IFA or DIY

BadgerTwin

We are trying to decide whether to use an IFA or go it alone. From talking to IFAs it seems they offer value with regard to making recommendations, oversight of efficiencies and liabilities, structuring and creating a plan, and preventing mistakes. Those we've spoken to offer this advice and oversight only if it goes together with discretionary management of funds. The initial set-up fee and ongoing charges seem large. With relatively low projected returns and high fee levels (between 1.62 and 2.18% per year including other costs) we are thinking it might be better to invest our money ourselves. 

We are starting late (in our 50s), hence looking for guidance. We have smallish pensions (not SIPPs), cash ISAs and some cash to invest from a property sale.  We are not looking for complex help only to invest in stocks and shares ISAs, SIPPs and a general trading account. With age not on our side, we don't want to make major mistakes. Family members have used IFAs and think this route is safest but a friend in finance recommended investing in core ETFs/index trackers through Interactive Investor.  We are also looking at Vanguard LifeStrategy funds. 

At the moment it seems preferable to control things longer term rather than hand everything over to an IFA with no guaranteed return (obviously there is no guaranteed return if you invest but with an IFA we’d pay fees on top) - but we are looking for a good place/plan to start. Has anyone used a hybrid approach combining IFA oversight without the DFM element, or is this a non-starter?  With market falls it looks like it may be a good time to get into investing, especially with inflation eroding cash every day. 

Any thoughts on how to get started or IFA advice-only?  Thanks.

dunstonh

rom talking to IFAs it seems they offer value with regard to making recommendations, oversight of efficiencies and liabilities, structuring and creating a plan, and preventing mistakes.

That is it.  The primary objective of an IFA is suitability for you and your objectives. 

Those we've spoken to offer this advice and oversight only if it goes together with discretionary management of funds. 

Most IFAs are advisory. A minority are discretionary.  However, it is often the regional/national firms that are discretionary (i.e. the larger ones).   That is a generalisation as some of the smaller ones will be as well.  The reason the larger firms often go discretionary is that the larger you get, the more systems and controls have to be in place to ensure that staff are working the same way and not going off doing things you cannot control as a company.      

The initial set-up fee and ongoing charges seem large. With relatively low projected returns and high fee levels (between 1.62 and 2.18% per year including other costs) we are thinking it might be better to invest our money ourselves. 

IFAs will typically work on lower projections than the actual rates that have been seen over the last decade or so.    Pretty much, under state and overdeliver rather than how it used to be decades ago when it was the other way around.    

Charges around 1.62% all in are not bad for smaller amounts.   You shouldn't exceed 2% and many IFAs can be under 1% all in (although more typical for larger amounts).

Family members have used IFAs and think this route is safest but a friend in finance recommended investing in core ETFs/index trackers through Interactive Investor.  We are also looking at Vanguard LifeStrategy funds. 

ETFs are more advanced and if you are going to be building a portfolio of index trackers then you need to decide what type of portfolio you are going to build, what ratios you are going to use and how often you are going to rebalance and adjust weightings to suit the economic data available.  

VLS is fine but its not the cheapest option and its rigidity on equity levels makes it appear simple but it does mean it can move around the risk scale when measured by volatility.   Many consider alternatives are better choices.   Some love Vanguard and wont consider alternatives at all.

Has anyone used a hybrid approach combining IFA oversight without the DFM element, or is this a non-starter?

That is not a hybrid approach.    An advisory IFA is more common than discretionary (as already mentioned).      

DFMs rarely add value.  There are some niche scenarios where they can (ESG portfolios for example).  However, in most cases they only add a layer of charges as you are paying for them but they make the work of the IFA easier.  Some IFAs discount their charge to reflect that but most don't.       DFMs are also the option of choice for wealth management companies.  Another generalisation (that wont be 100% correct) is to avoid firms that refer to themselves as wealth management.   That is usually a general indicator that they are going to be expensive.

BadgerTwin

Thank you for taking the time to explain, that is extremely helpful. 

You said “many consider alternatives are better choices” and I wondered if you’d be willing to comment on alternatives. 

Also, you mentioned ETFs are more complex and gave some comments on building a portfolio. Do you have any recommended reading (online or book form) for learning how to do this? 

Linton

Creating a plan for when and how you are going to meet your retirement needs would seem to be your primary need.  WIthout a plan choosing the right investments is difficult, with a plan it may be easy.  For example a single index tracker, or preferably small set of index funds within a multi-asset fund may well be the best answer.  Perhaps not ETFs as you could need several to cover the breadth of investments that can be covered by a single normal fund.  I use ii, and find them cheap and provide a perfectly adequate level of service.  However they are fixed fee and so for a small pot a % based platform may be cheaper.

The quoted on-going charge levels seem relatively high. If you add this to the insistence on using DFM, which increases the costs, I guess one of two circumstances may apply:
a) Your total pot is relatively small and to make the job worthwhile to the IFA it has to represent a reasonable amount of business
b) You are not talking to the right IFA  - for your needs an ordinary high street IFA will be fine, no need to to contact a large company with plush offices and glossy brochures.

If you can give us some idea of how much money you have to invest perhaps we can make more specific suggestions.

Linton

BadgerTwin said:

Thank you for taking the time to explain, that is extremely helpful. 

You said “many consider alternatives are better choices” and I wondered if you’d be willing to comment on alternatives. 

Also, you mentioned ETFs are more complex and gave some comments on building a portfolio. Do you have any recommended reading (online or book form) for learning how to do this? 

At this stage I wouldnt worry too much about specific funds (or platforms).   That would be like realising you need sort of vehicle, havent yet decided whether it should be a large SUV, a fast coupe, or small run-about for the shopping, but are spending your time worrying whether it should be electric or petrol and whether Ford would be the best manufacturer.

BadgerTwin

Thanks for your input. Pot is quite large due to the property sale, we have a complex situation in that both are self employed and we are paying school fees for the next five years so may need some income supplement too. Also both are in professions where we would probably keep working p/t indefinitely if health allows so don’t need a full income at 65 say. We have managed property for 20+ years but not investments, want to learn fast but realise there are pitfalls of DIY. 

Albermarle

Some random comments
1) The fees seem high, and as already mentioned a local IFA ( not using a DFM ) should be cheaper. Maybe in the 1.25% area all in, if you get a good deal and you have substantial funds. Take into account that if you DIY, there will be costs and they could be higher than this depending on what investments funds you choose. Although normally they should be lower. Can be as low as 0.2% but something around 0.5% to 0. 7% would be more typical to aim for.
2) These are only ongoing costs, there will be an initial charge for whichever type of advisor you have ( not for DIY of course) Could be in the £2.5K to £5K region. It is possible just to have this initial set up fee and not have the ongoing charge ( although you will still have to pay fund and platform costs of course
3) As well as understanding more about investing, you will need to learn about tax issues. Specifically tax efficiency of your plans.
4)Being a regular reader of this and the Pensions forum has helped a lot of us to improve our knowledge.

BadgerTwin

Thanks for your reply Albermarle, appreciated.  Yes, ensuring tax efficiency and awareness of risks/liabilities is a main reason for going with an IFA over DIY. 

V helpful to hear more about typical costs. We spoke to two IFA in London and two locally, adviser fees seem to be 1 or 2% of total pot for set up but with DFM and platform fees it’s nearer 2%, steep for a larger pot with projected returns looking v small. Advisory might be a better route. 

One adviser recommended moving my pension to his platform as management fees are high but I’m wondering if starting a new SIPP would be a better option.

Albermarle

One adviser recommended moving my pension to his platform as management fees are high but I’m wondering if starting a new SIPP would be a better option.

Moving to the preferred platform of the advisor is quite normal, although you do not have to . They should be able to access competitive fees, and it is easier for them and their clients if they are with platforms they are familiar with, and they know the customer service is good. The latter point is probably more important when taking from the pension, rather than adding to it.

If you decide to DIY then probably would be better to move to a modern pension on a  platform with lower fees, but remember there are normally two fees . One for the platform and one for the investments you choose.

with projected returns looking v small

There are many 'discussions' on this forum about the value ( or not ) of paying an IFA. Regarding investment returns it is nearly impossible to fairly evaluate whether an IFA adds value in this respect, as it is very difficult to be sure you are comparing apples with apples. 

You should not  think that if you have an IFA , they must somehow 'beat the market' to be worth paying them. The value mostly seems to comes in other ways,( peace of mind , less hassle than DIY, tax help etc )  but at a cost of course, and in the end only you can decide whether it is worth it or not.

bostonerimus

Keep things simple, understand the simple things that you are doing and have a plan for both good times and bad and you can DIY successfully. People's financial needs do not change that often so I find it hard to see the value of ongoing IFA fees at the 1% and 2% level. I can see a need for one time advice with complicated taxation, drawdown and estate planning issues, but annal IFA fees seem like a waste of money to me when most people have fairly straightforward needs.

dunstonh

we have a complex situation in that both are self employed 

Sole trader or limited company?   It makes a difference when investing.

Also, you mentioned ETFs are more complex and gave some comments on building a portfolio. Do you have any recommended reading (online or book form) for learning how to do this? 

ETFs used to be the option of choice for those wanting tracker funds as they were unbundled in charging whereas UT/OEICs/ICVCs were bundled.   However, in 2013, they became unbundled and the cost difference between ETF and the others became little or no different.    There can be small tax differences and the way the trackers work internally can be different.  e.g. synthetic replication, physical replication and sampled replication. 

Jumping into the differences between insured funds, pension funds, ETFs, ITs, OEICS, UTs, ICVCS, SICAVs, etc at this stage is not that important.   If you are going to build a portfolio of single sector funds you need to understand portfolio building first.   Whether you use an ETF or OEIC/UT/ICVC  for the tracker is lower in importance when how much percentage of the portfolio are you going to allocate to that country/region/bond style.   And if you don't have the skills and knowledge to portfolio build, you are best not doing it and should stick to a multi-asset fund (if you plan to DIY).

Ultimately, going DIY should be cheaper.   As an adviser,  I would say the majority of my clients are not that interested in the investment returns side.  They want suitability and someone doing the annual CGT use, Bed & ISA, bed & Pension, chargeable gain uses etc.   And most value the planning side more and having the sounding board for ideas.    Some go as far as asking how much they can spend on next year's holiday.  Others are a bit broader in their budgeting.  But for the vast majority, the investment side has the shortest conversation.