Is this IFA charge excessive?

PipesDown

I have been with an IFA for about a year paying a monthly fee. During this time we have done the usual end of year tax arrangements and tidied up a number of insurance and inheritance tax issues. However we have now come to the big one. My savings are a hodge podge of PEPs, ISAs individual shares and inherited cash, and the proposal is to move it into a diversified portfolio of low charge/passive funds. The IFA is moving to a wrap platform but my intention is to also use an online discount broker if doing so results in lower annual charges.

We have agreed the estimated annual fee for yearly reviews and rebalancing. However there is also a charge of 0.5% of the funds invested as an initial charge for the advice and the liability for giving it. This is purely the IFA charge, not the funds or wrap platform charges which are additional. Since the value of the savings is considerable, the cost of the initial charge is also considerable, equivalent to a couple of months wages for me, or perhaps about 16-20 hours at IFA hourly rates.

I'd be interested in reading anyone's opinion on whether the charges are reasonable or excessive.

meester

0.5% is quite low generally, in comparison to other IFAs. Even for £1m+ this is not a high charge.

dunstonh

However there is also a charge of 0.5% of the funds invested as an initial charge for the advice and the liability for giving it.

Thats cheap. Typical maximum is 3%. FSA publish the average at 1.8%.

Usually you would expect a cap on large portfolios but this is part of your discussions on charges.

and the proposal is to move it into a diversified portfolio of low charge/passive funds.

passive funds tend to suck, putting it bluntly. Why would you want to use those? Surely you invest to make money not invest to save charges?

jon3001

dunstonh wrote: »

passive funds tend to suck, putting it bluntly.

Is this on the basis of comparing funds from different sectors again? E.g. UK equitiy income funds (value sector) with FTSE All-Share Index trackers (blend sector)?

Which ones suck compared to their sector?

meester

jon3001 wrote: »

Is this on the basis of comparing funds from different sectors again? E.g. UK equitiy income funds (value sector) with FTSE All-Share Index trackers (blend sector)?

Which ones suck compared to their sector?

I just started a thread on this:
http://forums.moneysavingexpert.com/showthread.html?t=757539

The consensus is actually generally that active management sucks compared to passive, that on average, the performance of the active funds will be the same as the index, minus charges. Dunstonh has no scientific basis for his statement, whereas there is certainly studies showing the opposite (what he can say, is 'look at these managed funds, they've performed well for so many years that it must be skill'; if you look at the other thread there is a study that tests this and for some top funds there would appear to be evidence at 95% certainty that this is case, but it is not necessarily true that the top fund over 5 years can be shown to have outperformed the market, it might be that the second one has, but the first one hasn't, typically because the second fund is less volatile, and managers can generate outperformance by taking on more risk, since the general trend is up, but this doesn't mean they beat a geared index over the long term).

There may be exceptions to this, and it may or may not be possible to outperform the sector by choosing high performing funds.

Generally UK active funds should be perform better relative to a passive fund than overseas funds, where the managers have massive disadvantages of geographical disconnect, timezone problems, lack of information, cultural differences, etc - the latter is more likely to underperform. It's tricky to invest in overseas trackers via an OEIC or Unit Trust, but ishares has quite a few tracker ETFs.

dunstonh

Is this on the basis of comparing funds from different sectors again? E.g. UK equitiy income funds (value sector) with FTSE All-Share Index trackers (blend sector)?

Which ones suck compared to their sector?

I think we need to be more specific here on what we mean by passive. I considered passive to mean passive managed not trackers. Passive managed funds tend to be the poor performers. There is no point having a passive managed fund most of the time as a tracker would be a better option.

Having said that though, take a look at the FTSE all share trackers in relation to the UK all companies sector which they belong to and you will find mid table is their positioning. You then have a choice. Do you go for consistent mid table performance or do you go looking for outperformance? That is one for personal opinion.

and managers can generate outperformance by taking on more risk, since the general trend is up, but this doesn't mean they beat a geared index over the long term).

Or taking on less risk.

The problem is that when you look at funds in a sector, they are not all the same risk. They do not hold all the same investments and they will often have differing aims and objectives. Some times the trackers will be best. Sometimes the riskier funds in the sector will be best. Other times the more defensive funds in the sector will be.

The problem with studies trying to promote trackers as best or managed funds as best is like comparing Granny Smiths, Golden Delicious and Braeburns (and all other varieties) and saying which one is most like an apple.

As the studies show, funds which are poor tend to be consistently poor. So, once you eliminate those and the passive managed funds, you are left with a much smaller list of active managed and tracker funds. That helps your odds of choosing a better active managed fund.

I would prioritise sector allocation, then diversification within the sectors before selection of tracker/managed and if a tracker fits the need then go with it.

nrsql

The problem is that if you choose a tracker you are choosing an index.
If you choose a managed fund you are choosing a manager (or team).

The managed fund carries the extra risk that the manager/team can change. Could even change from active to passive (or near passive).

The question is really if you have picked a sector do you go looking for mid table performance or would you rather outperform with the risk of underperforming.

Looking at the fund history may help but you are intersted in the future performance - in spite of what some say good and poor funds do change. You are really trying to time the fund - a lot more difficult than timing the market.
In looking at tables you also need to take into account that a lot of poor performing funds will no longer be there - they will have been dropped/merged - especially over longer terms you wil get a distortion towards better performance for managed funds.

The reason I have a soft spot for trackers is that you don't have to do as much monitoring. It should always perform near the index. Missing a problem with an active fund can hurt a portfolio a lot so you need to keep on top of the company, manager, team etc...