Are these IFA fees reasonable?

Retired_I.F.A.

I hope you have a nice fat wedge tucked away in some offshore fund kittie that hubby knows nothing about. A six figure sum might be enough there again it might not.

You never know, you could end up divorced and if your lucky enough to be able to get round the money laundering rules, and the taxman and get the wedge back into this country without having to split it with your ex husband then dont spend it till he's dead because he might just claim you've illegally advised him on his pension and maybe given him bad advice regarding it. You'll need that wedge then to compensate him, and dont think you'll be entitled to a share of it either not once the divorce has gone though.

Beware the DIY route, but if you do go that way do it for yourself never ever for someone else. An IFA may cost your investment up to 5 or 6% initially but theres many who will do it for less than half that and it'll rarely amount to a reduction in yield exceeding 1/2 of 1% in the long term. Also remember by law he carries professional indemnty cover to protect you should he make a !!!! up of it and give you bad advice. Without P.I. he could not conduct any investment but his own and he remains liable till the day he dies which is why he usually carries the cover long after his own retirement.

jem16

kittie wrote: »

Why does everyone think that they need an ifa?

Not everyone does. However an awful lot of people go DIY and follow the latest fashion investing, make a total mess of it and say they will never invest again.

It is not rocket science and believe me when I say that the pension is doing very nicely indeed. Ok, the research was intense but definitely not impossible for anyone with a decent brain.

Not everyone has the time to spend on the intense research. Many don't find it in the least bit interesting. An awful lot, judging by the posts on these forums, don't have the first clue about a basic savings account never mind an investment fund. Making these people feel that DIY is easy can be the worst thing to do for them.

It's like anything else. If you are interested in it and are good at it then you DIY. If you are not interested or useless then you find a professional who will do it for you.

AlexGreen_2

Fred

Charges seem high to me. If you're really interested in getting the best for your investments, rather than paying all the middlemen you should work out how much everyone will be slicing from your pot initially, and every year - and then the long term damage this will do.

Then work out what those costs would be worth if you invested them and compunded them over 10-20 years.

Then think hard about whether your IFA can afford NOT to give you plain vanilla advice where to invest. What I mean here is that it's most probably going to take about 30 mins to come up with ideas where to invest your capital.

You can therefore do this yourself, save money each year (on charges and fees), re-invest those savings over the years. That means your fund will be hard to beat, not because you 'pick' better stocks or funds to invest in, rather because your portfolio won't be dragged down by fees.

Something to think about anyway.

dunstonh

Something to think about anyway.

It would be if it wasnt for the fact that many pension contracts now have the same annual charges whether you go execution only or advice. So its only the initial costs that differ.

What I mean here is that it's most probably going to take about 30 mins to come up with ideas where to invest your capital.

30 minutes for inexperienced investor to sort through 2000 funds to build a portfolio is not at all realistic.

meester

jem16 wrote: »

Not everyone does. However an awful lot of people go DIY and follow the latest fashion investing, make a total mess of it and say they will never invest again.

What's the rationale behind the sector allocations that IFAs use?

I.e. UK should be 50%, property 10%, etc.

Are they taught in IFA school?

Obviously a lot private investors ignore these and invest where they feel fit, and outperform (or underperform), but I wonder if these are based on any research or if it just received IFA wisdom.

The other thing is the issue of volatility. Are decisions-made on computer-calculated risk-adjusted returns? Or is it less sophisticated than that

dunstonh

What's the rationale behind the sector allocations that IFAs use?

Its effectively that 90% of the return is down to the sector and 5% is down to the funds. The other 5% is due to luck and charges.

Are they taught in IFA school?

Effectively yes. There are qualifications that focus on different investment strategies. You also have experience and information provided from research software and documentation.

Obviously a lot private investors ignore these and invest where they feel fit, and outperform (or underperform), but I wonder if these are based on any research or if it just received IFA wisdom.

Even with defined sector allocations, there are times you go off plan and keep yourself light in a sector. The sector allocations are a guide but the skill of the adviser is to tweak and utilise funds accordingly.

The advantage of sector allocation in its raw form is that even a low skilled adviser is likely going to result in giving you a decent spread.

The other thing is the issue of volatility. Are decisions-made on computer-calculated risk-adjusted returns? Or is it less sophisticated than that

In its raw form it is not as sophisticated as that. For example, you may have 4% allocated to emerging markets. Do you pick New Europe, Asia or BRIC or a spread? However, if you have a servicing IFA who will rebalance and tweak there is often some calculated risk adjustments. Whether they will be right or not is something no-one can say because you dont get it right every time.

There are other investment strategies as well. It doesnt have to be sector allocation. The important bit in my opinion is to know that there is some strategy and reason behind the fund choice and its not a random selection.

AlexGreen_2

dunstonh wrote: »

It would be if it wasnt for the fact that many pension contracts now have the same annual charges whether you go execution only or advice. So its only the initial costs that differ.

30 minutes for inexperienced investor to sort through 2000 funds to build a portfolio is not at all realistic.

But the first thing I'd suggest is don't go near the 2000 funds because you don't need them slicing and dicing your money for fees and charges every year. If you can save these types of charges (1%-3% a year) and then compound those savings up over 10-30 years it's going to be very hard for your fund NOT to beat the professionals.

But now you have to build your own portfolio which is far easier than most people think, [FONT=&quot]especially[/FONT] if they use ETFs.

If (say) my brother asked me how to invest his pension (using a SIPP) and he was 45 years old I'd suggest these weightings (leaving cash out, that's a [FONT=&quot]judgement[/FONT] call when 40 and due to retire in 20+ years).

Equities 60%
Bonds 20%
Property (funds) 20%

Assume he has a portfolio of £100k which for a SIPP is not that large.

I'm going to be using ETFs which many IFAs dislike because they don't pay them any income.

I would use the following Equity ETFs. Note that this has been split into sub-equity classes so there is -

40% invested in UK shares
25% in US/Euro shares
15% in far east developed, and
20% in emerging stockmarkets

FTSE 100 (ticker ISF) - £8,000
FTSE 250 (MIDD) - £8,000
UK Dividend + (IKUD) - £8,000
STOXX 50 (EUE) - £2,500
STOXX MidCap (DJMC) - £2,500
STOXX SmallCap (DJSC) £2,500
North American (INAA) £7,500
Japan (IJPN) - £3,000
Taiwan (ITWN) - £3,000
Korea (IKOR) - £3,000
China (FCX) - £2,400
Brazil (IBZL) - £2,400
Turkey (ITKY) - £2,400
East Europe (IEER) - £2,400
latin America (LTAM) - £2,400

Ok, that's the equity component of the SIPP done

BONDS

UK All Gilts (IGLT) - £6,667
£ Index Linked Gilts (INXG) - £6,667
£ Corp. Bonds (SLXX) - £6,667

Now the property, I'll again be using ETFs

UK Property (IUKP) £14,000
Asia Property Yield (IASP) - £2,000
US Property yield (IUSP) - £2,000
European property (UPRP) - £2,000

That's the full £100k invested and guess what the annual management charge on the portfolio will come out as UNDER 0.5% PER ANNUM.

Now, if you get an IFA to do this for you the total cost to run the fund is most probably going to cost 2%+. My portfolio therefore has a 1.5% head start every year but not only that, work out how much saving 1.5% a year will actually make you when compounded up over 10-30 years?

yes, the IFAs will suggest that because this SIPP portfolio has been built with ETFs which only match an index then there's no way the portfolio can offer [FONT=&quot]superior [/FONT] returns. This is true, but who says the IFAs will put you in 10+ funds that will ALL offer these fabled 'superior returns'? Chances are they'll get a few fund picks very right, a few very wrong and the rest so-so which means that the portfolio they build you will come out as pretty much average but STILL cost you 2%+ a year to run.

So it's not so much that my portfolio picks better stocks or investments, it doesn't, rather it's all to do with how much you can save a year by running your portfolio, re-investing this money and then compounding it.

[FONT=&quot]Ultimately[/FONT], successful long term investing (10-30 years) doesn't need to me any more complicated that this.

Good luck everyone.

PS. Of course there are always IFAs that buck the trend and are very good but these are very few and far between and of course you need to find them. Sort of like a needle in a haystack.........

whiteflag_3

AlexGreen wrote: »

Fred

Charges seem high to me.

How can you say this when the charges and the product provider are not mentioned at all?

As usual the old and very common mistake of not being able to differentiate between commission and charges has been made.

I also think you have a very narrow view on what IFAs actually do.


PS - your book looks expensive - i would imagine everthing in it is available by doing your own research and using sites like this.

PPS - using this site for advertising a book is not really the done thing!

AlexGreen_2

whiteflag wrote: »

How can you say this when the charges and the product provider are not mentioned at all?

PS - your book looks expensive - i would imagine everthing in it is available by doing your own research and using sites like this.

PPS - using this site for advertising a book is not really the done thing!

I was relating to the fact that the IFAs charges look expensive plus what, you think the funds the IFA is going to put him into aren't going to charge 1.5% or more? I don't know the IFA but probabilities would suggest that the IFA would get the better end of the business deal?

Yes, you're right virtually everything can be found on this website and others for free, that's the great thing about the net.

PS. How am I advertising? I've made 4-5 posts in the last few days never mentioned a book at all.

whiteflag_3

AlexGreen wrote: »

I was relating to the fact that the IFAs charges look expensive plus what, you think the funds the IFA is going to put him into aren't going to charge 1.5% or more? I don't know the IFA but probabilities would suggest that the IFA would get the better end of the business deal?

Yes, you're right virtually everything can be found on this website and others for free, that's the great thing about the net.

PS. How am I advertising? I've made 4-5 posts in the last few days never mentioned a book at all.

What IFA charges?- only commission is mentioned and I have already mentioned that it is half the standard -

Most of my clients are on AMCs between 0.6% and 1% so why would you assume a 1.5% amc for this IFA?

If you take the link to your website out of your profile it might not look like your just posting to promote your book.