A question about investments and charges

overcharged123

Please could anyone who is familiar with setting up trusts and investing give me some advice about whether this situation sounds right.  I am concerned I may be paying too much for financial advice.

In August 2017 I invested £80,000 inherited money into a trust for my children.  I have no experience in investing so I used a financial advisor who was recommended by the solicitor handling the probate – he is her brother.

The money was invested in a trust using the Standard Life International MyFolio Multi-Manager II fund which is a medium to low risk fund.  I was shown a chart of performance in previous years which showed the fund growing by about 30% in five years, although of course that performance was not guaranteed for the future.

The initial set up costs were £2,400 so the initial investment was £77,600.  The financial advisor charges £500 pa.  Every couple of years there is a financial review which is another £500.  The platform also levies charges which are about £1000 pa.

The fund’s values are …

August 2018 £80,324

August 2019 £80,417

August 2020 £78,319

August 2021 £87,519

August 2022 £82,208

August 2023 £80,311

Now £84,139

I know Covid hit some investments hard, but the platform and the financial advisor have each earned about £6k from my investment while its value has only increased by £4k.  The charges seem to be high and the gains quite low.

Should I have compared quotes as you would do with eg a builder?  I am kicking myself for being naive but I thought I could trust the financial advisor due to the recommendation from the solicitor.

What would you do in my position?

Thanks in advance for your time.

dunstonh

The initial set up costs were £2,400 so the initial investment was £77,600.  The financial advisor charges £500 pa.  Every couple of years there is a financial review which is another £500.  The platform also levies charges which are about £1000 pa.

£500 ongoing for the adviser is fine.   That also keeps the trustees covered.  An adviser is unlikely to want to do it foe less than that as its already at the low end.

Set up cost was at the upper end of reasonable but in the ballpark of reasonable.

I know Covid hit some investments hard, but the platform and the financial advisor have each earned about £6k from my investment while its value has only increased by £4k.  The charges seem to be high and the gains quite low.

Covid didn't directly do much damage.  The bonds element didn't drop during that period. Equities did but by summer they were already back up again.  The real damage was from November 2021 to mid 2023.  Bonds suffered their worst extended period in over 100 years.  All as a result of the 2008 Credit Crunch which happened a lot faster than expected because of Russia invading Ukraine which created an energy crisis and pushed inflation up at the same time as the end of QE.   Basically a perfect storm.

Any portfolio that has been heavy in bonds, in particular gilts, has had a very rough ride.   Equities have been good by comparison.  Equities have nearly doubled in the last 7 years whereas as bonds are just negative.

The fund used is 46% bonds, 43% equities and 10% unclassified (alternative assets).  

Should I have compared quotes as you would do with eg a builder?  I am kicking myself for being naive but I thought I could trust the financial advisor due to the recommendation from the solicitor.

Yes.  You could have got cheaper on the initial.   However, its not the adviser that is responsible for the returns.  It is the asset make up and events that have happened.  By choosing to be at the more cautious end, it has been victim to events that you would have to go back 100 years to see similar.   

What would you do in my position?

Equities give the long term growth.  But have periods of short term negatives or extended short term nothing.   Bonds exist in a portfolio to reduce the zig zig nature.      You don't have bonds in a portfolio to give you growth.  You have them to placate the risk of you making a bad decision during a market crash.    i.e. Stockmarket falls 50% (which it has done in the last 25 years and will do again at some point).      So, 100% equities gives you a 50% fall.    If you have 50% equities and 50% bonds, then the stockmarket fall wont be 50% but 25%.     

Bonds will still go up and down but more wavy line apart from around 5% of the time when they will act out of their norm.

So, maybe consider the objective and the amount of equities exposure if this money is long term.   

The fund itself has gone off the boil. Its a managed fund of fund and its been off the boil for some time.  



Here it is in blue and a portfolio with the purple being 60% equities and the teal being 40% equities.  You can see coronavirus drop in 2020 and the bond drops from Nov 2021 on both.         The old Standard Life myfolio funds started going off around late 2013.    But it woudln't have been until around 2015 that it would have been considered more than just a short term anomoly.

Maybe I would have thought the adviser would have recommended a switch out of that fund if they are doing annual reviews.   Although you say it was taken out in 2017 but the fund was already notably poor compared to other similar.   Also, the chosen offshore bond held may limit the investment options.       I have several old offshore bonds that I have inherited over the years  (i.e. put in place by someone else) and often find the fund range is rubbish and you are having to compromise but you can't bust the trust due to tax).   I personally prefer to use whole of market offshore bonds so you don't get that problem but its surprising to see how many still use traditional insurance company based legacy style offshore bonds.

masonic

The poor performance of a low-medium risk fund will have more to do with interest rates rising than Covid. The portfolio did rather well during the pandemic and has only faced significant loss when interest rates started to rise, which is to be expected. Now interest rates are stable, the portfolio seems to be generating a reasonable return again, judging by the last 5 months. Most of the portfolio will be in bonds, which now pay a much higher yield than they did a few years ago.

Setting up a trust is going to be more expensive than a conventional investment account, but the platform cost at over 1% is what stands out as being pricey. You're paying more for the account than the ongoing advice.

If this portfolio was being invested for children, the main question I'd have is whether it was invested at a sufficient level of risk.

wmb194

How many more years does it have left to run? I.e. when your children will receive it.

Albermarle

 I am kicking myself for being naive but I thought I could trust the financial advisor due to the recommendation from the solicitor.

The financial advisors job is to invest the money in line with your objectives and risk tolerance. There is no indication they have not done this.

As said lower risk funds have had a rough time recently and this is the issue.

overcharged123

dunstonh said:

The fund itself has gone off the boil. Its a managed fund of fund and its been off the boil for some time.  

Maybe I would have thought the adviser would have recommended a switch out of that fund if they are doing annual reviews.   Although you say it was taken out in 2017 but the fund was already notably poor compared to other similar.   Also, the chosen offshore bond held may limit the investment options.       I have several old offshore bonds that I have inherited over the years  (i.e. put in place by someone else) and often find the fund range is rubbish and you are having to compromise but you can't bust the trust due to tax). 

Thank you for your comprehensive and considered reply.  It’s interesting to see the effect of the different types of investment on the outcome of the overall fund.   

So the problem lies with the fund itself and not the advisor so much, although maybe he should have recommended a better fund.  

The financial advisor’s reviews aren’t annual, but every 2 or 3 years.  He has recently contacted me to arrange another, which is why I decided to look at the situation now, before the trust pays out another £500 for the review plus £500 in August for his annual charge.

I could go to the review and suggest changing the fund due to its poor performance and relatively high charges.  Or might I be better off finding a new financial advisor?

overcharged123

masonic said:

Setting up a trust is going to be more expensive than a conventional investment account, but the platform cost at over 1% is what stands out as being pricey. You're paying more for the account than the ongoing advice.

Thank you, so the platform charges are higher than usual – that plus dunstonh’s advice that the fund has not been performing well since before I was advised to invest in it, makes me think that maybe I need a different fund.

overcharged123

wmb194 said:

How many more years does it have left to run? I.e. when your children will receive it.

There are four children with ages between 14 and 23.  I will tell each of them about the fund when they are in a position to need it for eg a house purchase.  So the eldest may want it in a few years but the youngest will perhaps not need it for 15 years.   I haven’t told them yet because they will think 20K!!! and perhaps feel they don’t have to work so hard. 

dunstonh

So the problem lies with the fund itself and not the advisor so much, although maybe he should have recommended a better fund.  

In summary yes.    Its been off the boil long enough and better and lower cost alternatives have existed long enough for that decision to have been made by now.      It meets suitability requirements (so no wrongdoing) but its not optimal.

It may be worth checking the status of the adviser. Certain sales companies have been buying up IFA firms and converting them to tied basis. This prevents them from making new recommendations on plans not operated by the tied provider, but they can continue to keep existing plans running unchanged. It's probably not that, but it happens and there has been a lot of consolidation in recent years. If it has happened, you may want a stronger word.  (you can check the FCA register and look up the adviser and see if they are down as an appointed representative of a tied firm.

The financial advisor’s reviews aren’t annual, but every 2 or 3 years.  He has recently contacted me to arrange another, which is why I decided to look at the situation now, before the trust pays out another £500 for the review plus £500 in August for his annual charge.

Before 2018, reviews could be whatever you agreed between you.  2 or 3 years was fine.  From 2018, "at least annually" became the requirement for most tax wrappers (GIA, ISA etc) but it didn't apply to offshore bonds and insurance products.  However, it is considered good practice to treat all investment wrappers the same way.

I could go to the review and suggest changing the fund due to its poor performance and relatively high charges.  Or might I be better off finding a new financial advisor?

The fund can be improved upon if the offshore bond is whole of market.  If not, you are limited by the fund range available but certainly its need looking at compared to alternatives.   The adviser doesn't seem to be doing anything wrong but perhaps is taking the route of the least work possible.   

Albermarle

overcharged123 said:

dunstonh said:

The fund itself has gone off the boil. Its a managed fund of fund and its been off the boil for some time.  

Maybe I would have thought the adviser would have recommended a switch out of that fund if they are doing annual reviews.   Although you say it was taken out in 2017 but the fund was already notably poor compared to other similar.   Also, the chosen offshore bond held may limit the investment options.       I have several old offshore bonds that I have inherited over the years  (i.e. put in place by someone else) and often find the fund range is rubbish and you are having to compromise but you can't bust the trust due to tax). 

Thank you for your comprehensive and considered reply.  It’s interesting to see the effect of the different types of investment on the outcome of the overall fund.   

So the problem lies with the fund itself and not the advisor so much, although maybe he should have recommended a better fund.  

The financial advisor’s reviews aren’t annual, but every 2 or 3 years.  He has recently contacted me to arrange another, which is why I decided to look at the situation now, before the trust pays out another £500 for the review plus £500 in August for his annual charge.

I could go to the review and suggest changing the fund due to its poor performance and relatively high charges.  Or might I be better off finding a new financial advisor?

The normal practice is at the start of the relationship, the advisor asks you a lot of questions about yourself, your objectives and your attitude to risk.
For the latter if you say you are risk averse, then they will put you in a lower risk fund. So can you recall any of the conversation at the time?
The problem is that low risk means low growth, especially recently. So being risk averse can actually prove to be more risky in the end/long term. 

Millyonare

If you'd stuck that £80k in a simple US Nasdaq index tracker in Aug 2017, you'd now have about £200,000 in Mar 2023.