Fees and Charges

Username03725

After a review the advice is to move my 3 private DC pensions into one managed fund. Currently the 3 attract fees of 0.25 - 0.4%, the proposed new single pot would cost 1% p.a. with an initial xfer fee of 3%.

3% of few £100k is a good sized chunk, and 1% is significantly higher than the current charges. But it’s a much more actively managed fund; get what you pay for etc.

Question then is: are these fees and charges reasonable, comparable and normal? Or do they seem outrageously high or even low.

sandsy

The jury is out on whether there is any evidence that actively managed funds perform any better than passively managed funds. 

3% of a few £100k sounds high to me. Would generally expect % to drop as £ increase. Is 1% just the product charge or does that include paying for ongoing advice?

As part of the review, did you give any indication that a low level of fees and charges is important to you? Nothing to stop you declining the advice and/or going back and making that clarification now to see if the advice can be changed to take it into account.

[Deleted User]

Fees are certain. Performance isn’t.  Keeping the costs down should be a no-brainer.  Actively managed high cost  funds underperform over long periods of time.  

Like you say, 1% is a lot. In this day and age there is no reason to pay that much. Lots of great options for a fraction of the price.  Reading a book or two always helps. 

Personally I would not touch anything over 0.5%. People should always translate these costs into its corresponding portfolio cost over a typical duration like 25 yrs. 

Annual	25 yr		Annual	25 yr		Annual	25 yr
0.1%	2.5%		1.1%	24%		2.1%	41%
0.2%	4.9%		1.2%	26%		2.2%	42%
0.3%	7.2%		1.3%	28%		2.3%	44%
0.4%	9.5%		1.4%	30%		2.4%	45%
0.5%	12%		1.5%	31%		2.5%	46%
0.6%	14%		1.6%	33%		2.6%	48%
0.7%	16%		1.7%	35%		2.7%	49%
0.8%	18%		1.8%	36%		2.8%	50%
0.9%	20%		1.9%	38%		2.9%	52%
1.0%	22%		2.0%	39%		3.0%	53%

So, 1% in annual costs translates to a portfolio that is a fifth smaller after 25 years than a portfolio with 0.1% costs, all other aspects being equal. Its a lot of money. 

Whoever is giving the advice to transfer into a much higher cost portfolio is making a sound call for his own portfolio. 

gm0

You need to understand the components of the charges to make accurate comparisons of route a vs route b

But essentially an IFA offer is a negotiatable price to act for you. It is an offer.  They may take the view it's take it or leave it.  Or not.

The fact that DIY can be done sub ~0.3% all in (platform, fund, lack of advice, albeit mostly for passive funds) doesn't alter the fact that advisers are making a living and will charge a setup fee and a tiered ongoing fee % with size to generate a minimum annual spend. Higher%/a deterrent to small funds or to make up the difference for a case to be managed. A typical 0.5% for ongoing service for them on top of platform and fund elements which is how you get to 1% or indeed more quite easily.

If taking the michael they will add a discretionary fund manager below them and above the funds to do some of their work for an extra fee to you and then not rebate that element of outsourced work from their own fee.  Wealth managers (the not independent single solution FAs are worse again) with very obscure pricing practices

I have been offered 0 initial charge in the past to get ongoing business and funds under management i.e initial setup for a single transfer in at zero cost to secure the ongoing business and charges.   That was a cost of sales marketing decison for that IFA for those funds to make such an offer.  It's not about the paraplanner and admin and insurance cost of *doing* the regulated steps (which are real cost to the adviser's business) but a commercial choice about prices to attract or to not attract your business and have it be profitable.

bostonerimus

Username03725 said:

After a review the advice is to move my 3 private DC pensions into one managed fund. Currently the 3 attract fees of 0.25 - 0.4%, the proposed new single pot would cost 1% p.a. with an initial xfer fee of 3%.

3% of few £100k is a good sized chunk, and 1% is significantly higher than the current charges. But it’s a much more actively managed fund; get what you pay for etc.

Question then is: are these fees and charges reasonable, comparable and normal? Or do they seem outrageously high or even low.

One sage investor once said "you get what you don't pay for" when praising low cost tracker funds. Who is giving you this advice?

JohnWinder

...and 1% is significantly higher than the current charges. But it’s a much more actively managed fund; get what you pay for etc.

That's usually the case, with apples or shoes etc. But not with investment funds, unless of course you have some information we don't have about fund returns and fees. If not, try this:

‘The expense ratio is the most proven predictor of future fund returns. We find that …and that’s also what academics, fund companies, and, of course, Jack Bogle, find when they run the data.’
‘So, the cheaper the funds, the better your returns. All told, cheapest 20% funds were 3 times as likely to succeed as the priciest 20% of funds.’
https://www.morningstar.com/articles/752485/fund-fees-predict-future-success-or-failure

JohnWinder

So, 1% in annual costs translates to a portfolio that is a fifth smaller after 25 years than a portfolio with 0.1% costs, all other aspects being equal. Its a lot of money.

Yes, nice chart above showing the damage extra fees cause over 25 years.
Or DIY with the future value (FV) function on a spreadsheet, which needs (expected %return/year, how many years you’ll invest, initial investment, how much you’ll contribute each year).
Or, for a party trick, pull out your phone, open the calculator, turn the phone on its side to bring up the scientific calculator, then punch in: 1.045 (that’s for 4.5%/year return), press the x with little y above it key, then press how many years you’ll invest for, then press times 10,000 (your initial investment), then equals. Repeat with 1.04 to indicate how much you’d get after those years if the fees were 0.5% higher. Use screenshots of the answers, or for the piece de resistance, use the calculator’s memory.

[Deleted User]

sandsy said:

As part of the review, did you give any indication that a low level of fees and charges is important to you? Nothing to stop you declining the advice and/or going back and making that clarification now to see if the advice can be changed to take it into account.

Its like telling the hairdresser that you want a good haircut. Should be obvious that investors are not looking to self-harm.  

Linton

Over 25 years charges can make a significant difference to your portfolio. But choosing inappropriate funds for your requirements and circumstances or can be far more damaging. Charges are not the most important difference between funds.

Therefore it makes sense to decide your strategy first and then find the most effective way of implementing it.

dunstonh

After a review the advice is to move my 3 private DC pensions into one managed fund.

Some of the most popular multi-asset funds with underlying passives are managed funds.   So, having some knowledge of that managed fund would be useful.  

Currently the 3 attract fees of 0.25 - 0.4%, the proposed new single pot would cost 1% p.a. with an initial xfer fee of 3%.

Moving a from investments costing 0.25-0.4% to 1% (excluding advisers charges) would need to explaining.   Excluding adviser charges, you would expect the pension and funds to be in the 0.3-0.5% range nowadays.  hardly any providers have initial charges.   So, I am going to assume that the initial charge is the adviser charge.   3% needs context.  3% on £30,000 isn't bad.  3% on £150,000 is expensive.   You say a few hundred thousand, so that would make it expensive.

Charges are a secondary consideration and not the primary concern.  Suitability is the primary concern.     I think the ongoing charges need to be broken down rather than the bottom line.   You would expect something like the following if its an IFA:  platform charge 0.25%,  fund charges 0.18% and adviser charge 0.50% giving you 0.93%.   1% sounds a bit rounded but it does suggest that the managed fund could well be a multi-asset fund with underlying passives.   

Username03725

Thanks. The general advice is what my instinct was telling me, that these initial charges + ongoing fees are on the high side.