of 55% equities and a mix of UK & overseas fixed interest.

Now it makes more sense, as normally 55% equities would not be seen as a low risk portfolio, but puts it firmly in the medium risk category and typical of what many would base a drawdown/retirement  strategy on .
75% equities would be seen as medium/high risk and potentially a bit too volatile for most retirees ( but not all) .
I am a bit surprised to see your IFA pushing you up the risk scale this far in your situation. Presumably because the DB pension gives a solid base and you are not too many years away from the state pension.
Just be aware that a 75% equities portfolio could drop pretty steeply in a short space of time which not everybody can tolerate .

BG88

thanks again, everyone. 

To clarify the intention is to change every fund I hold at the same time, and that the higher equity position is justified by bonds offering poor value.  As far as I understand it, the logic is that the conventional 60/40 split is no longer really medium risk and that you should hold a higher percentage in equities to achieve a similar outcome. 

I'm not really chasing returns as my outgoings are not extravagant.  I do however want to see my money working, so I guess that is why my IFA is pushing for a portfolio tailored for growth.  I will go back to my IFA and ask specifically about charges being high & CGT implications.   Are there any other obvious questions I should be bringing up?


  

Albermarle

BG88 said:

thanks again, everyone. 

To clarify the intention is to change every fund I hold at the same time, and that the higher equity position is justified by bonds offering poor value.  As far as I understand it, the logic is that the conventional 60/40 split is no longer really medium risk and that you should hold a higher percentage in equities to achieve a similar outcome. 

I'm not really chasing returns as my outgoings are not extravagant.  I do however want to see my money working, so I guess that is why my IFA is pushing for a portfolio tailored for growth.  I will go back to my IFA and ask specifically about charges being high & CGT implications.   Are there any other obvious questions I should be bringing up?


  

Your IFA is not the only one saying that bonds look to offer poor potential value in the next few years . It is discussed regularly on this forum, and there appears to be no obvious good solution and only least worst solutions , such as

Increase equity %
Hold more cash instead of bonds 
Exchange some % bonds for other assets , like infrastructure , gold, property etc 
Some mixture of the above 

Various other non mainstream ideas ( usually best avoided by most )

Stick with the tried and tested 60:40 or something similar

Different opinions and nobody knows really .

dunstonh

I'm not really chasing returns as my outgoings are not extravagant.  I do however want to see my money working, so I guess that is why my IFA is pushing for a portfolio tailored for growth.  I will go back to my IFA and ask specifically about charges being high & CGT implications.   Are there any other obvious questions I should be bringing up?

Be wary.   One of the ways to reduce costs is to go passive on your government bonds.     Passive on bonds has been good for the last decade.  However, going forward, passive may not be a good idea on government bonds.      Currently, 30% of developed government bond issuance offers negative yield.     Passives would be buying those but managed can avoid them.

We moved corp bonds from passive to managed earlier in the year and I am now looking at the gilt side. If both go managed then the cost of portfolios will go up.   I could take the easy option and stay in passive to keep costs low but that could be false economy.   These decisions are judgement calls but if you handicap the adviser by forcing cost focus over returns focus then you may put yourself in a worse position.  (none of this impacts on other areas where we use passives)