Active vs Passive investment

jimjames

dbrookf said:

Juno_Moneta said:

Frankly it’s shocking that an IFA would dump your pension into a passive tracker and have the cheek to charge you 1.38% a year for the privilege. 

The tracker they choose could literally just be a basic FTSE100 vehicle, or hopefully a global tracker instead. 

They are using barely any knowledge or experience to do this and you’d be better off dismissing them and self investing with a SIPP on a platform like Hargreaves Lansdown or Vanguard. 

Don’t let fear of managing this yourself force you down the easy route of unnecessary commissions. 

It is broken down like this:

1. Portfolio Fee - 0.25%
2. Aggregated Fund Cost - 0.16%
3. Financial Planning Fee - 0.75%
4. Platform Cost - 0.22%

ie 1.38%

Does this sound more reasonable?

No, not really reasonable. The fund cost is 0.16% and you're paying nearly 10x that in total costs. You're paying for the platform, what is the portfolio fee? That just seems like an excuse to add more charges on.

JohnWinder

Most new investment money in UK is going into passive investing in recent times. Some suggests it's because advisers were prohibited from taking commissions for recommending investments. https://www.evidenceinvestor.com/post/why-the-uk-is-leading-europe-s-push-towards-passive 

Most of Europe still struggles under the old yolk because commissions are allowed.

If your adviser has just seen the light with passive vs active investing, it suggests they are slow learners since the benefits have been known for years although the products available only more recently.

Just be aware that your adviser may have looked back over the past few years to see what combination of investment assets of a passive nature produced the best results. She may then have bundled these up as her offering. Not good. The future results might be better with a different mix, given the same risk. The past does not predict the future well. Better to choose you investments based on sound principles. Perhaps she's doing that.

Juno_Moneta

dbrookf said:

It is broken down like this:

1. Portfolio Fee - 0.25%
2. Aggregated Fund Cost - 0.16%
3. Financial Planning Fee - 0.75%
4. Platform Cost - 0.22%

ie 1.38%

Does this sound more reasonable?

Well, you don't say how much is in your pension, but since you mention 2 people in late 60's I'm going to just pick a number and work out with £300,000

So this is what you are paying for:

1. Portfolio Fee - 0.25%
   £750 just for having a portfolio, yay!
   
   
2. Aggregated Fund Cost - 0.16%
   £480 is the lowest fee here - and presumably just a passthrough from the underlying funds - which gives you a clue to the real cost of ownership!
   
   
3. Financial Planning Fee - 0.75%
   £2,250 this is the kicker - it doesn't take much planning to pay into a tracker fund. What is the detailed plan? Track an index until death? Is that plan worth £187 a month to you, compared to say your monthly fuel bill?!
   
   
4. Platform Cost - 0.22%
   £660 because those websites don't maintain themselves do they?
   
   
   I'm sure these are all pretty standard ways of breaking down a big number (£4,140) into smaller (more palatable to client) pieces and I don't want to invoke the ire of all the hard working IFAs reading this - so at the end of the day it's your choice and perhaps the perceived peace of mind is worth this sum to you. But do consider other options/approaches before simply signing up...
   
   

Linton

Juno_Moneta said:

Frankly it’s shocking that an IFA would dump your pension into a passive tracker and have the cheek to charge you 1.38% a year for the privilege. 

The tracker they choose could literally just be a basic FTSE100 vehicle, or hopefully a global tracker instead. 

They are using barely any knowledge or experience to do this and you’d be better off dismissing them and self investing with a SIPP on a platform like Hargreaves Lansdown or Vanguard. 

Don’t let fear of managing this yourself force you down the easy route of unnecessary commissions. 

Disagree.  The role of an IFA is to help you manage your financial affairs to meet your objectives.  As regards choice of specific investments, which is only a comparatively small part of the job,  the most appropriate for your circumstances should be the criterion. That could well be a single global tracker or it could be much more complicated.

dunstonh

Frankly it’s shocking that an IFA would dump your pension into a passive tracker and have the cheek to charge you 1.38% a year for the privilege. 

The IFA is not charging 1.38%.  They are charging 0.75%.  And almost certainly it will not be "dumping" them into a single tracker.  That would be daft.

The 1.38% charge is the total cost including TC & IC.   Most DIY investors ignore TC & IC but advisers and providers have to include it in their cost disclosures (advisers generally ignore TC as well but are still required to include it)

The tracker they choose could literally just be a basic FTSE100 vehicle, or hopefully a global tracker instead. 

Why on earth would they pick 100% into a FTSE100 tracker?  Where has the op even suggested such a thing?

They are using barely any knowledge or experience to do this and you’d be better off dismissing them and self investing with a SIPP on a platform like Hargreaves Lansdown or Vanguard. 

HL's platform is one of the most expensive on the market for OEICs/UTs

Don’t let fear of managing this yourself force you down the easy route of unnecessary commissions. 

Commission hasn't existed for a decade.  

It is broken down like this:

1. Portfolio Fee - 0.25%
2. Aggregated Fund Cost - 0.16%
3. Financial Planning Fee - 0.75%
4. Platform Cost - 0.22%

ie 1.38%

Does this sound more reasonable?

 Portfolio fee sounds like the DFM charge.   0.25% is at the upper end of typical. 
The aggregate Fund cost would be OCF + TC + IC.    0.16% wont be the OCF that DIY posters will assume it is.
Advice fee is in the ballpark for portfolios of around £250k towards £500k.  (you would aim for less than that above that)
Platform cost is ok.   The best platforms in terms of functionality, financially secure and cost are typically between 0.15% to 0.2%.  The old school platforms tend to be a bit higher in the 0.2% to 0.25% range.

Some of the responses are assuming a single tracker fund.  That won't be the case.  So, you can disregard their comments.   The firm you are using was damned expensive previously.     Without knowing the amounts invested, its difficult to say whether the advice fee is reasonable but the DFM charge and platform charges are higher than they need to be.   The fund charge is where you would expect it to be

We need to know whether this is an IFA or FA and the amounts invovled.
An FA will only offer their own product range.  They don't have the ability to shop around.  
An IFA does have the ability to select from the whole of market.

If it is an FA, that may explain their higher platform and DFM charges.        If it is an IFA, then they can do better on DFM fee and platform fee if you are fee focused.  

Linton

dbrookf said:

Our Financial advisor has offered us a change from an active investment we have via them (2.32% cost) to one that they have set up themselves but passive (1.38% cost). Thinking it is a no brainer to change to this, but anyone advise pros and cons? We are in our late 60s and this is our pension fund.

It all depends on your objectives. If they are simple you may well find a passive fund the most appropriate and cheapest.  On the other hand  with more complex objectives being able to choose from the wide range of different types of active funds may be useful. In retirement that will depend on your strategy for extracting a steady income from volatile investments and other needs like inheritance planning.

I use a mixture of active and passive.

I am uneasy about the advisor asking you as to which you want. Shouldn’t the advisor be advising? Also with them just happening to have a portfolio of passive funds right for your needs.  Are you sure they are Independent?

Juno_Moneta

dunstonh said:

The tracker they choose could literally just be a basic FTSE100 vehicle, or hopefully a global tracker instead. 

Why on earth would they pick 100% into a FTSE100 tracker?  Where has the op even suggested such a thing?

OP said "... to one that they have set up themselves but passive ..."

That's where they suggested such a thing.

I said "... the tracker they choose could literally just be a basic FTSE100 vehicle ..."

Definition: A passive fund is an investment vehicle that tracks the stock market and replicates its performance. Performance: Passive funds track the performance of the index they're linked to, such as the MSCI World or FTSE100. Passive funds fluctuate according to that index.

But you're an IFA so you know this. Simpy highlighting that this is exactly what the OP suggested.

dunstonh

I am uneasy about the advisor asking you as to which you want. Shouldn’t the advisor be advising? Also with them just happening to have a portfolio of passive funds right for your needs.  Are you sure they are Independent?

It is one of the differences between an IFA and FA.    FAs will often present options for the individual to pick whereas an IFA should give a definitive solution (unless it is an area of pros and cons that where discussion of those leads to the solution).

OP said "... to one that they have set up themselves but passive ..."

That's where they suggested such a thing.
I said "... the tracker they choose could literally just be a basic FTSE100 vehicle ..."

Using passive funds does not mean having a single fund.  There wouldn't be a need for a DFM charge if it was a single fund.  The fact there is a DFM charge means it the investor will hold the individual funds.   If it was a single OEIC, then there wouldn't be a separate DFM charge is the charge would be within the OCF.

Juno_Moneta

Yeah I wasn't insisting it was a single fund - it was just given as an example, could be many in actuality.

Also a little feedback on your replies - I know you're an experienced IFA and very familiar / comfortable with acronyms as you mention OCF, TC, IC, DFM, OEICs, UTs - but let's not forget the thread was started by a poster saying "We are in our late 60s"

dunstonh

Yeah I wasn't insisting it was a single fund - it was just given as an example, could be many in actuality.

As there is a DFM charge, there will be a portfolio.   A single fund would not have a DFM charge externally. It would be within the fund OCF. 

For example, Vanguard Lifestrategy OEICs have a 0.22% OCF and TC of 0.05%.  So portfolio charge is 0.27%. Whereas Vanguard Lifestrategy MPS has an OCF of 0.12%. DFM charge of 0.10% and TC of 0.05% = 0.27%.  The same as the OEIC version.

Most DIY investors would refer to VLS charges as 0.22% even though it's 0.27% on paper.

Also a little feedback on your replies - I know you're an experienced IFA and very familiar / comfortable with acronyms as you mention OCF, TC, IC, DFM, OEICs, UTs - but let's not forget the thread was started by a poster saying "We are in our late 60s" 

Most of what I have written was not aimed at the OP but at responders indicating that they believe they have sufficient knowledge.   Although if they intend to go down the DIY route, they will need to know these things.  Plus, the OP hasn't supplied answers to some key questions asked yet.   Once they do, more direct answers can be given.