Costs of an offshore bond in trust

Imnoexpert_2

An IFA has advised that money ( from a house sale ) should be invested in a bare trust in an offshore bond. The reason for this choice is a little odd, and I’d prefer not to go into it in this post. This query is about the rate of charges proposed.

Just to clarify issues often raised, the IFA is Independent, the companies involved are ‘reputable’ and the reason for the choice is not to evade, or even particularly to mitigate tax or to be ‘deprivation of asset’s’.

IFA is Charging equivalent of 0.58% up-front charge

Offshore bond in trust Provider 0.1% up-front charge

Then ongoing charges of

IFA 0.5% p.a

DFM appointed by IFA 0.81% p.a

Offshore Bond in Trust 0.1% p.a

Ongoing fund charges 0.59% p.a

There are no charges for fund changes

These are clearly high charges, but IFA says they are a good deal for an offshore DFM. As the money will be invested in a fairly conservative portfolio (50% equities), Risk Band C there must be a fairly good chance that over the short term the investment will not even cover the charges.

Is this about what you should expect to pay? Is it worth shopping around different providers?

Is there a cheaper way of doing it – apart from DIY?

HappyHarry

Upfront charges look reasonable, the offshore bond ongoing fee of 0.1% is good, fund charges are towards the higher side especially since most offshore bonds have access to lower cost funds, but why are you paying an IFA 0.5% and a DFM 0.81%(!) ongoing fees? That is a total of 2.0%pa in ongoing fees which looks very expensive. What exactly is the IFA doing for their 0.5% pa, and what is the DFM doing for their 0.81% per annum?

dunstonh

DFM appointed by IFA 0.81% p.a

That is very high unless it also includes the fund charges.  DFMs are normally in the 0.1x% to 0.3x% range

Ongoing fund charges 0.59% p.a

So, it doesnt include the fund charges.

There are no charges for fund changes

You wouldnt expect to be in this day and age.

These are clearly high charges, but IFA says they are a good deal for an offshore DFM. 

You dont need an offshore DFM.    You dont need a DFM at all but lets say one was wanted, then any of the usual suspects would be cheaper than that.

As the money will be invested in a fairly conservative portfolio (50% equities), Risk Band C there must be a fairly good chance that over the short term the investment will not even cover the charges.

50% equities shouldnt have any problem over the long term.  There will be short term loss periods though as with any investment.

Is this about what you should expect to pay? Is it worth shopping around different providers?

I wonder if you are reading the DFM charge correctly.  If it was DFM and OCF included then it would be more in the ballpark.  However, DFM alone is damned expensive.

It would be worth asking for clarification.  If the DFM is really that expensive then tell the IFA you don't want a DFM or alternatively you want a low cost DFM.   IFAs are whole of market by default.  So, they have to take onboard any influences you wish to give  (e.g. ESG, ethical, passive, hybrid, active etc).

You can get offshore bonds on platforms at only a very small addtional cost over ISAs or GIAs or SIPPs nowadays.   You can get whole of market investment selection within an offshore bond at no additional cost.     You could easily have the charge under 0.9% p.a. including platform, adviser and fund charges.

Bostonerimus1

If this is not for tax efficiency why bother with the added expense?...which looks to be considerable.

Imnoexpert_2

Thanks for your thoughts guys

I have added the VAT onto the DFM charge to get the percentage. I am told it will be applied by the DFM

The IFA charge seems to be for two meetings a year where we will review the investment. I have made a separate post about how we would benchmark that. It is an 'Advisory Charge

The DFM is managing a portfolio of 36 funds (but I guess this is not a portfolio unique to me). The charge is a 'Portfolio Management Charge'

Dunston - I am again very grateful for your thoughts. You say "You could easily have the charge under 0.9% p.a. including platform, adviser and fund charges". What is the way to do this? Should I go to another IFA?

As I said I'd rather not discuss the reason this strategy (which isn't mine) has been suggested. If it was up to me I would just gift the money and keep it in a few low cost index funds.

dunstonh

I have added the VAT onto the DFM charge to get the percentage. I am told it will be applied by the DFM

DFMs should not be charging VAT.   It is a non-vatable service.

The DFM is managing a portfolio of 36 funds (but I guess this is not a portfolio unique to me). The charge is a 'Portfolio Management Charge'

In general, hardly anyone has bespoke portfolios nowadays.  Regulation and compliance has pushed firms, whether advisory or discretionary, towards centralised propositions.

Dunston - I am again very grateful for your thoughts. You say "You could easily have the charge under 0.9% p.a. including platform, adviser and fund charges". What is the way to do this? Should I go to another IFA?

The use of an offshore bond and trust suggests the amount is large.    You are not likely to do all that for a relatively low amount.     So, when you look at larger investments, the adviser charge is typically 0.50%.   A platform charge about 0.2x% and a portfolio of passive funds around 0.09%.    By going advisory rather than discretionary, you avoid the DFM charge.    If something about discretionary appeals to you then there are plenty of low cost ones.

xylophone

should be invested in a bare trust 

Is the beneficiary of the bare trust a minor?

https://www.evelyn.com/insights-and-events/insights/trusts-for-children-explained/#:~:text=Bare trusts are unlimited in,what they wish with it.

You do realise that the beneficiary of a bare trust has the absolute right to access and control at the age of 18 (16 in Scotland)?

Are you aware of the regulations relating to the registration of trusts?

https://www.gov.uk/guidance/register-a-trust-as-a-trustee

And of the tax treatment of bare trusts?

https://www.litrg.org.uk/tax-guides/savers-property-owners-and-other-tax-issues/introduction-trusts#:~:text=With a bare trust, the,they held the property directly.