IFA service and charges

fcjf

I am proposing switching from self-managing my pension investments to going all in with an IFA and would appreciate a sanity check that I am doing the right thing and some advice on questions for the IFA.

I am 52 years old and looking to retire somewhere between 58 & 60. In addition to a DB pension which is in the PPF and currently valued at £20,000 pa at age 60, I have 2 DC pensions and a SIPP and I have been considering consolidating the DC pensions and SIPP via an IFA. The current valuations of these are;

• Former employers DC pension with Lifesight (Wills Towers Watson) of £290k, plan fund charge of 0.105%
• Current employers DC pension with Fidelity of £50k (I can withdraw current value but keep making mine 8% and employers 8% contributions). Plan fund charge of 0.21%
• Hargreaves Lansdowne SIPP of £125k. HL 0.45% + various product charges.

I have had an initial free Zoom meeting with the IFA and they have issued a report which recommends transferring the above into a SIPP from a company called Parmenion in their Spectrum A (adventurous) portfolio which aligned with my attitude to risk and capacity for loss. The report from the IFA included performance comparisons between my current investments and the proposed SIPP which details significantly better performance through their choice of SIPP over the past 5 years (I appreciate that past performance is no indication of future returns). The charges for this transaction would be

IFA charges: 2.2% for the initial transaction with ongoing charges of 0.91% pa

Product fees: of 1.21% (0.79% for the Portfolio, 0.22% custody charge & 0.2% DFM)

My rationale for moving is two-fold;

1. I suspect that the next few years are going to be ‘bumpy’ and investment experts are going to be far better qualified to negotiate through this than me and would stop me potentially making rash decisions. In any respect, putting the financial element of my retirement in the hands of experts just seems the right thing to do and I’d expect that the additional product charges would be far outweighed by better overall performance.
2.  The IFA should guide me through the future years in winding down the risk heading towards retirement and then ensure that investments and drawdowns are managed tax efficiently to suit our circumstances. I think I have enough knowledge to do a good job of this myself but happy to pay for expert advice.

Even in writing this post this plan of action seems eminently sensible but I still have some reservations about the size of the IFA fees. I have no issue paying the going rate for good service but other than reading reviews for the IFA how do I guarantee that I get VFM. I am yet to have the follow up appointment with the IFA so am gathering some questions and would appreciate some help.

Are the proposed charges above fairly standard?

Is the initial 2.2% transaction charge (£10,000) for the IFA alone or will some of this be paid to the product provider? If for the IFA what do they do for £10,000? I guess this is one for the IFA direct and I do appreciate that this will be time consuming with numerous legal requirements but this still seems high?

For the IFA’s ongoing charge of 0.91% (£4200pa) should there be an agreed scope of services for these charges? Is there a metric to ensuring that good service is provided?

The proposed Spectrum A portfolio has a risk rating of 78, with 6-8 years before retirement is this too high and if so should the IFA be making a recommendation to reduce this?

The initial transaction fee of £10,000 can be taken from the product provider prior to purchasing the funds. If I go through with this I would consider adding £6000 to my HL SIPP before the transfer so, as a HRT payer, in effect cover off the £10,000 with this payment, is there anything wrong with this logic?

I have only approached 1 IFA through unbiased should I approach one or more IFA’s for their views and charges? As a supplementary question to this, is being comfortable with the advisor more important than a negligible difference in charges?

Any advice or comments would be gratefully received.

P.S. I also have an ISA currently worth £46,000 and my wife has a SIPP of £20,000 and an ISA valued at £20,000. We haven’t yet included my ISA or my wife’s investments in the discussions with the IFA.

wjr4

The initial charge is very high & the ongoing charge would unlikely be 0.91%, it will usually either be 0.5%, 0.75%, 1%. Why are they recommending an adventurous portfolio? Have they shown how much the portfolio fell during the last stock market crashes? 

BritishInvestor

"I have had an initial free Zoom meeting with the IFA and they have issued a report which recommends transferring the above into a SIPP from a company called Parmenion in their Spectrum A (adventurous) portfolio which aligned with my attitude to risk and capacity for loss. "

 Personally I would be wary of an adviser that discussed investments in the first meeting. Retirement planning is about so much more than investments. The first meeting should be about seeing if you are a good fit and also whether the adviser can add value to your situation. 

"The IFA should guide me through the future years in winding down the risk heading towards retirement"

And without a proper planning exercise, you won't know if you can afford to "reduce risk". 

"how do I guarantee that I get VFM."

He could start by taking you through a thorough retirement planning process

"If for the IFA what do they do for £10,000?"

Why don't you describe exactly what he has done (other than discussing investments)?

"The proposed Spectrum A portfolio has a risk rating of 78, with 6-8 years before retirement is this too high and if so should the IFA be making a recommendation to reduce this?"

Impossible to say. How much risk do you "need" to take to be able to finish work at 58-60 without having to worry about running out of money?

"I have only approached 1 IFA through unbiased should I approach one or more IFA’s for their views and charges?"

Charges are definitely important, might be worth speaking to a couple of others.


"As a supplementary question to this, is being comfortable with the advisor more important than a negligible difference in charges?"

I think the fee difference will be more than negligible (to put it politely!).

"We haven’t yet included my ISA or my wife’s investments in the discussions with the IFA."

How can he have arrived at a solution without including this? This would've been fleshed out at the data-gathering exercise and included in the financial plan surely?

Edited to add: Total ongoing fees are 2.12% per annum. It's important to understand the impact of fees on retirement portfolio sustainability. On a pot of your size, you should be closer to 1.12% IMO.

Audaxer

Apart from the initial charge of £10k, the ongoing fees totaling 2.12% amounts to nearly £10k per annum which seems very high. I don't know anything about the SIPP provider or adventurous portfolio they propose, but with these charges I think it would have to produce very good returns to beat a low-cost globally diversified portfolio that could be self managed.

However I can understand if you feel more comfortable going through an IFA. I would suggest maybe approaching a few IFAs to compare their charges, and making sure they are definitely Independent FAs, and not just FAs. Has the IFA you approached advised what funds are in their Spectrum A portfolio, or given you a global breakdown and percentage of equities in the portfolio etc.?

fcjf

wjr4 said:

The initial charge is very high & the ongoing charge would unlikely be 0.91%, it will usually either be 0.5%, 0.75%, 1%. Why are they recommending an adventurous portfolio? Have they shown how much the portfolio fell during the last stock market crashes? 

The ongoing charge of 0.91% is correct, its in their report and in their schedule of charges. It does seem high and I wasn't sure of comparables but have just been reading through a recent thread on IFA charges and its definitely high and if I go ahead (with any IFA) I'd definitely want to know the scope of services which I would be getting from my money. 

They are recommending the adventurous portfolio after I completed a standard questionnaire without any further discussions.
No, they haven't shown the portfolio losses during the last crash but then again I'm not sure it was around then.

wjr4

fcjf said:

wjr4 said:

The initial charge is very high & the ongoing charge would unlikely be 0.91%, it will usually either be 0.5%, 0.75%, 1%. Why are they recommending an adventurous portfolio? Have they shown how much the portfolio fell during the last stock market crashes? 

The ongoing charge of 0.91% is correct, its in their report and in their schedule of charges. It does seem high and I wasn't sure of comparables but have just been reading through a recent thread on IFA charges and its definitely high and if I go ahead (with any IFA) I'd definitely want to know the scope of services which I would be getting from my money. 

They are recommending the adventurous portfolio after I completed a standard questionnaire without any further discussions.
No, they haven't shown the portfolio losses during the last crash but then again I'm not sure it was around then.

This is poor service in my opinion. They are trying to transfer the pensions without taking into account your overall financial situation, for a very high fee. Try searching for ‘financial planners’ rather than ‘financial advisers’. Financial advisers should be extinct one day as they concentrate on the investments rather than actual planning, which is what most newer financial planners do. 

fcjf

Audaxer said:

Apart from the initial charge of £10k, the ongoing fees totaling 2.12% amounts to nearly £10k per annum which seems very high. I don't know anything about the SIPP provider or adventurous portfolio they propose, but with these charges I think it would have to produce very good returns to beat a low-cost globally diversified portfolio that could be self managed.

However I can understand if you feel more comfortable going through an IFA. I would suggest maybe approaching a few IFAs to compare their charges, and making sure they are definitely Independent FAs, and not just FAs. Has the IFA you approached advised what funds are in their Spectrum A portfolio, or given you a global breakdown and percentage of equities in the portfolio etc.?

The ongoing fee is 0.91%, so approx. £4000 but still makes me uneasy, certainly without knowing what I get for that

Yes, they provided a full list of the funds in the recommended portfolio along with the % allocations.

I would be happy just transferring the pensions myself, it was more the choice of funds to run with that I maybe thought could be done better by an IFA both now and going forward. If the year on year improved performance by the IFA provider at least matches their fees then I'm not in effect paying anything, or is this not the way to look at it?   

BritishInvestor

Audaxer said:

but with these charges I think it would have to produce very good returns to beat a low-cost globally diversified portfolio that could be self managed.

Realistically, it's very unlikely to happen.

Dead_keen

It is very difficult to get an intuitive feel for how much a small percentage fee will steal from your pension pot. The power of compounding means that it can have an eye watering impact.  Have a look at this: https://www.vanguardinvestor.co.uk/articles/latest-thoughts/retirement/minimise-costs-maximise-pension

I've found this calculator using google (no idea if it is any good) but you can play with your own numbers and hope it is accurate.  As you are quite young, make sure that you use a long period (e.g. 35 to 40 years) see http://www.candidmoney.com/calculators/pension-cost-comparison-calculator

By way of comparison, Vanguard's fees for a low-cost diversified index tracker would be around 0.12% to 0.24% pa plus a capped platform fee of 0.15%.  So 0.27% (or lower with larger pots).    Using your numbers in that comparator (2.2% initial, 0.91% ongoing, £465,000, no further contributions, 35 years vs 0.27%) and making up a 6% annual return, the extra charges your IFA is suggesting would mean that your pot is roughly £700,000 smaller (i.e. it has reduced by 21% from what it would have been with low charges).  

Personally, I find those charges quite high but then you would probably get some very nice Christmas cards from your IFA.

I should say that there are other low cost funds around.  

This guy has produced an interesting book (with a couple of chapters focused on US stuff, but the rest is good) if you want another view: https://jlcollinsnh.com/stock-series/

BritishInvestor

fcjf said:

Audaxer said:

Apart from the initial charge of £10k, the ongoing fees totaling 2.12% amounts to nearly £10k per annum which seems very high. I don't know anything about the SIPP provider or adventurous portfolio they propose, but with these charges I think it would have to produce very good returns to beat a low-cost globally diversified portfolio that could be self managed.

However I can understand if you feel more comfortable going through an IFA. I would suggest maybe approaching a few IFAs to compare their charges, and making sure they are definitely Independent FAs, and not just FAs. Has the IFA you approached advised what funds are in their Spectrum A portfolio, or given you a global breakdown and percentage of equities in the portfolio etc.?

The ongoing fee is 0.91%, so approx. £4000 but still makes me uneasy, certainly without knowing what I get for that

Yes, they provided a full list of the funds in the recommended portfolio along with the % allocations.

I would be happy just transferring the pensions myself, it was more the choice of funds to run with that I maybe thought could be done better by an IFA both now and going forward. If the year on year improved performance by the IFA provider at least matches their fees then I'm not in effect paying anything, or is this not the way to look at it?   

Investing, and investment management is commoditised. You could read a book (Tim Hale's is a great starting point) and build a similar low cost, globally diversified portfolio that many decent financial advice firms use (hint: they don't tend to use active funds or DFMs and have funds cost totalling ~0.3%pa).

An adviser won't be able to generate vastly superior returns than you could generate yourself (if you were convinced you could stick to the plan), so if that's all you think you might be getting, there's got to be a question around value-add, IMO. 

BritishInvestor

Dead_keen said:

It is very difficult to get an intuitive feel for how much a small percentage fee will steal from your pension pot. 

True, but probably not as much as is lost through (typical) investor (mis)behaviour.