Questions re IFAs

ozzy_man

Hi everyone,

I'm looking at using a financial advisor for the first time, having just received a lump sum of money, and hoping to get some advice on a few things from people who've used them. The purpose is basically to try and work out how much of that sum to put into a pension (currently i just have the standard government mandated workplace one) vs other investments like stocks and shares (I don't want to lock all the money away until retirement), as well as working out monthly savings needed alongside that to hit a particular level of income in retirement.

I was put in contact with an advisor via Unbiased and have had the initial chat and received a few documents. His rate is 3% for the set up fee, then 0.75% annually. So my first question is whether that is a reasonable rate? He's laid out the services for that fee as including:

Full financial review

Implementation of advice

Tax and investment planning

Cash flow model and lifestyle

Secondly, in the documentation it says his company is " does not have permission to handle client money, therefore, we can only accept cheques or BACS payments to pay for our fees. Cheques or payments for investments need to be made payable to the product provider." A bit of googling suggests that's not unusual but it's unclear why it might be the case. Does it indicate anything I should be concerned about?

And as a more general related question, by entering into an agreement with an IFA do you typically give them access to your funds ie they're authorised to move money around from back accounts etc? Or do they just give advice then you make the transactions? 

I see from other posts in the forum that the prevailing opinion is IFAs aren't necessary/are charlatans etc, but all of the above is in light of the fact I have absolutely no clue about investments nor really enough time to learn how to do it well DIY. I'm thinking maybe I'll give an IFA a go for a year and try and use what he does as a basis to possibly learn how to do it myself after that.

Appreciate there's a lot there so not expecting individual replies to address all of it. Any insight anyone can give into any of the individual elements would be very much appreciated though.

Thanks

tebbins

The prevailing opinion is not at all that IFAs are unnecessary or Charlatans, finance is something most people can DIY, however only with sufficient knowledge and IMHO based on your post I think you could find a (good) IFA valuable and useful.
You're asking for a holistic review of your personal financial situation, a plan for retirement, tax advice etc. Here on the forum we can offer comments, opinions, suggestions and some of us can answer specific technical queries. However we cannot - and not just legally cannot - do what an IFA can do.
When you have a health problem you see a healthcare professional, if you've ever started a new hobby i.e. the gym maybe you got a PA to start with, you get a mechanic for your car, professional construction workers to do stuff on your house. Similarly, for most people with questions about money, a good IFA can be extremely valuable and useful.

ozzy_man

Ok maybe the comment was a bit strong, just seen other similar threads descend into that argument so trying to head it off. Thanks for the response anyway 👍

Linton

ozzy_man said:

......

1) Secondly, in the documentation it says his company is " does not have permission to handle client money, therefore, we can only accept cheques or BACS payments to pay for our fees. Cheques or payments for investments need to be made payable to the product provider." A bit of googling suggests that's not unusual but it's unclear why it might be the case. Does it indicate anything I should be concerned about?

2) And as a more general related question, by entering into an agreement with an IFA do you typically give them access to your funds ie they're authorised to move money around from back accounts etc? Or do they just give advice then you make the transactions? 

3) I see from other posts in the forum that the prevailing opinion is IFAs aren't necessary/are charlatans etc, but all of the above is in light of the fact I have absolutely no clue about investments nor really enough time to learn how to do it well DIY. I'm thinking maybe I'll give an IFA a go for a year and try and use what he does as a basis to possibly learn how to do it myself after that.

.....

1)  This is a protection not a concern and is normal for people who act as intermediaries.  It helps ensure that money you pay them to buy investments cannot legally be used for other purposes.

2) You would need to give permission for an IFA to manage your portfolio.  Generally the IFA would not give you a list of tasks and leave you to get on with it.

3) MSE like other social media attracts a range of people. Some are evangelists with strong views who sadly spend their life telling them to you.  I dont think the majority of people using the forum would share the characterisation you give.  As in all jobs there may well be some IFAs who are dishonest or incompetent but the profession is highly regulated and as in other regulated professions those shown to have behaved badly can be disciplined possibly losing their livelihood.

I think your proposed approach is sensible.

MX5huggy

Have you spoken to any other IFA’s it’s generally recommended you get 3 quotes from builders, IFA’s are no different.

3% seems quite steep but that depends on the value of your investment. 3% on £100k maybe reasonable but on £1m no so. 

dunstonh

I was put in contact with an advisor via Unbiased and have had the initial chat and received a few documents. His rate is 3% for the set up fee, then 0.75% annually. So my first question is whether that is a reasonable rate?

Percentage figures are relative to the amounts involved. 3% on £10,000 is dirt cheap.  3% on £200,000 is very expensive.  Many adviser firms have caps and collars or tiering on their charges.  The greedier ones don't.

Secondly, in the documentation it says his company is " does not have permission to handle client money, therefore, we can only accept cheques or BACS payments to pay for our fees. Cheques or payments for investments need to be made payable to the product provider." A bit of googling suggests that's not unusual but it's unclear why it might be the case. Does it indicate anything I should be concerned about?

That is what you would expect and want.    It is a level of consumer protection as it means the only time you pay money to the adviser is for their fees.    Payments should go directly to the provider.  Also, adviser firms don't work with cash.  No specific rules against it but with cheques/bank transfers, everything is audit trailed cleanly.  

And as a more general related question, by entering into an agreement with an IFA do you typically give them access to your funds ie they're authorised to move money around from back accounts etc? Or do they just give advice then you make the transactions? 

It depends.   Some platforms allow the setting up of direct debits where ad-hoc payments can be collected using the direct debit.  Advisers can key in the amount and date for that to be collected.   Plus, advisers can key in withdrawals.  They can also do fund switches within the investments. However, an adviser operating on an advisory basis should confirm transactions with you in advance.   With discretionary advisers, they dont have to.

I see from other posts in the forum that the prevailing opinion is IFAs aren't necessary/are charlatans etc, but all of the above is in light of the fact I have absolutely no clue about investments nor really enough time to learn how to do it well DIY.

There are a few anti-IFA trolls on this board.  They post mostly incorrect rubbish to try and get a response.   Probably to report it and get the IFAs that contribute on the board banned.  Most of them don't have a clue what an IFA does and have never used one.   THey are just using a forum to spout off and cause trouble.

Albermarle

His rate is 3% for the set up fee, then 0.75% annually. So my first question is whether that is a reasonable rate? 

In addition to the comments above, you will need to keep a careful eye on the ongoing investment and platform charges as well .

For example IFA charge 0.75% + platform charge of 0.25% and fund charges 0.25% is OK 

0.75% plus another 1% is getting expensive.

Some IFA's even delegate the investment management to someone who has their own charge as well .

Just something to be aware of .

Ok maybe the comment was a bit strong, just seen other similar threads descend into that argument so trying to head it off. 

I do not think it was too strong . You are wisely trying to avoid your thread heading in an unproductive direction.

Rollinghome

ozzy_man said:

I was put in contact with an advisor via Unbiased and have had the initial chat and received a few documents. His rate is 3% for the set up fee, then 0.75% annually. So my first question is whether that is a reasonable rate? He's laid out the services for that fee as including:..........

I see from other posts in the forum that the prevailing opinion is IFAs aren't necessary/are charlatans etc,

Many of the complaints about IFAs came about from a single feature that once prevailed – the payment of high levels sales commission to intermediaries by the fund management companies.  The FSA/FCA took action ~8 years ago to ban commission on investments and the position is far better and safer for investors today.

Until then, most IFAs were in effect the sales agents of the fund managers.  They were paid commission to sell their products rather than charging fees to the investor.  Typically, fund managers paid IFAs 3% for new business plus 0.75% a year ongoing “trail commission”.  For investment bonds where investors were locked in, the commission was far higher.

Paul Lewis of the BBC Moneybox programme told an audience of IFAs then that the term they used wasn’t  inappropriate as they weren’t “independent” and didn’t give “financial advice”, they just sold investment products.

There were inevitably scandals including where greedy advisers sold investments that paid well above normal commission rates. See https://citywire.co.uk/investment-trust-insider/news/a2o-network-clamps-down-on-high-commission-funds/a368042?section=new-model-adviser

Back then, the efforts of advisers on boards like this tended to concentrate on rubbishing products like low-cost index funds and investment trusts, i.e. investments that didn’t pay them commission. You can see that in old posts by IFAs on this board if you look back. Now, with no commission, those same advisers will happily recommend index trackers, and investment bonds are rarely recommended. There was a similar problem with platforms such as Hargreaves Lansdown who also received commission rather than charge fees.

IFAs and platforms are now required to charge an explicit fee and can’t take commission payments on investments.  (Although the FT wrote in Nov 2019 “Close to £184bn of UK investor money is languishing in expensive funds that still pay commissions to financial advisers, despite efforts by the financial regulator to stamp out conflicts of interest and overcharging.”)  Training requirements have also been raised. Now you, the investor, pays the advisor, not the fund managers, and investment management fees for commission-paying funds have tumbled.

It’s true that IFAs working for a company will still often be paid commission or bonuses by the company for business but that shouldn’t effect the fund selection.  You should obviously feel confident that the person you see isn’t encouraging you invest more than appropriate just to increase their company bonus, but that would be against the regulatory requirement for advice. Whereas IFAs can provide any investments available from the platforms they use, FAs can only offer their company’s products.

So now, all you have to decide is what advice you need, if any, whether the cost makes it good value for you, and whether you’ve chosen the best person to give that advice based on your meetings. The rate you pay will be dependent on the sum involved and are often negotiable. It will vary from area to area and may depend on local competition.

Without knowing the details, the fees you mention seem reasonable but you’ll be spending a lot of money, so shop around and compare.

Linton

In the old days you as a customer did not suffer financially from the IFA taking a commision.  If you went to the fund provider directly they kept the commision for themselves.

Some IFAs may well have been driven by commision to give inappropriate advice, but it wasn't universal.  When my wife moved to a new job our IFA assessed the company's pension scheme and advised her to join it even though it meant her stopping contributions to the pension he had set up for her a few years previously.

Rollinghome

Linton said:

In the old days you as a customer did not suffer financially from the IFA taking a commision.  If you went to the fund provider directly they kept the commision for themselves.

I'm afraid the situation was quite the reverse. 

Investment management ongoing charges were around double what they are today, in order to include the cost of paying  trail commission to intermediaries.  The initial charge of around 5% to pay initial commission has now all but disappeared completely.  Investors were  paying those extra costs which went to advisors without getting the "independent advice" they thought they were getting. 

As you say, Investors were often still charged the full fees by the fund managers even if the investor bought directly and didn't get the  "free advice" because they didn't dare undercut the intermediaries they depended on for business.

The whole system stank, which is why it was rightly banned by the regulators, the FSA. The funds we buy today without the inclusion of commission are appropriately called "clean funds" by the industry.

With the banning of commission has come a complete change in the way advice is given and I notice even your outright opposition to low cost index funds is less vehement now that IFAs are more likely to recommend them. That's good to see.

Diplodicus

Excellent posts.

Please visit more often, Rollinghome.