Alternatives to Discretionary Fund Management of pension

DaveO

Hi,

I have had a couple of meetings with Financial Advisors regarding taking my pension and both are pushing the “wealth management” idea whereby they stick my pensions into one that can be managed on their preferred platform and I give them the authority to mange the funds, i.e. they are doing Discretionary Fund Management.  The idea being they will react to changes in the market.  I would be using a drawdown product to take the pension income.

They obviously expect paying for this service but it all seems rather expensive.  In one example the cost would total 1.91% of the fund value which in my case would be a five figure sum.  This is made up of the ongoing advisor fee plus costs associated with the platform and general fund management.

What this means is to give me a 4% rate of return on the investments they are going to need to achieve around 6% consistently.   It’s also possible in bad times they would not even achieve 1.91% but they would still take that.

Does this level of fee seem high?

I have always been wary of actively managed funds as the costs put them at a disadvantage compared to passive investments such as trackers.

One of the advisors is even suggesting I switch my current main company pension to their platform before my preferred retirement date so they can manage it despite the much greater fees (the fees for the company pension are very small).  The company pension would remain open so my employer would still pay into it until my retirement date. Justification for this is the company scheme doesn’t allow a wide range of funds to invest in and won’t react to market changes such as falling bond values.

I am aware some providers offer “Investment Pathways” that offer a cheaper set of packaged funds with no IFA involvement to invest in but from what I can gather they don’t expect particularly high returns anyway and these may also stick with high levels of cash or bonds.

The discretionary fund management idea seems to be the go-to option of IFA’s so other than one of these Investment Pathway products are there other alternatives?

Thanks in advance for any replies.

Albermarle

The discretionary fund management idea seems to be the go-to option of IFA’s

You should be able to find IFA's who do not use DFM's, The advantage here is that you cut out one layer of charges and any proposed investment changes are run by you first.

1.9% seems to be pretty typical for this type of arrangement. If you have a large fund , which seems to be the case , then you should be able to get something like the following:

IFA   0,5%

Platform 0.2%

Funds ( mixture of passive and active ) 0.5%

Normally the IFA will want to switch you to their preferred platform, because they are familiar with it, can get quick responses and most of their other clients will be on it. However it would not be compulsory .

Of course there will be an initial one off fee of a few grand, in both cases I presume.

Alternative is to DIY, as many of the posters on here do . Saves charges, but it is not for everybody, and in the end you never know whether you would be better off with an IFA or not. 

dunstonh

I have had a couple of meetings with Financial Advisors regarding taking my pension and both are pushing the “wealth management” idea whereby they stick my pensions into one that can be managed on their preferred platform and I give them the authority to mange the funds, i.e. they are doing Discretionary Fund Management.  The idea being they will react to changes in the market.  I would be using a drawdown product to take the pension income.

Wealth managers favour DFMs as its cheaper for the adviser firm as they do not need to pay for investment research.  Plus, they get the consumer to pay for the DFM.   Its no wonder they like DFMs.

Does this level of fee seem high?

For a wealth manager?  no.
However, its higher than an advisory portfolio (as they have no DFM charge)

I have always been wary of actively managed funds as the costs put them at a disadvantage compared to passive investments such as trackers.

Although some DFMs do have passive only portfolios or hybrid portfolios (a bit of both).

The discretionary fund management idea seems to be the go-to option of IFA’s so other than one of these Investment Pathway products are there other alternatives?

Not correct.   The most common method for IFAs is still to do advisory portfolios and not discretionary.    DFMs are the go to option for wealth management firms.

So, your options are (in no particular order):
1 - IFA/FA with DFM  (with the extra costs you mention)
2 - IFA on an advisory basis (without the extra costs of the DFM).
3 - Pathways 
4 - DIY

DaveO

Thanks for both replies.

I presume the advantage of the DFM over an advisory portfolio is supposed to be the DFM is actively managed whereas an advisory portfolio may only be rebalanced once a year maybe?

Audaxer

DaveO said:

What this means is to give me a 4% rate of return on the investments they are going to need to achieve around 6% consistently.   It’s also possible in bad times they would not even achieve 1.91% but they would still take that.

In bad times there will be negative growth percentages in nearly all investment portfolios, so if your portfolio dropped 20% in value in a bad year, it would be the same percentage charged, but on the reducing value. 

BritishInvestor

DaveO said:

Thanks for both replies.

I presume the advantage of the DFM over an advisory portfolio is supposed to be the DFM is actively managed whereas an advisory portfolio may only be rebalanced once a year maybe?

The DFM may claim this to be advantage, but realistically, tinkering will tend to be detrimental.

dunstonh

I presume the advantage of the DFM over an advisory portfolio is supposed to be the DFM is actively managed whereas an advisory portfolio may only be rebalanced once a year maybe?

Once a year is plenty.    Indeed, if you look at many DFM portfolios, they tend to review quarterly with very little or no change in most quarters.  

IMO, the only time a DFM may offer value is with ESG portfolios for those that have a strong opinion on ESG matters (rather than a casual preference).

gm0

If you don't already know specifically why *you* need or want a DFM then you very probably don't need and arguably should not pay for one in addition to advice.  I have never seen a good argument for the general case drawdown pensioner of modest means through mass affluent.

The fact this extra layer of outsourcing makes the wealth manager's compliance and ongoing work simpler should be reflected by *their* fee reducing to offset all or part of the DFM cost element that they are introducing to make their life simpler. 

Does that come with any guarantee to you on investment performance.  Of course not - unlikely to be in any way contingent or performance based in terms of costs.  Expect an expensively formatted report explaining the poor performance net fees when luck runs out. With tied advice and wealth management this fee offset is unlikely though it's not impossible something will be offered.  So evaluation of *total* cost is what matters along with the value you place on other contextual advice on your finances and topics where DIY can be genuinely difficult or time consuming, fund and fund manager and investment trust ongoing monitoring and review (if your portfolio choices require a quantity of that).

Ballpark example : DIY

Fidelity, 10 blended ETFs. £45 platform for ETFs + 0.25% for the blended fund costs.
Allow £100 for rebalancing trades once per year. Entirely possible. So around 0.26% on ~500k blending truly cheapest passives with some selected up to 0.75% drag funds as satellites.

Advice should cost 0.5% or less if you want it.

So without advice. Target 0.3% drag all in.  With advice target 0.8% to circa 1%. 

And avoid anybody overcharging you liberally for !!!!!!.

sandsy

Find another adviser who does not describe themselves as a wealth manager. Make sure they describe themselves in writing as independent. Make clear that minimising charges is an important objective for you (so that more of your pot is available to fund your retirement).

Albermarle

Ballpark example : DIY
Fidelity, 10 blended ETFs. £45 platform for ETFs + 0.25% for the blended fund costs.
Allow £100 for rebalancing trades once per year. Entirely possible. So around 0.26% on ~500k blending truly cheapest passives with some selected up to 0.75% drag funds as satellites.

I think this example is really for more experienced investors. An easier DIY approach for a less experienced investor, might be using mainly multi asset funds + maybe a couple of managed Wealth Preservation trusts + maybe a couple of more specialist managed sector funds ( as an example) 

In which case probably total charge around 0.6% , depending on platform used etc.

Still a lot cheaper than 1.9% though !