Are these IFA fees reasonable?

dunstonh

Even if the annual management charge was 1.5% (which is the typical unit trust charge) that doesnt make it the IFAs charge.

If you use the provider that this site promotes heavily then that typical amc for them is 1.5% and there is no IFA involved in giving advice.

jamesd

AlexGreen wrote: »

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

I'm not an IFA and I don't usually like ETFs because I don't like guaranteeing worse than index performance, which is what an ETF guarantees.

AlexGreen wrote: »

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.

What you're suggesting instead guarantees sub-standard after costs investment returns to save costs. Better to pick managers who have a consistent record of out-performing. Definitely true that not all IFAs will do this but why stick with a bad IFA? If you had to stick a needle in a haystack with no data and no later ability to try again if performance was bad, ETFs would make sense.

If you can't find a good manager in a sector, giving up and going with a tracker also makes sense.

AlexGreen wrote: »

So it's not so much that my portfolio picks better stocks or investments, it doesn't

Trackers are following the market and clearly do make worse picks than the fund managers who consistently outperform. Lets take an easy example, one of the most popular funds in the UK and the IUKD (I assume you meant that rather than IKUD) sector:

IUKD: 12 months, -19.94%
Invesco Perpetual Income: -3.31%

So why would I want a dumb tracker when I can pick someone like Neil Woodford and his team and get 16% better performance? Any reason to believe that they will suddenly start to do worse than their record suggests?

Even if you like trackers in principle (and which consumer could fail to like lower fees in principle?), why on earth would you pick IUKD when you can pick this fund instead and have every reason to expect that you'll do better?

AlexGreen wrote: »

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.........

It's not a needle in a haystack. Pick where you want to invest and then pick find managers and houses in that sector with a consistent record of achieving above average returns. The BestInvest data should make it clear that this is routinely achievable.

If you want to actually persuade people who don't knowingly pick middle of the road performance you're not going to do it by writing about fees and ignoring performance, or writing about fees and comparing only to sector average performance.

Your challenge is to prove that ETFs do better than fund managers who consistently outperform over many years, or that it's impossible in the UK to pick such managers. That's a far tougher target.

You have given a good list of ETFs, though, and that'll be useful as a starting point: pick those unless you can find a better manager.

AlexGreen_2

Yes, you can pick a great fund manager like the Invesco one but would you put all your money into the fund? Chances are no which means you've got to continually pick managers which out-perform. And that is a very tall order for anyone when 75%+ of funds under-perform. To me picking the best funds year after year is no different from an investor saying BEFORE he invests that 'I'm only going to invest in the best stocks'. Very easy to say but very hard to do.

So yes, the FTSE Dividend + would not have been such a great investment (with hindsight of course) but I'm only suggesting that 8% of the total SIPP portfolio would have been invested there.

My point is a simple one, and one which is I admit at first hard to comprehend. It's not so much the performance of one's investments that matter (as long as they don't under-perform), rather the costs of running a portfolio and what those cost savings will mean when compounded up over 10-30 years.

Study after study has shown that the majority of funds underperform their benchmarks simply because the fees and charges they levy are a drag on performance plus the impact of portfolio turnover (the costs associated with buying and selling). This is a major disadvantage to investing in funds but they obviously carry a potential major advantage as well - they can always out-perform. Conversely the advantage/disadvantage of ETFs is the opposite, they can never really under-perform but can NEVER out-perform either (I admit though that not all ETFs track an index such as the FTSE Div+).

If I was going to invest for the medium term I would most probably use a combination of funds and stocks because I'd be looking to generate superior returns and can afford to accept the risk associated with hunting out those returns (the risk is that my picks might not be any good). This strategy may or may not work out.

But if I'm investing for the long term (10-30 years) I have a fantastic chance of automatically generating great returns by investing in a portfolio of ETFs because my costs are rock-bottom (all the savings get re-invested and compounded). But if I don't then it's hard to fathom that my fund (over the long term) would do a lot worse than an actively managed one that's made up of 10-20+ funds.

The strategies that I suggest as someone here said yesterday are not new, in fact right now hundreds of billions of pounds and dollars in long term institutional money are being run in this fashion (you only have to look at the growth figures of ETFs). And you have to ask why this is? Surely, if anyone has access to some of the best and brightest in the fund management world it's this group so why have they 'thrown in the towel' so to speak and moved from active management to passive management?

I think it's because passive management for long term portfolios works just as well if not better. Plus of course it's simple to run and operate which for many SIPP owners is a real bonus.

I'll finish by quoting Warren Buffett -

“Over the [past] 35 years, American business has delivered terrific results. It should therefore have been easy for investors to earn juicy returns: All they had to do was piggyback Corporate America in a diversified, low-expense way. An index fund that they never touched would have done the job. Instead many investors have had experiences ranging from mediocre to disastrous.”

If you substitute the word ‘UK’ for ‘American’ the quote is still very applicable.

PS. What this automatically boils down to is one's thoughts over active/passive management. Each side generally thinks that the other is wrong and however much you argue it's almost impossible to get the other side to turn. Perhaps the most sensible thing to do is to say 'good luck' with your way, but I'm going to do things my way.

AlexGreen_2

Also the trouble is with picking managers who in the past have done great is that the future doesn't always replicate the past. I'm using a survey done by the WM Company (https://www.wmcompany.com), a leader in performance measurement and investment administration services as a basis. They found that looking at the performance of UK Funds over a rolling 5 year period for 20 years -

"The top 25% of funds in any given 5 year period had only a random chance of remaining in the top 25% for the following 5 years"

Always exceptions to the rule of course but even those fund managers with great track records only became apparent AFTER they'd stacked up initial multi-year track records. So Neil Woodford when he started out was just another name and face without much of a following or credence.

dunstonh

I'll finish by quoting Warren Buffett -

“Over the [past] 35 years, American business has delivered terrific results. It should therefore have been easy for investors to earn juicy returns: All they had to do was piggyback Corporate America in a diversified, low-expense way. An index fund that they never touched would have done the job. Instead many investors have had experiences ranging from mediocre to disastrous.”

If you substitute the word ‘UK’ for ‘American’ the quote is still very applicable.

It is worth noting that the UK market is very different and Warren Buffett does not use that strategy for himself. He is very much a value investor.

American investors tend to be very inward looking. You just have to look at their asset allocations to see just how inward looking it is. UK investors tend to be more outward looking and have a greater exposure to overseas investments and that is where the funds really come into their own.

Study after study has shown that the majority of funds underperform their benchmarks simply because the fees and charges they levy are a drag on performance plus the impact of portfolio turnover (the costs associated with buying and selling).

You have to look at data in context. If you look at the most common used trackers in the UK, then they would be the FTSE all share or FTSE100 trackers. The FTSE all share tracker falls mid table in the UK all companies sector by its very nature. It hovers around mid table all the time. If you remove the passive managed funds, most of the banks and insurance company funds then you end up in a position where the majority of active managed funds beat the index.

There is a place for trackers but the blind assumption that they are better than managed doesnt work as well in the UK market. If you want sector average performance then great. If you want to aim for outperformance then not so great.

One could argue that if someone is willing to put the sort of time into their investments that you suggest, they would be wanting to get a better return than a mid table tracker. Plus, the vast majority of UK consumers dont have the skills, time or willingness to research themselves. Your options are great for those that do but it is a very small minority.

AlexGreen_2

Dun

Yes, but I'm not suggesting that you only use trackers, actually I don't like 'trackers' as such because I think ETFs are far better, pretty similar products though.

I'm also not suggesting that one any investor puts their capital in FTSE 100 or FTSE All Share (trackers or ETFs). Rather they're just one component of a long term portfolio.

I think what Buffett is getting at is not inward/outward stule investing, rather many investors chop/change, try and buy low/sell high, always think they have the potential and skill to earn better results than the market or economy offers etc.

But what they often get because of how they operate in the markets is sub-standard returns. Whereas if they didn't think too much, became a 'boring' investor, rode the waves (both up and down) they'd get far better returns. Hard to argue with him, regardless of how he himself operates.

Reminds me actually of another great quote of his -

"Most market operators should always know their limitations'...

netlang

I too am in a similar position to Freddy124 and our fund value is sitting at £150K (between 3 directors). I have been unhappy with my current IFA as he has only given me 2 reviews in 3 years so decided to look for another IFA. The new IFA thinks our pension is very sound but does need to brought up to date a bit with regard to recent changes. For this he is looking at 3% of fund value plus 0.5% trailing commission and the plan would also incur a AMC of 1% but no regular payment charges.

I admit I do not know how much work is involved in transferring the business to a new IFA but £4500 to move is scarily expensive to me. :eek:

I have spoken with the existing IFA who will do more for me but he wants a retainer equating to £1000 per year + his existing commission (which I am unsure of the amount at the moment) and he says this will pay for the annual review and fund allocations. I must admit he seems to have done OK for us but I do wish he was a bit more proactive.

So I am confused on who or what would serve me better because if I chosoe a new IFA and found him to be unsuitable I would need to move and pay yet another 3% of fund value

dunstonh

Most pensions do not pay trail. The first IFA sounds like there would be no trail which is why you are being asked to pay for servicing. The second IFA sounds like he wants to move it to a SIPP or fund supermarket or modern personal pension where the annual managment charges are typically 1.5% with 0.5% being the natural fund based trail.

I admit I do not know how much work is involved in transferring the business to a new IFA but £4500 to move is scarily expensive to me. :eek:

You can get that cheaper. 3% is the typical maximum. FSA publish collectives as being 1.8% as average taken. That means some take more, some take less.

You could ask the IFA what he would do on fee basis because the fee should be a lot lower than the commission in this case and under TCF guidelines, the commission should not match the fee or the fee should not be artificially high to put you off it.

Your fund value is enough to have IFAs interested and get an annual review. Some may be greedy, some will be more interested in the trail and not the initial and discount the initial a lot more.

AlexGreen_2

dunstonh wrote: »

One could argue that if someone is willing to put the sort of time into their investments that you suggest, they would be wanting to get a better return than a mid table tracker. Plus, the vast majority of UK consumers dont have the skills, time or willingness to research themselves. Your options are great for those that do but it is a very small minority.

Time is not a factor at all. Most people reading these boards have plenty of common sense so to build and more importantly understand how to build a portfolio doesn't take long at all because as we all know 'common sense' plays a dominant role.

For my own SIPP it took me 2 hours to work out exactly where and how I will be investing my money for every month this year. And then on the first of the month (or 1st business day) I buy my ETFs, takes less than 5 mins. No real thinking, just following a solid strategy.

Successful long term investment doesn't need to be complicated or hard, it's just that many have an agenda to suggest that it should be

EdInvestor

To find funds which consistently outperform over periods up to 10 years, check the ratings at

www.citywire.co.uk/Funds/Home.aspx

Better still, if you want to save on charges, buy shares direct and don´t trade.