Are these IFA fees reasonable?

carl916

Hi

I have recently spoken to an IFA with regards to setting up a personal pension and wanted to run the fees past someone more in the know to check that they are reasonable.

I have over 30 years until retirement and was looking to invest £100pm initially.

The advised product is from Skandia with an annual management fee of 0.75%. Unless I’m mistaken, there is also a fee per fund, for example 1.25% for SK Fidelity European.

The advisors fee is an £200 initial fee, £3 for each regular payment and 0.5% each year of the encashment value of the fund from regular payments.
From the above fee I have available an example based on 7% growth which reads £12.30 after 2 years, £90.74 after 10 years and £845.72 after 32 years. Am I correct is saying that if I were to increase my regular payments to £200 after a few years then the commission after 32 years would be approximately double? Do these figures sound reasonable?

I’m happy with the fund allocation and feel comfortable with the above fees. At the time of speaking to my IFA, he explained how they like to setup a long term relationship with their clients, which explains the structuring of their fees. I understand that this type of setup would likely cost more in the long term but I value the concept of an ongoing relationship and this approach gives the advisor a vested interest in the plan’s performance.

On a side note, after reading through the documentation sent through from the IFA, it states “Your financial advisor will not receive any advisor’s fee for arranging this Plan”.
This contradicts the £200 initial fee detailed above. I plan to question this statement with my IFA but would it be okay to put this down to general advisory fees?

Regards, Carl Gilbert

dunstonh

Skandia are about to end this contract and replace it with the Selestia based contract. It may be an idea to be on the Selestia contract rather than the Skandia one. There is nothing wrong with Skandia's contract apart from it having higher charges than Selestia and it uses pension funds rather than unit trusts (the latter not really being an issue but if you can get unit trusts cheaper then its logical to use them). Once upon a time the Skandia contract was the best you could get. Not any more. It's still good but not the best.

On a side note, after reading through the documentation sent through from the IFA, it states “Your financial advisor will not receive any advisor’s fee for arranging this Plan”.
This contradicts the £200 initial fee detailed above. I plan to question this statement with my IFA but would it be okay to put this down to general advisory fees?

The skandia contract allows an explicit fee to be built in to it. However, that isnt the case here as your adviser it taking commission instead of fee.

It is possible your adviser isnt aware of the Selestia/Skandia product merge. His rep may not have given him any details. I personally have found my Selestia rep has given me far more information than my Skandia rep although they are now merged as one now with them splitting the areas.

carl916

Thanks dunstonh.

It may be an idea to be on the Selestia contract rather than the Skandia one

Would I still be able to use the same advisor or would it be the case that my chosen advisor prefers to work with Skandia? Or now that they have merged this won't be an issue as the Selestia product is now merged with Skandia.
Could the fund allocation stay the same? How much work would be required to change product and would this affect the cost of the plan?

Once upon a time the Skandia contract was the best you could get. Not any more. It's still good but not the best.

What is the best contract? I get the feeling that IFA's have their preferred products. I know less then my advisor does, would it be reasonable to suggest a different contract or would I need to find an IFA who prefered working with what I thought (or heard) was the best product?

I think this talk of which product is best has taken me slightly off subject. My initial concern was with the cost of the advice and the commission charged. Doesn't challenging the advice of my IFA goes against the concept of an IFA or is it just the contract that's up for debate and the fund allocation is where the IFA comes in?

Regards, Carl Gilbert

dunstonh

Would I still be able to use the same advisor or would it be the case that my chosen advisor prefers to work with Skandia?

The same adviser is fine. Its his recommendation. He just fills out a different form for you.

Could the fund allocation stay the same?

Yes it can. Although Selestia are closer to 1000 funds compared to Skandias 300.

How much work would be required to change product and would this affect the cost of the plan?

It shouldnt change the recommendation much at all. Probably will create the adviser about 20-30 minutes of work.

What is the best contract?

There is no one best contract. Sometimes you do stakeholder, sometimes you do personal pensions, sometimes fund supermarket pensions, sometimes SIPPs. The aim is to fit the right product, the right provider and the right funds to the individual.

I get the feeling that IFA's have their preferred products.

There is an element of that and it can be due to local circumstances. For example, I get excellent service out of Norwich Union but awful service from Scottish Equitable. You could speak to many IFAs who would find the complete opposite.

Research software is how you do a lot of the narrowing down of options but you can find that different IFAs get different terms. I may use Selestia because I get their best terms but your IFA may get better terms under Skandia (you can replace provider names with any).

I know less then my advisor does, would it be reasonable to suggest a different contract or would I need to find an IFA who prefered working with what I thought (or heard) was the best product?

The best relationship between adviser and client is when you talk to each other. As I said, its quite possible that your adviser hasnt been made aware of the Selestia contract and the merger between Selestia and Skandia. They have already merged their ISAs and Unit trusts (final stages happen later this month) so the pensions are due anyday.

You used Skandia Fidelity European as an example. On the Skandia contract that has a 2% annual management charge (1.25% plus 0.75%). On the Selestia contract it uses the real Fidelity European unit trust fund and charges 1.5% which is the standard annual management charge.

The adviser will be paid an identical amount whether its skandia or selestia so this is not a concern over commission bias.

My initial concern was with the cost of the advice and the commission charged.

Its not the cheapest but if the advice is good quality and you are getting servicing, then thats better than going to an adviser that takes maximum up front and you dont see them again.

Doesn't challenging the advice of my IFA goes against the concept of an IFA or is it just the contract that's up for debate and the fund allocation is where the IFA comes in?

You arent challenging the adviser although there is nothing wrong with that.

Remember that you can pick any number of providers and have identical funds and allocation and as I said above, local servicing arrangements or deals the advisers have struck with providers can differ the terms of the contracts so you can have 5 different IFAs giving an illustration on the same product but with different charging structures.

What I would suggest is a soft approach and say that you were chatting with a friend who has an IFA and he mentioned that the Selestia and Skandia were merging and that the Selestia contract is going to be the pension they are keeping and its the one his IFA recommended him. Then let the IFA go away and look into it and come back to you.

In our profession it is all about information. Whilst research software can get you some of the way, decent local contacts and reps are needed to do the rest and if your IFA hasnt been told about the Selestia contract then there is a good chance he wouldnt be aware of it as it is a fairly new classification of personal pension as it falls between SIPPs and personal pensions. So, it should reflect on his advice.

I was made aware of a new launch product on Wednesday coming later this month. If the rep of that company hadnt contacted me about it I wouldnt know it existed. It wont appear on the research software. So, dont think that not knowing about a contract makes the adviser bad. There are tens of thousands of products out there and you cant know them all.

carl916

Thanks once again. It's clear to see that there's a lot of options available.

You used Skandia Fidelity European as an example. On the Skandia contract that has a 2% annual management charge (1.25% plus 0.75%). On the Selestia contract it uses the real Fidelity European unit trust fund and charges 1.5% which is the standard annual management charge.

So with Skandia, they charge 0.75% plus the 1.25% charged by the fund?!? How is the 1.5% made up with Selestia?

On the Selestia contract it uses the real Fidelity European unit trust fund

So Skandia are using the pension fund and Selestia are using the unit trust fund. Correct? What's the difference between a pension fund and a unit trust fund? It sounds like the same fund but the unit trust is more direct (raw).

dunstonh

Thanks once again. It's clear to see that there's a lot of options available.

The research software showed 38,000 different fund combinations available with products and providers.

So with Skandia, they charge 0.75% plus the 1.25% charged by the fund?!? How is the 1.5% made up with Selestia?

The charge is the retail fund charge.

With Skandia you have Skandias version of the fund and you have their charge. So, in this case you have "Skandia's Fidelity European". With Selestia you actually get the real Fidelity European and you pay the retail charge.

So, in Skandias case they are charging you 0.75% for the pension contract and 1.25% for the fund. In Selestias case you are not being charged for the contract but you are being charged 1.50% for the fund. In reality, Fidelity pay Selestia a cut from the 1.50% annual charge.

So Skandia are using the pension fund and Selestia are using the unit trust fund. Correct? What's the difference between a pension fund and a unit trust fund? It sounds like the same fund but the unit trust is more direct (raw).

The unit trust is the main fund. It is the raw/direct fund as you call it. The pension version still ends up in that fund but it has different charges and there can be delays and second layers of charges hidden away which mean you may not get as good as performance as being in the real fund. Of course, those delays can work for you as well as against you so they do average out over the long term.

However, to reflect the differences here is one year performance using the exact same dates and Fidelity's European fund (and assuming default charges with each provider):

Norwich Union Fidelity European S2 3.34%
AXA Fidelity European 3.29%
Norwich Union Fidelity European S6 3.07%
Zurich Fidelity European 2.85%
Winterthur Life Fidelity European 2.83%
Scottish Widows Fidelity European S4 2.53%
Norwich Union Fidelity European S5 2.42%
Fidelity European UNIT TRUST 2.12%
Scottish Widows Fidelity European S1 1.92%
Scottish Widows Fidelity European S2 1.80%
Canada Life Fidelity European PS4 1.80%
Clerical Medical Fidelity European 1.72%
MetLife Fidelity European 1.68%
Skandia Life Fidelity European SP 0.75%
AIG Life TGSB Fidelity European 0.58%
AIG PPB Fidelity European 0.58%
Scottish Mutual Fidelity European 0.51%
Skandia Life Fidelity European Pn -0.01%
CIS Fidelity European -0.35%
Fidelity Life Fidelity European -0.70%
LVFS Fidelity European -1.09%
Scottish Equitable Fidelity European -1.43%

So, you can see that a few have actually come in a bit better than the UT in the same period. That is probably due to a combination of luck and charges not being too bad. However, the majority are worse than the UT. Some providers have multiple appearances depending on which version of the pension you are in and that will highlight the difference in charges in their contracts.

Given the choice, I would prefer to be in the real unit trust. That said, for smaller values, it is often worth starting out on a personal pension like NU or Scot Widows until you build up a decent enough fund value to then make investment into the unit trust funds worthwhile. A spread of the best stakeholder funds along with a range of external funds can be the more cost efficient option. However, that is getting into the fine tuning that usually takes place in the advice process when the adviser knows more about you and what you want from the pension and your investments. Something we cannot do here.

EdInvestor

dunstonh wrote: »

Norwich Union Fidelity European S2 3.34%
Fidelity European UNIT TRUST 2.12%
Skandia Life Fidelity European Pn -0.01%
Scottish Equitable Fidelity European -1.43%

There's a spread of 2% between the best and worst here.Note that over a 25-year typical pension plan, a 1% annual difference will eat up 25% of the value of your total fund.

scouser_in_exile

dunstonh wrote: »

Skandia are about to end this contract and replace it with the Selestia based contract.

Post Edited