IFA fees

bestcheck

I am trying to choose an IFA for the first time to help me manage recently acquired funds of £100,000.

I'm minded to go for a small firm with whom I've just had a meeting. But I'm uncertain about the payment structure. He will accept commission or fee. I'm inclined towards fees. Fees are 3 percent of initial funds under management, then 1 percent of the value of the fund each subsequent year.

Is this excessive or normal for a fund of this value?
Should I negotiate?
Would I be better off considering commission payment or something in between?

Thanks for any advice.

jem16

It's on the high side but perhaps depends on the level of service they are offering and whether you want this.

For comparison I pay 1% commission and 0.5% trail(annual).

whiteflag_3

bestcheck wrote: »

I am trying to choose an IFA for the first time to help me manage recently acquired funds of £100,000.

I'm minded to go for a small firm with whom I've just had a meeting. But I'm uncertain about the payment structure. He will accept commission or fee. I'm inclined towards fees. Fees are 3 percent of initial funds under management, then 1 percent of the value of the fund each subsequent year.

Is this excessive or normal for a fund of this value?
Should I negotiate?
Would I be better off considering commission payment or something in between?

Thanks for any advice.

How does a 3% "fee" of initial funds under management differ from say 3% initial commission?

Either way the IFA gets £3000, so why are you inclined towards fees?

IMHO a fee based adviser charges an hourly rate based on the work involved. What you have been proposed is just commission by another name !

Most IFAs take 0.5% trail commission to cover ongoing servicing, so what is your guy doing to justify 1% "fees" per annum? I hope he hasnt just told you he is a "New Model Adviser" and thinks thats enough justification.

dunstonh

Most modern investments have the commissions charged explicitly. i.e. 3% commission is actually a 3% fee against your money.

3% is the typical maximum for unit trust based investments. 1.8% is the average (published by the FSA). 0.5% is the natural trail based commission.

So, if this IFA is taking 3% plus 1% then he at the typical maxmium for initial and double the norm on the annual.

I hope he hasnt just told you he is a "New Model Adviser" and thinks thats enough justification.

I know you dont like that model but there isnt a need for that. Most NMAs take very little up front. Typically a set fee or a much smaller initial around the 1% mark. This adviser is taking the typical maximum so that doesnt fit with the NMA structure. The ideal NMA model is 1+0.5 (with a cap on the 1%). I know some have factered in a 1%pa approach but it isnt something that really fits with the ideal. Like any retail area, you get some charging more than others.

3+1 is greedy. 3+0.5 is the typical max. Anything around 1.8+0.5 or lower is what the aim should be.

whiteflag_3

dunstonh wrote: »

I know you dont like that model but there isnt a need for that.

Not quite true- I have no problem with NMA model, I just cant seem to find many IFAs who can demonstrate what they do extra for the additional 0.5% pa.

Dh, I know you will be well aware the effect an additional 0.5% pa has on investment returns. Surely clients need to know where their adviser is adding value in return for this extra charge?

Ive asked broker consultants for the last two years what the IFAs they deal with do for the extra 0.5% and the only answer I get is "nothing, its just the business model they are adopting". Which translates into "They are charging their clients twice as much for the same service but their clients havent realised..............yet!"


Ps Dont even get me on to Towry Law!!!!!!!!!

dunstonh

Not quite true- I have no problem with NMA model, I just cant seem to find many IFAs who can demonstrate what they do extra for the additional 0.5% pa.

I'm not sure what you mean by extra 0.5%. The typical NMA only takes the natural fund based trail. If advisers are taking an extra 0.5% on top of the natural then I am with you all the way. I believe they need to be offering something justifiable to be able to get away with it under the TCF guidelines.

On this thread, the adviser is after an extra 0.5% and taking typical maximum initial which doesnt really make him a transactional (old model) IFA or a an NMA IFA. It makes him a greedy sod.

Ive asked broker consultants for the last two years what the IFAs they deal with do for the extra 0.5% and the only answer I get is "nothing, its just the business model they are adopting".

If they are adopting the model but not the principles and then charging more for it then its not really NMA. I could call myself a plumber but it doesnt mean I can fix a broken tap.

Which translates into "They are charging their clients twice as much for the same service but their clients havent realised..............yet!"

Until the RDR comes in and hopefully it does come in requiring higher qualifications and customer agreed remuneration then these "types" wont be able to get away with it.

Ps Dont even get me on to Towry Law!!!!!!!!!

One of my pet hate companies. Perhaps we best not go there.

bestcheck

Thanks for the advice you all have provided re my questions.

As for what this IFA provides to justify the fee:
- my potential adviser has won several awards of the year, seven and eight years ago.
- the firm has a personal rather than distant relationship with clients and access between formal reviews is available any time
- keeps up to date with value-added strategies and uses computer technologies that are 'the best in the industry'.
- specialises in investment and retirement planning (what I need).
- access to other related professional firms if required.

On comparing fees to commission the commission schedule provided does look high. For example:
Unit Trusts - 3% plus 1% thereafter, which compares to 0.8% market average
Bonds - 8% compared to 4.3% market average
Pensions - 6.4% then 1% compared to 0.7% market average.

Since these are his own figures he must believe he can justify these transparently high charges. I guess his main selling feature, apart from expertise, is that he acts as a personal financial friend and shares objectives long term.

Too good to be true?
I guess I should see if I can negotiate his fees down ..

meester

bestcheck wrote: »

Thanks for the advice you all have provided re my questions.

As for what this IFA provides to justify the fee:
- my potential adviser has won several awards of the year, seven and eight years ago.
- the firm has a personal rather than distant relationship with clients and access between formal reviews is available any time
- keeps up to date with value-added strategies and uses computer technologies that are 'the best in the industry'.
- specialises in investment and retirement planning (what I need).
- access to other related professional firms if required.

On comparing fees to commission the commission schedule provided does look high. For example:
Unit Trusts - 3% plus 1% thereafter, which compares to 0.8% market average
Bonds - 8% compared to 4.3% market average
Pensions - 6.4% then 1% compared to 0.7% market average.

Since these are his own figures he must believe he can justify these transparently high charges. I guess his main selling feature, apart from expertise, is that he acts as a personal financial friend and shares objectives long term.

Too good to be true?
I guess I should see if I can negotiate his fees down ..

What's too good to be true?

His rip-off fees?

Everything else is just BS. What on earth is a financial friend. Do you pay your friends?

Walk away, find someone else.

dunstonh

On comparing fees to commission the commission schedule provided does look high. For example:
Unit Trusts - 3% plus 1% thereafter, which compares to 0.8% market average
Bonds - 8% compared to 4.3% market average
Pensions - 6.4% then 1% compared to 0.7% market average.

If they are the commissions from the Menu then I wouldnt necessarily take them at face value. They could be the typical maximums they would take. I have the maximums on mine despite being much cheaper because the form is obsolete and its easier to go with the network template and not use the FSA calculator for each cell and keep a permanent record of each entry.

However, if they are the actual commissions/fees taken then perhaps you should question why different tax wrappers are treated differently and not the same. Clearly that allows for a potential bias whereas a clean single charged structure removes any such potential.

- my potential adviser has won several awards of the year, seven and eight years ago.

I've said it before. Awards are rubbish. They are voted on by those that wouldnt have a clue if he is any good or not. Maybe it was his turn to win the award or he was popular with the in crowd back then. Awards mean nothing. It doesnt matter if they are provider awards, adviser awards, fund awards etc. Its all a shallow pat on the back and take turns winning for the big guns to add some shield to their letterhead or marketing stuff.

- the firm has a personal rather than distant relationship with clients and access between formal reviews is available any time
- keeps up to date with value-added strategies and uses computer technologies that are 'the best in the industry'.
- specialises in investment and retirement planning (what I need).
- access to other related professional firms if required.

And you think most others dont have any of that? Well they do and they dont charge more for it. The question you need to ask is what are you getting from the additional charges on top of the natural charges. Nothing you have posted so far gives any indication of something special.

ince these are his own figures he must believe he can justify these transparently high charges.

or he is greedy.

I guess his main selling feature, apart from expertise, is that he acts as a personal financial friend and shares objectives long term.

Get me a bucket please. I think I am going to be sick.

Look, if they are the real "fees" then you should walk away as they are rip off and indeed, probably not very compliant and could easily fall foul of the FSA's TCF guidelines where fees should not match the commissions or be used in a way to put you off a fee.

However, they could be you misreading the menu of commissions and assuming the maximums on there are what you are going to pay. If that is the case, then I would ask him what commission or charge he is going to take from your £100k. Simple question which should be a simple answer. Ideally 1.8% initial and 0.5% natural trail or lower.

bestcheck

Thanks for replies and observations.

The Adviser stated in my initial meeting that fees would be 3% followed by 1% of funds managed thereafter. His document states:
Fee Option: We will agree the rate before beginning work. Typical charges for funds under management are: 3% of the initial investment amount and 1% per year of the value you ask us to manage (amount will vary in line with fund value).

With regard to commissions, it is correct that the percentages I gave earlier are his maximum charges.

As to his expertise: my meeting determined that he does not advise on high risk investments. Most of his clients are retired or, like me, nearing retirement. He recommended the expected spread of cash, fixed interest and stock market investments, plus derivatives (to hedge, I think). He also advised guaranteed return investments ensuring a minimum return of say 5% but enabling higher returns. These could be for income or capital growth. He agreed I might reserve a percentage for higher risk (presumably handled by someone else).

Whether this kind of management deserves his higher fees I don't know.

jamesd

I don't think it does. It is interesting that as an IFA he may be recommending derivatives and shares (if that's what he means by stock market investments, rather than meaning just funds).

He appears not to have a fee structure that is a genuine alternative to commission, as it's supposed to be. That's not the sort of approach to complying with the financial services regulations that would make me interested in doing business with him.