Financial Advise draw down pension fees

zagfles

lisyloo said:

bostonerimus said:

Yep if you have a 5% annual drawdown and fees are 1% you end up with only 4% and you've just spent 1/5th of your income on financial fees. That could easily to lbe your largest single cost in retirement. Financial advisors will argue that if your drawdown goes up each year with inflation then their fees as a percentage of your drawdown will decrease as you get older. They don't often say that in a down market their fees will continue to eat into your pot at the worst of times. Ongoing financial fees are a real drag on your retirement spending.

But the fee isn’t 20% of the drawdown, it’s 1% of the total pot.
it’s the total pot that’s being managed or advised upon not just the bit that’s being drawn down.

1% per year, which could work out at 15-20% of the pot over the whole retirement.

bostonerimus

lisyloo said:

bostonerimus said:

Yep if you have a 5% annual drawdown and fees are 1% you end up with only 4% and you've just spent 1/5th of your income on financial fees. That could easily to lbe your largest single cost in retirement. Financial advisors will argue that if your drawdown goes up each year with inflation then their fees as a percentage of your drawdown will decrease as you get older. They don't often say that in a down market their fees will continue to eat into your pot at the worst of times. Ongoing financial fees are a real drag on your retirement spending.

But the fee isn’t 20% of the drawdown, it’s 1% of the total pot.
it’s the total pot that’s being managed or advised upon not just the bit that’s being drawn down.

Assuming a 5% of the pot drawdown, 1% fees on the entire pot is 20% of the drawdown. If you go with 4% the fees would take up 25% of your annual income. You'd better have that as a line item in your budget.

dunstonh

bostonerimus said:

lisyloo said:

bostonerimus said:

Yep if you have a 5% annual drawdown and fees are 1% you end up with only 4% and you've just spent 1/5th of your income on financial fees. That could easily to lbe your largest single cost in retirement. Financial advisors will argue that if your drawdown goes up each year with inflation then their fees as a percentage of your drawdown will decrease as you get older. They don't often say that in a down market their fees will continue to eat into your pot at the worst of times. Ongoing financial fees are a real drag on your retirement spending.

But the fee isn’t 20% of the drawdown, it’s 1% of the total pot.
it’s the total pot that’s being managed or advised upon not just the bit that’s being drawn down.

Assuming a 5% of the pot drawdown, 1% fees on the entire pot is 20% of the drawdown. If you go with 4% the fees would take up 25% of your annual income. You'd better have that as a line item in your budget.

It is a rather bizarre way to look at the costs though.

If the person only had a 1% draw need then that method of relating charges to draw rate would be completely different despite the charges being the same.

The fact is that the charge is related to the fund value.  Not related to the draw rate.

Linton

bostonerimus said:

lisyloo said:

bostonerimus said:

Yep if you have a 5% annual drawdown and fees are 1% you end up with only 4% and you've just spent 1/5th of your income on financial fees. That could easily to lbe your largest single cost in retirement. Financial advisors will argue that if your drawdown goes up each year with inflation then their fees as a percentage of your drawdown will decrease as you get older. They don't often say that in a down market their fees will continue to eat into your pot at the worst of times. Ongoing financial fees are a real drag on your retirement spending.

But the fee isn’t 20% of the drawdown, it’s 1% of the total pot.
it’s the total pot that’s being managed or advised upon not just the bit that’s being drawn down.

Assuming a 5% of the pot drawdown, 1% fees on the entire pot is 20% of the drawdown. If you go with 4% the fees would take up 25% of your annual income. You'd better have that as a line item in your budget.

Yes, but the assumption of % pension drawdown depends on your assessment of your investment capabilities.  The important factor is not the absolute size of the charges but the difference between the charges and the gross drawdown you consider viable.  If you have the confidence, knowledge, and ability to manage a large portfolio providing a sustainable 5% drawdown more cheaply why would you pay for advice?  Otherwise then possibly otherwise.

zagfles

The best way to look at charges is try to work out the total percentage of your portfolio that will get eaten by charges. If charges are 1% a year and the portfolio is gradually drawn over 30 years until there's none left, an approximate calculation is that 15% of the fund goes in charges, as of course as the portfolio is spent it's value decreases and so the charge decreases. So it will average about 0.5% of the initial portfolio, so 15% of it over 30 years.

If that's just the IFA fee, that's pretty substantial as you'll have to add fund and platform fees too, if they're another 1% then you've lost about 30% of your fund in charges. Obviously this is very approximate as it'll be affected by fund performance, draw rate etc, so could be higher or lower.

lisyloo

bostonerimus said:

lisyloo said:

bostonerimus said:

Yep if you have a 5% annual drawdown and fees are 1% you end up with only 4% and you've just spent 1/5th of your income on financial fees. That could easily to lbe your largest single cost in retirement. Financial advisors will argue that if your drawdown goes up each year with inflation then their fees as a percentage of your drawdown will decrease as you get older. They don't often say that in a down market their fees will continue to eat into your pot at the worst of times. Ongoing financial fees are a real drag on your retirement spending.

But the fee isn’t 20% of the drawdown, it’s 1% of the total pot.
it’s the total pot that’s being managed or advised upon not just the bit that’s being drawn down.

Assuming a 5% of the pot drawdown, 1% fees on the entire pot is 20% of the drawdown. If you go with 4% the fees would take up 25% of your annual income. You'd better have that as a line item in your budget.

Yes of course, but you also need to have as a line item the extra performance your getting which I’d expect to be more than that (otherwise what are you paying for?).

if you are reasonably sure you can make your portfolio perform as well as the advisor (and any other advice you are getting) then I’d totally agree with dropping them.

Albermarle

lisyloo said:

bostonerimus said:

lisyloo said:

bostonerimus said:

Yep if you have a 5% annual drawdown and fees are 1% you end up with only 4% and you've just spent 1/5th of your income on financial fees. That could easily to lbe your largest single cost in retirement. Financial advisors will argue that if your drawdown goes up each year with inflation then their fees as a percentage of your drawdown will decrease as you get older. They don't often say that in a down market their fees will continue to eat into your pot at the worst of times. Ongoing financial fees are a real drag on your retirement spending.

But the fee isn’t 20% of the drawdown, it’s 1% of the total pot.
it’s the total pot that’s being managed or advised upon not just the bit that’s being drawn down.

Assuming a 5% of the pot drawdown, 1% fees on the entire pot is 20% of the drawdown. If you go with 4% the fees would take up 25% of your annual income. You'd better have that as a line item in your budget.

Yes of course, but you also need to have as a line item the extra performance your getting which I’d expect to be more than that (otherwise what are you paying for?).

if you are reasonably sure you can make your portfolio perform as well as the advisor (and any other advice you are getting) then I’d totally agree with dropping them.

The OP seems very inexperienced, so just dropping the advisor and DIY'g would not seems a good idea.
Probably the best first step would be to see if fees can be reduced, whilst they think about what to do next.

zagfles

lisyloo said:

bostonerimus said:

lisyloo said:

bostonerimus said:

Yep if you have a 5% annual drawdown and fees are 1% you end up with only 4% and you've just spent 1/5th of your income on financial fees. That could easily to lbe your largest single cost in retirement. Financial advisors will argue that if your drawdown goes up each year with inflation then their fees as a percentage of your drawdown will decrease as you get older. They don't often say that in a down market their fees will continue to eat into your pot at the worst of times. Ongoing financial fees are a real drag on your retirement spending.

But the fee isn’t 20% of the drawdown, it’s 1% of the total pot.
it’s the total pot that’s being managed or advised upon not just the bit that’s being drawn down.

Assuming a 5% of the pot drawdown, 1% fees on the entire pot is 20% of the drawdown. If you go with 4% the fees would take up 25% of your annual income. You'd better have that as a line item in your budget.

Yes of course, but you also need to have as a line item the extra performance your getting which I’d expect to be more than that (otherwise what are you paying for?).

if you are reasonably sure you can make your portfolio perform as well as the advisor (and any other advice you are getting) then I’d totally agree with dropping them.

An IFA's job is not to get you better performance, it's to make sure your investments are appropriate, tax issues are considered, risk level is appropriate etc. It's fund managers' job to get good investment performance, that's what their fee is for.

gm0

Advice is a decision about paying the market price for help with getting it all setup and then run properly based on your circumstances, risk capacity (£) and attitude.  The choice to "not pay" for it is about how motivated you are to put the time in to learn DIY investment in drawdown.  It's also about how well you cope with "trust me" professional relationships with people you just met. With different financial incentives. You rely on regulations, their professionalism and personal integrity. And any diligence you do to keep an eye on things once you are signed up.  I am bad at the trust aspect.
So I chose to put the time in. If I get it wrong it will be because I chose the wrong (unlucky as it turned out) investment strategy or mucked up the implementation (mistakes). But not because I chose the wrong adviser.  I am not evangelical about encouraging DIY.  It suits me. It may not suit you. It has taken me a *long* time to get somewhat comfortable with it. (been here 4 years now gradually getting ready as time and other commitments permitted).  And about 2/3 of the way through getting it all moved about and setup as I now want it.

Let's imagine a drawdown pension pot which travels from £X to zero over 40 years. (This is the case that "just" worked with an otherwise fairly normal approach of deaccumulation of a mix of returns net fees and capital.  Many possible paths to other 40 year outcomes would be better than complete depletion if the plan was well judged in the first place AND and returns co-operate.

So what are the likely annual fees

Wealth management - FA  could be 1.5% - 2%+ annual costs.

IFA - 0.8% - 1.2% of which 0.5% is their fee the rest varying with portfolio shape for fund blends and introduced platforms

DIY   0.3% - 0.7% (for the same portfolio shapes with similar building blocks on DIY platforms). 

With passive investment and picking low cost funds on particular platforms as the core you can drive it lower.
Down into the 0.1x - 0.2x range but there are diminishing returns. Complexity and you can start to muck up the portfolio shape if you over emphasise this one aspect of low drag on investment return

Viewed over the life of the retirement - ongoing advice is a bit of a luxury item

Getting to a portfolio shape and doing the setup may well be worth 1-2% of pot value to you.  It's a non-trivial exercise.  As I am finding out

Ongoing advice covers monitoring it, portfolio and fund review, and adjusting income once every 12-18 months for 40 years.
Now that may (or may not) be worth the 10% of the initial value that it represents.

Calculation = halfway point of Pot = X/2) * 40 * 0.5% = 10% of X for depletion from X to 0).

You can of course mix and match - get pension transfers and portfolio setup done for a transactional fee by an adviser and drop ongoing advice.  Your job to adjust income, rebalance portfolio, and monitor.  Self insured. 
You can DIY to start with and buy an annuity or use an adviser later if your health declines and you don't want to bother with it anymore.

Plenty of options to suit a range of people with simpler or more complex affairs and family circumstances

BritishInvestor

bostonerimus said:

Yep if you have a 5% annual drawdown and fees are 1% you end up with only 4% and you've just spent 1/5th of your income on financial fees. That could easily to be your largest single cost in retirement. Financial advisors will argue that if your drawdown goes up each year with inflation then their fees as a percentage of your drawdown will decrease as you get older. They don't often say that in a down market their fees will continue to eat into your pot at the worst of times. Ongoing financial fees are a real drag on your retirement spending.

The average DIY investor would probably be quite happy (probably ecstatic) to only trail the market by 1% pa.

Many think nothing of paying a fund manager 1% per year, so fees don't seem to be that important to some.