Bad pension advice on funds?

TH1878

MiserlyMartin wrote: »

Hi, thanks to Dunston and all for the replies. I finally got an appointment with the IFA. Told him my concerns and current attitudes to risk. Now he is advising this split:

50% First state global emerging
20% Invessco perpetual high income
30% Artemtis european growth

So only 3 funds now. I've looked over my last statements and am quite annoyed that I did a substantial transfer from another 2 old pensions in late 2006 so I really bought into the property fund near the top. This has left me about 20% down.

I am so disillusioned with the stock market currently I don't really know what to do. What do you do when you don't trust the market and your IFA? I feel we are going into dark times, a possible depression and I wish I could take my money out of the pension and put it somewhere safe for 5 years or so.

Those ideas are not based on my media readings, its my own opinion that we have had the mother of all booms and now I think its time for a long overdue correction, so i want to save my pension fund somehow if its at all possible.

Perhaps it isn't?

:eek::eek:

You told him you were more cautious and he put you in that portfolio??

On a very very basic level, and excluding property for a moment, you would expect the following for a risk profile of 1-5:

Risk Profile 1 - 80% Fixed Interest / 20% Equities
Risk Profile 2 - 60% Fixed Interest / 40% Equities
Risk Profile 3 - 40% Fixed Interest / 60% Equities
Risk Profile 4 - 20% Fixed Interest / 80% Equities
Risk Profile 5 - 100% Equities

Obviously, this is very very basic and you wouldn't assess someone's risk profile on a scale of 1-5 anyway as it's too crude.

However, let's assume you are a Risk Profile 2 (Cautious) - the portfolio your IFA suggested is 100% equity. Sometimes I think (some) IFAs like to project their risk profile onto you which is what I think has happened here.

jamesd

This suggestion is not remotely close to matching your specified risk tolerance and that is what an IFA is required to do. 50% in emerging markets is a gross mismatch, completely wrong for risk matching to you. It's even too much for most high risk mixtures.

There's fair reason to believe that 50% in emerging markets may work out very well. But that doesn't matter because along the way it's going to see much more up and down movement than you have specified. Medium or low says that you do not want to be seeing those ups and downs and are willing to sacrifice the growth potential to avoid them.

If you want to know how to change your initial mixture to make it low risk, here's the sort of thing that should be done.

Artemis UK Special Situations 30%

Keep 5%, change 15% to BlackRock UK Absolute Alpha, 5% to Artemis European Growth and 5% to JPM Natural Resources.

FP Property Fund 20%

Keep 10%, change 8% to CF Arch Cru Investment Portfolio if they can get it without a 10% initial charge. Else use a corporate bond fund. The other 2% can go into First State Global Emerging Markets.

End result would be this mixture:

BGI Cautious Index 30%
Newton Income 20%
BlackRock UK Absolute Alpha 15%
FP Property Fund 10%
CF Arch Cru Investment Portfolio 8%
Artemis UK Special Situations 5%
Artemis European Growth 5%
JPM Natural Resources 5%
First State Global Emerging Markets 2%

Many other ways to get there and this one is far from perfect (not great international mix and a bit too high risk in that area still, for example), just way better.

Do note that your four fund original mixture wasn't bad, just not a good enough match to your risk tolerance and that showed up in a decrease in value greater than you were willing to accept. The changes the IFA proposed are horrible, completely unacceptable for your risk tolerance.

TH1878

I'm not sure all those funds are available under the FP pension.

MiserlyMartin

Thanks for the replies. I'm not sure either about those funds. I can't find BlackRock UK Absolute Alpha or CF Arch Cru Investment Portfolio. I can only have a maximum of 6 funds anyway.

The advisor is used by my company and advises the whole workforce! Yes he does brag about his choice of funds outperforming balanced managed options and tells me off the record which risky funds he is having a punt at this month for his own investments.

I told him that I thought First State was too high risk - he just started telling me I have another 35 years until I'm 70 so risk is not a problem. And that I need to take risk. "Do I want 10% or 50% growth?", he says.

I have an idea to cease my own (extra) contributions into the pension and open a new one (and maybe later transfer a lot of this pension into it), but where could I find an advisor that I wouldn't have to pay for myself? The other thing I could do is use a firm like Cavendish. My company will only contribute into their own scheme, not others and it is 6% of my salary - not bad.

I'm really annoyed. I transferred 2 older pensions that I have had since 1996 into this scheme under his original split recommendation, so 20% of that is 20% down in the property fund.

Do I have a case for bad advice now? Mis selling?

I don't think being in the FP property fund is a good idea because its all commerical UK property. The UK is going to be badly hit in the coming years - its not really started yet. There will be a lot of vacant retail units around. For this reason I cannot see these funds recovering for 4 or 5 years.

Fixed interest funds are not something I know anything about. What kind of yield do they produce? I see the FP index linked fund is doing well especially since July last year!! 33% growth over 5 years, not brilliant but pretty safe?

TH1878

MiserlyMartin wrote: »

Thanks for the replies. I'm not sure either about those funds. I can't find BlackRock UK Absolute Alpha or CF Arch Cru Investment Portfolio. I can only have a maximum of 6 funds anyway.

The advisor is used by my company and advises the whole workforce! Yes he does brag about his choice of funds outperforming balanced managed options and tells me off the record which risky funds he is having a punt at this month for his own investments.

I told him that I thought First State was too high risk - he just started telling me I have another 35 years until I'm 70 so risk is not a problem. And that I need to take risk. "Do I want 10% or 50% growth?", he says.

I have an idea to cease my own (extra) contributions into the pension and open a new one (and maybe later transfer a lot of this pension into it), but where could I find an advisor that I wouldn't have to pay for myself? The other thing I could do is use a firm like Cavendish. My company will only contribute into their own scheme, not others and it is 6% of my salary - not bad.

I'm really annoyed. I transferred 2 older pensions that I have had since 1996 into this scheme under his original split recommendation, so 20% of that is 20% down in the property fund.

Do I have a case for bad advice now? Mis selling?

I don't think being in the FP property fund is a good idea because its all commerical UK property. The UK is going to be badly hit in the coming years - its not really started yet. There will be a lot of vacant retail units around. For this reason I cannot see these funds recovering for 4 or 5 years.

Fixed interest funds are not somehting I know anything about. What kind of yield do they produce?

There is no case for mis-selling - you just have to accept that investments go up as well as down - a lot of advisers didn't see the property bubble bursting in Dec 2006. Plus, he only put 20% of your investment in Property which is hardly excessive; when I was at FP, some idiot IFAs wrote bonds invested solely in 100% property - you've got to feel for those clients now!

If you want to get out of the property fund, then send in a switch request now as there is a 6 month notice period. You can change your mind at any point during that 6 months IIRC.

You do have quite a while left to retirement so could possibly accept slightly higher risk as over that period you should see good returns. However, am I correct in thinking that you do not like to see any drop in your fund value at all? If so, then you shouldn't let the adviser pressurise you into investing into the funds he would invest in - you don't have the same risk profile as him.

In terms of 'finding an advisor that I wouldn't have to pay for myself?' - do you think IFAs work for free? What you could do is agree a fee for the work the IFA does, and then get him to take it out of the commission paid by the insurance companies (which is similar to how Cavendish works) and rebate the rest by reduced charges. I'd be hesitant in the DIY option for yourself as it's usually only a viable option if your knowledge of funds is sufficient, which in this case I suspect it isn't (I didn't mean that as an insult).

In terms of fixed interest investments, they themselves can vary nearly as much as equities can so it's difficult to give an answer to your question.

Finally, I can't remember correctly, but are you sure you can't have 10 funds rather than 6? I don't know of any scheme at FP where you were limited to 6 funds. I suspect the 6 funds relates to an additional 6 funds to the 4 you already have.

dunstonh

The advisor is used by my company and advises the whole workforce! Yes he does brag about his choice of funds outperforming balanced managed options and tells me off the record which risky funds he is having a punt at this month for his own investments.

Not being funny but balanced managed funds are medium risk funds which are a bit of Jack of all trades, master of none. Some good examples exist but you would expect higher risk funds to outpeform them in the long run. However, in the short term (i.e. now) the higher risk funds are sky diving whilst the balanced managed funds have a fair amount of downside protection.

I told him that I thought First State was too high risk - he just started telling me I have another 35 years until I'm 70 so risk is not a problem. And that I need to take risk. "Do I want 10% or 50% growth?", he says.

Explaining that to you is acceptable. If you still feel that its high risk then you make the point. The adviser has to discuss risk and that doesnt just mean investment risk but also inflation risk and shortfall risk. Knowing the risks enables you to informed decisions about which risks you are happy with and which risks you are not.

but where could I find an advisor that I wouldn't have to pay for myself?

You always pay for advice. Whether you pay directly by fee or by commission. Its never free.

I'm really annoyed. I transferred 2 older pensions that I have had since 1996 into this scheme under his original split recommendation, so 20% of that is 20% down in the property fund.

Do I have a case for bad advice now? Mis selling?

20% in property is fine. Whilst it suffered in the last 12 months it is still down less than say a FTSE tracker fund. That is not a mis-sale.

Fixed interest funds are not something I know anything about. What kind of yield do they produce? I see the FP index linked fund is doing well especially since July last year!! 33% growth over 5 years, not brilliant but pretty safe?

Why are you looking at performance over 5 years? Fixed interest funds had a bad couple of years. Mainly as yields were low and you could get better on cash. So why be in a fixed interest fund when that is the case? However, the yields over the last 12 months have been rising and the downside protection with that higher yield is attractive and now offer good potential. What they did the 3 or 4 years before that doesnt matter as that was a different economic cycle.

EdInvestor

Sometimes I feel quite sorry for IFAs.This is one such case.

MiserlyMartin

Perhaps i shouldn't have asked about mis-selling straight after talking about the property fund being down. I was more thinking about the advice to put 50% in emerging markets when I have a risk profile thats medium. With recent lack of confidence I'd say my attitude to risk has chnaged now to low.. But he advised high risk funds is that mis selling?

whiteflag_3

EdInvestor wrote: »

Sometimes I feel quite sorry for IFAs.This is one such case.

I dont!

There is nobody holding a gun to their head saying they must do "asset allocation" or fund picking. Its clear that vast majority of IFAs are no better than you ED, so as I said in another post, why they want to make a rod for their back is beyond me!

dunstonh

There are no rule requirements for investing. You can single fund invest, use sector allocation, asset allocation, high yield or a random pick.

I'm in two minds on whiteflag's comments. IFAs are not fund managers and there is no requirement for IFAs to learn anything about it in real depth. So at worst case scenario they are no better than novice. I know a number of IFAs that dont have a clue about investing. Indeed, some have come to me to ask why the values on investments have gone down. One even said that he didnt think the money could go down as it was in an investment bond. That is quite frankly disgraceful (he has a with profits background and though the values could only ever go up because of the tax wrapper and not the fund!).

However, there are also IFAs that have studied further who have a much greater understanding of investments and have defined strategies and are able to make decent investment recommendations.

A lot of IFAs havent had to worry about investments and allocations etc. Historically there was only one option in their eyes and it was with profits. For decades it did the job it was needed to do and unit linked options werent available as they are now. Now that with profits are not really viable options (with a few exceptions) some IFAs have realised it and improved their knowledge on unit linked whilst others still have their heads buried in the sand.

I think the worst type of adviser is the one that believes they can stock pick. They have the potential to do the worst damage. And that is what has happened here. The "tips of the week" or limiting investments to whats currently fashionable. I would rather they just stick to recommending balanced managed funds or whatever.

We are coming up to an important crossroads for many IFAs. The retail distribution review , if it stays in its current form, will see many of the low skilled advisers not survive the higher qualification requirements. Those that do move on up will have to learn more about investing as one of the modules is more detailed on investing and managing a portfolio.