Do I have to pay an IFA pension yearly ongoing fee?

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  • johnjo569
    johnjo569 Posts: 41
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    edited 14 December 2018 at 11:04AM
    HappyHarry wrote: »
    It's not a scam. A scam is where you are deprived of funds through trickery or lies. Your IFA seems to be quite up front and transparent about the fee, so calling it a scam is rather misleading of you.

    HappyHarry, scam was the wrong word and i apologise, it just feels like its a bit of a rip off thats all. My IFA is a nice guy, I get on well with him when I have seen him and he has been upfront with his charges, its mostly my own fault for taking so long to get a little more proficient at looking after my own finances intelligently. I just feel the charges at this moment in time in my particular circumstance seem excessive hence my wanting to see if I can stop them. Ideally I would like going forward to have a yearly/ two yearly review at a fixed price that has been negotiated and suits both parties rather than just paying out large sums in percentage based ongoing yearly fees. Also, the more I put in the more the costs are going to be relative to the size of the pot.. for the same work he'll be doing, it doesn't make sense!!.

    Thanks for your reply its much appreciated.
  • dunstonh
    dunstonh Posts: 116,033
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    Apologies Dunstonh scam does sound a little heavy, it just FEELS a lot of money to pay out.

    But it may be money well spent. Although it may be unnecessary. It depends on your portfolio.

    For example, one of our bespoke portfolios costs 0.38% and our charge is 0.5%. That is 0.88% in total. It has been consistently outperforming a very frequently mentioned cheap fund costing 0.22%. So, yes, its possible to get cheaper but it doesn't mean you get better.

    Equally, you could be on a basic fund (like that 0.22%) that requires little or no adviser input and if you do not place value on the regular adviser contact then you are best ending it.

    We have an internal classification on our clients as either cost focused or returns focused. Most of the time, the cost focused ones end up on transactional (one off or ad-hoc) advice and end up in a basic low cost fund.
    This feels like compound interest in reverse!

    Would you rather pay 0.2% p.a. and get 5% after charges or 0.6% pa. and get 6% after charges? (that is simplistic and missing a lot of added discussion but keeping it as simple as possible to see what your preference is).
    Also, the more I put in the more the costs are going to be relative to the size of the pot.. for the same work he'll be doing, it doesn't make sense!!.

    It makes sense as bigger pots need more work and the cost of liability increases. Someone with £20k would almost certainly be on a multi-asset fund and really should be transactional advice. Someone with £200k would likely be on a bespoke portfolio requiring ongoing servicing.
    I am an Independent Financial Adviser (IFA). The comments I make are just my opinion and are for discussion purposes only. They are not financial advice and you should not treat them as such. If you feel an area discussed may be relevant to you, then please seek advice from an Independent Financial Adviser local to you.
  • johnjo569
    johnjo569 Posts: 41
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    edited 14 December 2018 at 11:20AM
    If you feel you are not getting value for money, you have two alternatives: switch to another IFA or manage your investments yourself. There are plenty of people on this board that DIY - I have a much bigger pension pot than you which I manage myself (not trying to boast, just trying to show that people that DIY do not just do it on small pension pots).

    You say "If in the future I decide to say, lower my risk level, I will be happy to get him to do this for me." Why do you need him to do that for you? On many pension platforms you can adjust the investments yourself.

    You need to be a bit clearer about the pension scheme you have. It could be that the IFA has their own specific set of portfolios and that is what you are paying for on an annual basis (in addition to the meeting). However, if you just have a selection of funds on a common pension platform, you could easily manage that yourself. It sounds like you are in the latter situation, but it's not clear.

    It took me about 5 years of reading, researching and experimenting to get to the point that I was comfortable to DIY. These books helped me: "Investing Demystified" by Lars Kroijer and "DIY Simple Investing: A Guide to Simple but Effective Low Cost Investing" by John Edwards. The Monevator website is good as well.

    It is possible to terminate the relationship with your IFA (subject to your contract and pension) and then get one-off advice when you think you need it. I'm not sure how keen IFAs are to do this, I think they prefer a long term relationship. The IFAs on here will probably comment.

    Thanks Old Music Guy... I have both those books and I occasionally use Monevator. I have a slow and steady ISA similar to his example.

    Im not confident enough to go it alone pension wise yet. My pension is with Royal London and its a fairly standard low platform fee pension where you decide your "pots" which are basically a series of funds with differing allocations based on levels of risk and return. Its all managed by in-house Royal London fund managers although its costed more like a passive platform rather than the usual managed schemes, i think its 0.75% yearly fees. My IFA doesn't get involved in the day to day upkeep of the pension.
  • bowlhead99
    bowlhead99 Posts: 12,295
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    johnjo569 wrote: »
    Apologies Dunstonh scam does sound a little heavy, it just FEELS a lot of money to pay out. If my pension has a bad year due to a world some crisis etc and say returns are down to 3-5% my pension charges me its annual percentage fee then add my advisors fee and before you know it over 20% of the profit on my investment has gone on fees.. thats a lot considering i'm working like mad to save and secure a decent retirement. This feels like compound interest in reverse!

    It is best not to think of fees for a service as a percentage of your profits 'in a bad year'. For example in an actual bad year your pension pot will not just have low positive returns, it will have negative returns, perhaps 10 or 20 or 30% or more, depending on your risk level. So your profits are less than zero. The £800 fee would be more than infinity percent of your profit, because there weren't any profits. Conversely if you make 40% gains in a year because it's the year markets come back from a collapse, the fee might more like only a percent of your profits.

    So when your fee varies from 1% of the profit to over infinity percent of the profit in a particular year, it is relatively meaningless to compare the two things. It is not supposed to be a fee that's charged on performance, because the adviser is supposed to be giving you independent unbiased advice and if you said he could have (e.g.) a twentieth of the performance in any given year (say 0.4% on 8% but always being a twentieth), he would be incentivised to advise you to take greater risks because of the greater performance potential and greater potential fee for him, on the same level of work.

    You have to decide if over the long term it is better to get advice or not, and whether you should have advice with servicing or not. The benefit of advice to keep a portfolio in line with risk/suitability levels, probably comes in the bad years (rebalancing funds, ensuring funds are still appropriate, and avoiding panic selling) rather than the good years when everything's today and everything's going up and any chump can make money.

    If you want advice but don't want servicing, you may find out that the ad hoc transactional pieces of work are expensive because the adviser needs to get to know you and your portfolio and your risk level every time. Also if you are only buying advice per transaction and not engaging him to do periodic rebalances or assessments each year, he may prefer to offer you simpler or lower risk products (eg mixed asset funds that are internally rebalanced themselves by their own fund manager) because you perhaps can't be trusted to do the ongoing reviews and rebalances if left to your own devices.

    The latter point being that it is harder for him to convince his regulator that the advice was appropriate if he sets you up with a 10-15 fund portfolio of specialist funds and expects you to rebalance it yourself annually, because you may later make a complaint and lie to the regulator that you are no good at maths and didn't know you would have to rebalance it from time to time.
  • johnjo569 wrote: »
    My pension is with Royal London and its a fairly standard low platform fee pension where you decide your "pots" which are basically a series of funds with differing allocations based on levels of risk and return. Its all managed by in-house Royal London fund managers although its costed more like a passive platform rather than the usual managed schemes, i think its 0.75% yearly fees. My IFA doesn't get involved in the day to day upkeep of the pension.
    If Royal London offer simple choices of "pots" based on risk levels, I can't understand why you need an IFA to help you. If you've read the books and understand the principle of equities and bonds in funds and how that affects risk and volatility, it's pretty easy to decide to shift to different risk levels in these managed funds. You could do it cheaper if wanted, but if you are happy with Royal London, no problem.

    Probably what you need to do is some serious retirement planning. You need to look at the income levels you will need in retirement and decide how much you need your pension to deliver in addition to other income sources like SP, savings and any other pensions. That helps you decide if you need to increase/decrease the risk levels in your investments. It also helps you decide on your retirement strategy in terms of approach to drawdown, TFLS etc.

    Once you have done all of that it will help you decide what to do with your pension pot. I've just retired and have adopted a very defensive strategy, because my long term financial plan shows that all I need to do with my investments is to match inflation. I don't need capital growth, so I have adjusted my portfolio to avoid sequence of returns risk in the early years of retirement before SP age.
  • AnotherJoe
    AnotherJoe Posts: 19,622
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    johnjo569 wrote: »
    Apologies Dunstonh scam does sound a little heavy, it just FEELS a lot of money to pay out. If my pension has a bad year due to a world some crisis etc and say returns are down to 3-5% my pension charges me its annual percentage fee then add my advisors fee and before you know it over 20% of the profit on my investment has gone on fees.. thats a lot considering i'm working like mad to save and secure a decent retirement. This feels like compound interest in reverse!


    Then in that case take some responsibility for your own actions and look after it yourself.
    You arent being forced (another reason the overused "scam" word is even more irritating in this case)
    20 years ago i cut my ties with my FA and self managed since then.

    It hasn't been all plain sailing but at least I am every familiar with whats in it and why. If you are in that position regards the funds, then you have probably reached the level you dont need one.
  • dunstonh wrote: »
    Would you rather pay 0.2% p.a. and get 5% after charges or 0.6% pa. and get 6% after charges? (that is simplistic and missing a lot of added discussion but keeping it as simple as possible to see what your preference is).

    The problem is that there is no guarantee at all that paying your 0.6% is going to get you any better performance than just being in a decent multi asset/ multi geography/ low cost fund, and here lies the problem, it requires a jump of faith and trust in the IFA. What if after a year you are down on where said fund would be? What if you are still down after 2 or 3 how much faith do you have? At what point do you jump ship and where to? another IFA, said fund?

    I want to start drawdown on my fund in 2 years (currently in very low cost multi asset fund with my employer), so I will be discussing my requirements with some IFAs. My hope is I find someone that gives me the level of confidence in their ability/understanding that I frequently get from dunstonh’s forum posts, otherwise I might just give self management a go.
  • OldMusicGuy
    OldMusicGuy Posts: 1,752
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    green_man wrote: »
    The problem is that there is no guarantee at all that paying your 0.6% is going to get you any better performance than just being in a decent multi asset/ multi geography/ low cost fund, and here lies the problem, it requires a jump of faith and trust in the IFA.
    Indeed, that's why I prefer not to pay IFA fees. But if dunstonh approached me and said that our excess fees are only payable when our bespoke portfolio outperforms a reference fund, then I'd be more open to considering it.
  • dunstonh
    dunstonh Posts: 116,033
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    The problem is that there is no guarantee at all that paying your 0.6% is going to get you any better performance than just being in a decent multi asset/ multi geography/ low cost fund, and here lies the problem, it requires a jump of faith and trust in the IFA.

    That is the unknown situation but it at least gives us the mindset of the individual. Are they prepared to pay more to get a potentially better return. Or do they prefer lower costs even if it may reduce potential.

    There is no right or wrong here. It is horses for courses. i estimate that new business for us is around 60% with ongoing servicing and rest without. Some IFA firms are not interested in transactional/ad-hoc business.

    We actually tend to use Royal London on transactional cases where the person is relatively low in knowledge and understanding of investing and amounts are low. At £200k, we would be looking at potential alternatives if we thought the person was ready to move on from a more basic option. On servicing clients, we dont charge for moving provider/platform. For transactional clients, we would. But then, we wouldnt recommend a model portfolio to a transactional client. Only a servicing one.
    . But if dunstonh approached me and said that our excess fees are only payable when our bespoke portfolio outperforms a reference fund, then I'd be more open to considering it.

    That charging method would not be feasible to either side and at the end of the day, an IFA is not an investment manager. It is just that we are much closer to it than the average consumer and suitability for the individual is the overriding factor. Plus, modern research and due diligence requirements are much higher than they were with just 5 years ago, let alone 10 or 20 years. So, for someone that doesn't know what they are doing, having an IFA with a structured process and total charges of around 1.2% (platform, fund, adviser) is a lot better than ending up with HL in one of their managed portfolio funds (two of which are in their top 10 selling funds). If the individual is knowledgeable enough to DIY and is willing to put the time in, then they should DIY.
    I am an Independent Financial Adviser (IFA). The comments I make are just my opinion and are for discussion purposes only. They are not financial advice and you should not treat them as such. If you feel an area discussed may be relevant to you, then please seek advice from an Independent Financial Adviser local to you.
  • Albermarle
    Albermarle Posts: 21,619
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    my advice would be to probably look at managing the funds yourself, there are plenty of online providers who offer investment portfolios based on your chosen to attitude to risk. Financial advice has changed over the last few years and investment performance is very much secondary now with what we do for clients. The annual fee we charge is mainly to cover advice with regard to tax planning strategies and advice on planning for the future, will they have enough money in retirement, how can they maximise the amount they leave to children etc etc.
    The above is an extract from an IFA's comments on a recent similar thread that kind of fits with other comments on this thread.
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