Meeting with my IFA and Wealth Manager

IanManc wrote: »

You don't need to find a theologist to tell you that VLS100 isn't index investing. VLS100 is a fund of funds, which involves management decisions by Vanguard as to which of its in-house funds it invests in, and in what proportions. VLS100 doesn't follow an index, so clearly isn't "index investing".

True, but using it to invest in fixed proportions into indexes is certainly at the 'index' end of the scale on a range from fully passive indexed to fully active freeform.

We are considering options available to someone who is perhaps not an experienced investor and has hitherto not done their own detailed investment allocations because they were not confident in coming up with their own asset allocation and investment fund selection decisions because of being concerned they might screw it up.

So, if they want to be 'hands off' after their initial investment decision there are a number of practical choices:

they could invest cheaply with a fund such as VLS (fund-of-funds with broadly fixed allocations into basic indexes) ;

or they could invest a little more expensively with a different fund manager (fund-of-funds with variable allocations into indexes) ;

or more expensively with a different fund manager (fund of funds with variable allocations into other funds which might be a mix of indexes and actives, or all actives - or perhaps not a fund-of-funds at all, just active fund that directly holds investments across asset classes) ;

or more expensively with an IFA making recommendations on and implementing asset allocation decisions by selecting funds or products that suit from across the passive and active space whose respective managers select the underlying portfolio ;

or more expensively with an IFA making recommendations on product type (wrappers, risk/volatility levels) and then handing over to a discretionary fund manager for detailed implementation and allocation to asset types and underlying portfolio selection.

These different options come with a range of fees and are unlikely
to produce the same results as each other either gross or net of those fees.

Advocates of 'cheapest is best, just get someone to throw together some basic trackers for you' will point out that if you spend an extra x percent on fees and get the exact same profile of gross returns then the £1.5 million you hope to have in a few decades time might be less than a million.

Advocates of a more complex approach might say that if they put a% into ABC Hedge Fund and b% into DEF Credit Opportunities Fund and c% into GHI Special Situations Fund and d% into JKL Commercial Property Fund and e% into MNO Infrastructure Fund and f% into PQR Private Equity Fund and g% into STU Real Assets Fund and h% into VWX Smaller Companies fund and i% and j% into Y Cash Fund and Z Short-dated Govt Bonds Fund... plus k% to w% into a variety of regional or sectoral specialist equities and bond funds... you will certainly not get the exact same profile of gross returns as by investing x% into a bond index and y% into a domestic equity index and z% into a foreign equity index, but it will be a good thing.

As such - the exponents of a more complex approach will say - you will still be able to get the aforementioned £1.5 million while experiencing lower volatility along the way than if you had aimed to achieve it by following the rollercoaster of the cheap index. Or, potentially you will be getting greater returns by identifying better prospective returns for the risk so you can easily afford the fees that take you down from those greater returns to some figure which is still north of £1.5 million net.

Those on the 'passive investing' side of the argument are sceptical, and will say that the people who help you deploy your money to the more complex products, or who work in the financial services sector and earn money from managing or operating those products, are basically destroying the wealth of the nation; ripping your £1.5m retirement pot away from you and replacing it with a £0.8m one, and that peddling their snake-oil to get fat on your hard-earned wages is as vile and abhorrent as raping a donkey in front of your grandchildren.

The cynics would think that employing an IFA to implement product selection is bad enough - when you can do it yourself after a few weekends of googling - let alone employing an IFA who is going to pass the buck on asset selection and recommend you spend more money employing a wealth manager / discretionary fund manager. The latter point is quite sensible as IMHO you probably do need to have quite serious wealth for an appreciable amount of value to be added by a DFM ; though I think the former may be naive because some people will make serious mistakes left to their own devices.

Clearly in this case, the OP who has made up his mind that he doesn't need an IFA or DFM service because he would like to manage his own affairs, shouldn't bother having a "we'd like to convince you to stay" meeting with his IFA and DFM. He is well aware that managing your own fortune badly can leave you in a worse position than paying someone to manage it middlingly - but does not expect to intend to manage it badly

IMHO there is nothing wrong with paying fees to achieve something - and having a lot of choice and freedom in the marketplace to do just that, is fine - it only becomes a non-moneysavingexpert thing to do when the fees are being paid for something you don't need or want.

IMHO, a key way of looking at the active vs passive choice is: what is the hurdle of higher costs which active has to overcome if it is to outperform passive? and then: is there any reason to suppose the active strategy you're considering can achieve that?

the cost difference is always a bit unclear, because 1 element of the costs, viz. the higher internal trading costs of active funds, is not known in advance, and often not even clearly disclosed retrospectively.

however, if you are DIY, the total extra costs of active could be as low as c. 0.5% + those internal trading costs.

and if you're already using an IFA, and you ask them to use an active instead of a passive strategy, the extra costs would be similar.

OTOH, if you're confident selecting a simple DIY passive strategy (e.g. pick 1 cheap multi-asset fund, on a cheap platform), but not confident using an active strategy (which needs not just to be set up, but more monitoring to decide whether/when to switch active managers), and you're wondering whether to employ an IFA to do the latter, then the incremental costs are much higher: the same 0.5% + internal trading costs for the active funds themselves, but also perhaps 0.5% for the IFA (or more for a smaller portfolio - you might needs £100k+ to get it down to 0.5%), and apparently also more for a platform, say another 0.25%, because IFAs appear not to use the fixed-charge platforms which would be cheapest (for portfolios of £100k+) ... so you are up to c. 1.25% + internal trading costs.

that extra hurdle is part of why i think it's a bad argument for IFAs to suggest it could be worth using an IFA for their active fund selection. but especially when there's no explanation about why it should be expected to outperform, other than they are paying somebody else to come up with active allocations (yes, but what is the strategy, at a high level? without knowing that, how would 1 know whether it's likely to work?) and that it's worked over some number of years (so what? we know that some active strategies will outperform, so this is no surprise; we just don't know which 1s will outperform in advance, and whether outperformance will persist. we also don't know whether an unspecified bought-in strategy even is a consistent strategy, or whether a data provider is actually radically changing their strategy over time).

and active via IFA + DFM will be even more. i doubt there is any point in that, no matter how wealthy you are. for it to work, there would need to be investment strategies which are likely to produce outperformance (for a given level of risk) and which are only accessible via DFMs.

getting back to reasons to expect outperformance from active ... plausible ones might include: small companies are likely to outperform big-cap, and there aren't any trackers available for UK smaller companies. or: "value" companies are likely to outperform, and there aren't any decent passive ways to buy just value companies for some stock markets.

implausible reasons would include: our active managers talk to the managers of the companies they invest in, and decide whether they're any good (mostly irrelevant: quality of company matters far more than quality of management, and top managers tend to be good at selling themselves, so it can be dangerous to talk to them!). or: our managers hop in and out of different sectors of the market depending on what point in the economic cycle we're in (yes, and so does everybody else: share prices always attempt to anticipate the economic cycle, and why should you be better at this than anybody else?).

A_T wrote: »

you won't be able to do that in the UK unless you only use UK and US equity trackers.

well, it's a tight fit, but let's see ... just taking the cheapest tracker i've found for each region (and assuming the OCF is the only relevant cost measure, which isn't quite true):

UK: 0.06% (ishares UK equity index fund, class D)

north america (i.e. USA + canada): 0.07% (ishares north american equity index fund, class D) (there are also several USA-only ETFs with the same OCF)

europe ex-UK: 0.1% (ishare continental european equity fund, class D; or HSBC european index fund, class C)

japan: 0.12% (fidelity index japan, class W)

pacific ex-japan: 0.18% (ishares pacific ex-japan equity index fund, class D)

emerging markets: 0.25% (several options)

so certainly some funds are over 0.1%, but you might just keep the portfolio's average under 0.1%, depending on weightings (mainly, by not putting a lot in pacific ex-japan and emerging).