Your browser isn't supported
It looks like you're using an old web browser. To get the most out of the site and to ensure guides display correctly, we suggest upgrading your browser now. Download the latest:

Welcome to the MSE Forums

We're home to a fantastic community of MoneySavers but anyone can post. Please exercise caution & report spam, illegal, offensive or libellous posts/messages: click "report" or email forumteam@.

Search
  • FIRST POST
    • fronty
    • By fronty 28th Mar 19, 7:38 PM
    • 16Posts
    • 2Thanks
    fronty
    Excessive or reasonable charges for managed SIPP?
    • #1
    • 28th Mar 19, 7:38 PM
    Excessive or reasonable charges for managed SIPP? 28th Mar 19 at 7:38 PM
    Hello,

    In January 2016 I transferred my pension into a SIPP with Standard Life. I previously had a SIPP with Scottish Equitable and was managing it myself, but with a busy work life and the birth of my two kids I just found it impossible to do all the research and keep on top of it all, so I basically stopped managing it and it festered for a few years.

    So I spoke to my IFA, they did a risk assessment and took the SIPP under management and added it to their "medium" portfolio. My IFA is PFM Associates, and on the whole I've been quite happy with them, they regularly review my SIPP and switch holdings according to the directives of their "investment committee". It's basically invested in around 15 funds with wide diversity.

    Over the past 3 years my investment has grown by £63K, and is currently valued at £350K, however I have noticed some quite high fees being deducted and I am unsure if they are reasonable or not.

    The charges are split between SIPP platform fees of approx. £100/month and "on-going advisor fees" of approx. £300/month. In total I see fees of approx. £450 being deducted on a monthly basis.

    Over the past 3 and a bit years years the charges have amounted to approx. £16,700. Annually it's looking like around £5,700 is being taken in fees. So with a valuation of 350K this is working out around 1.6% PA. However I am only paying in £250/month gross at the moment, so it almost feels like my cash isn't being invested, it's just being taken in fees.

    Now I appreciate that I have to pay to get a managed portfolio, and advice, but my SIPP is managed with a load of others and they switch us all in and out of funds as they see fit, I am not getting a personalised "discretionary" service.... so I am now wondering if the fees are justified.

    I can't remember what they charge for this service but doing some quick maths it suggests it's 1% PA (350K portfolio, 3,600 PA in fees, you do the maths!), with the other 0.6% going to the SIPP provider. I'm not sure which bit of fees the fund management charges come out of.

    So it feels like the IFA is charging around 1% for their management of my SIPP - does this sound reasonable? The problem is as my portfolio grows they are obviously going to take a larger and larger cut, so I am wondering whether I should switch to someone else. But then of course there's the old adage, "you get what you pay for"... a cheaper IFA might not produce as much growth... but I don't really know whether my IFA has done well or not at the moment, or whether their fees are reasonable or not.

    Regardless I think I am in the wrong business!

    Comments...?

    Thanks,

    Fronty
Page 4
    • menziesthefish
    • By menziesthefish 16th Apr 19, 1:40 PM
    • 14 Posts
    • 9 Thanks
    menziesthefish
    You first need to work out what you want.
    Nail on the head.

    If you feel you may be getting ripped off by a 1% management fee, what would you consider an acceptable fee?

    Personally, I would be pretty happy with a 7%+ average annual return (I presume net of all fees?) over the last 3 years, without having to spent any of my own time doing the necessary research - which yes, takes far longer than 4 hours per year.

    Are there cheaper fund managers out there? Absolutely. Could you have achieved better returns using a different combination of funds/ETFs/ITs etc? Absolutely. But then performance is always backward-looking, so you show me any diversified portfolio and someone will always be able to produce one that's done better.

    If the only value you feel you are getting from your IFA is the performance of your investments (something which is ultimately out of his control) then I would suggest you don't need an IFA and you should move the money to an out-an-out investment manager who would charge you less.

    However, if your IFA is providing a range of other planning services - tax planning, estate planning, cashflow modelling etc. i.e. showing you what your investments will be able to achieve for you - then the 1% may start to be more palatable.

    As an aside, I also noted an early reply:
    1% = 3.5k every single year, whether portfolio goes up or down
    This is not correct. The fees you pay will be a percentage of the investment value, so if the investment value drops so will the monetary value of the fees you pay.
    • fronty
    • By fronty 16th Apr 19, 4:09 PM
    • 16 Posts
    • 2 Thanks
    fronty
    - OP, you should ignore all the Vanguard and Index Fund information for now. This is further along the line.
    Originally posted by Lokolo
    I'm interested why you say this?

    The "problem" I am having is that the Vanguard funds, even the VLS60 fund (which I think is a better comparison than VLS80) has outperformed my portfolio, but I am paying an IFA 1% a year to actively manage it and the percentage appears to be uncapped.

    I wouldn't mind so much if they were delivering superior performance or the fee % was lower, but they aren't AFAIK, so it makes me wonder why I don't just put the money into a VLS60 and save myself thousands of pounds in fees every year? Or put half in VLS40 and half in VLS60 to give me a 50-50 split between equities and bonds/fixed interest (I will be 50 this year).

    I don't really use my IFA for anything other portfolio management.
    • menziesthefish
    • By menziesthefish 16th Apr 19, 5:24 PM
    • 14 Posts
    • 9 Thanks
    menziesthefish
    I don't really use my IFA for anything other portfolio management.
    In which case I would say there is very little reason for you not to take the DIY route and use e.g a VLS fund for a fraction of the price. Professional fund managers regularly fail to out-perform the market consistently, so I wouldn't expect an IFA to do so. As long as your risk appetite is suitably represented, the markets will take care of the rest.

    It is arguably only when you get to the stage of needing to draw benefits from the pension that the DIY route becomes far more of a risk to all but the most experienced investor. That's the point at which the input from an experienced professional can add true value, especially as part of wider retirement funding discussion.
    • Lokolo
    • By Lokolo 16th Apr 19, 5:30 PM
    • 20,085 Posts
    • 15,227 Thanks
    Lokolo
    I'm interested why you say this?

    The "problem" I am having is that the Vanguard funds, even the VLS60 fund (which I think is a better comparison than VLS80) has outperformed my portfolio, but I am paying an IFA 1% a year to actively manage it and the percentage appears to be uncapped.

    I wouldn't mind so much if they were delivering superior performance or the fee % was lower, but they aren't AFAIK, so it makes me wonder why I don't just put the money into a VLS60 and save myself thousands of pounds in fees every year? Or put half in VLS40 and half in VLS60 to give me a 50-50 split between equities and bonds/fixed interest (I will be 50 this year).

    I don't really use my IFA for anything other portfolio management.
    Originally posted by fronty
    So does your portfolio have the same objectives as the VLS60 fund?

    If I came on and said "invest in Netflix stocks as it's done so much better than my FTSE 100 tracker" what would you say?

    By all means you can shove it all in VLS60. I couldn't care less. But it's incredibly naÔve to invest in something you don't understand.
    • menziesthefish
    • By menziesthefish 16th Apr 19, 6:31 PM
    • 14 Posts
    • 9 Thanks
    menziesthefish
    So does your portfolio have the same objectives as the VLS60 fund?
    Looks like it. Broadly-speaking.

    Based on the portfolio presented by the OP, both are looking to achieve long-term capital growth in line with a what is considered to be a 'medium' risk profile.
    • Lokolo
    • By Lokolo 16th Apr 19, 9:56 PM
    • 20,085 Posts
    • 15,227 Thanks
    Lokolo
    Looks like it. Broadly-speaking.

    Based on the portfolio presented by the OP, both are looking to achieve long-term capital growth in line with a what is considered to be a 'medium' risk profile.
    Originally posted by menziesthefish
    There are quite a few differences.

    The OPs portfolio has only 20% bonds compared to the 40% on the VLS60. 10% property for the OP vs 0% for VLS60, 20% vs 15% UK etc.

    I think risk wise I'd say the OPs is more adventurous. But there are quite a few different asset allocation differences. Both are an active choice of asset allocation.

    I don't believe comparing performance of the VLS Vs the OPs fund useful. At the end of the day, someone has decided the asset allocation. One will always end up better than the other, there's still a human decision in there. I'd be more interested in an index portfolio of the same assets as the OPs portfolio. That would be a better comparison.

    However I do agree about keeping costs low if possible.
    • Mordko
    • By Mordko 16th Apr 19, 10:37 PM
    • 191 Posts
    • 48 Thanks
    Mordko

    Personally, I would be pretty happy with a 7%+ average annual return (I presume net of all fees?) over the last 3 years.


    This is not correct. The fees you pay will be a percentage of the investment value, so if the investment value drops so will the monetary value of the fees you pay.
    Originally posted by menziesthefish
    1. 7% in the last 3 years with the pound dropping 10% vs $ (I think) isnít great, to put it mildly. This is major underperformance vs a single multi asset investment with the same percentage of bonds.

    2. Your portfolio is 350k. It drops 10k in a rising market. Your IFA achieved a loss for you. He still gets 3,400. Ok, itís 100 quid less than 3500, but thatís neither here nor there. He is getting paid handsomely regardless of whether he does a good job or a terrible one.
    Last edited by Mordko; 16-04-2019 at 10:41 PM.
    • Mordko
    • By Mordko 16th Apr 19, 10:55 PM
    • 191 Posts
    • 48 Thanks
    Mordko
    - I saw another post recommending 3-4 ETFs for a portfolio. I wouldn't recommend this, if you want to limit the number of investments, then multi asset ones would be a good start. I currently have 7 and would increase to 8 or 9 to get some exposure to other asset classes.
    I wasnít recommending 3-4 ETFs. Thatís what I am using that is all. Fairly typical for a couch potato portfolio. I would certainly not recommend 8 or 9. Why on earth when you could cover stocks and bonds from all over the world with a single fund? Simple is better than complex.

    There are 3 reasons I have more than 1 ETF:

    1. when I built my portfolio multi-asset wasnít available.
    2. Tax efficiency and a bit more flexibility
    3. Itís a little cheaper, but this wouldnít be good a reason by itself
    • Mordko
    • By Mordko 17th Apr 19, 12:39 AM
    • 191 Posts
    • 48 Thanks
    Mordko
    - I saw a post in this thread saying you only need to spend 4 hours looking at your portfolio a year. This is bordering on ridiculous. You do not need to spend 4 hours a week, but you do need to spend at least a couple of days (a weekend) reviewing your portfolio each year. Rebalancing (again, you need to know what this is).
    In general, the less time people spend, the better. Rebalancing takes less than an hour for me on very rare occasions it is actually required (once every 5 years or so). With a single fund op is thinking about, rebalancing isn’t required at all.
    • Lokolo
    • By Lokolo 17th Apr 19, 8:16 AM
    • 20,085 Posts
    • 15,227 Thanks
    Lokolo
    I wasn’t recommending 3-4 ETFs. That’s what I am using that is all. Fairly typical for a couch potato portfolio. I would certainly not recommend 8 or 9. Why on earth when you could cover stocks and bonds from all over the world with a single fund? Simple is better than complex.
    Originally posted by Mordko
    I decided my asset allocation before choosing my funds. In order to match my asset allocation I required 7 different funds. For reference this is my asset allocation (and I have no idea how to format on MSE even though I've posted thousands of times!)

    UK Large Cap 14%
    UK Small Cap 12%
    Europe ex UK 20%
    US All Cap 26%
    Asia inc Jpn 10%
    Emerging Markets 13%
    Tech 5%

    I suspect I could get the UK Large and Small cap in one fund, and maybe include the Europe as well. But overall it's fine for me.

    In general, the less time people spend, the better. Rebalancing takes less than an hour for me on very rare occasions it is actually required (once every 5 years or so). With a single fund op is thinking about, rebalancing isn’t required at all.
    Originally posted by Mordko
    I can see why you only rebalance every 5 years with only 3-4 ETFs, I'd be interested to know your asset allocation.

    I think the OP putting £350k in one fund wouldn't be advisable unless it is a multi asset fund. And even then I'd have to seriously questioning it.
    • menziesthefish
    • By menziesthefish 17th Apr 19, 8:23 AM
    • 14 Posts
    • 9 Thanks
    menziesthefish
    He is getting paid handsomely
    That is purely subjective and can only be determined by the OP. It's a matter of 'value' rather than pounds & pence.

    regardless of whether he does a good job or a terrible one.
    Again, this is purely subjective. How do you measure good or bad? Based on your other comments you seem to be suggesting that the IFA's only role is to consistently match or beat a given benchmark and that is the primary determinant of what you would consider 'success'. Given no-one can do this consistently I doubt any IFA would be willing to be measured on that basis - unless they advertise themselves as investment managers, in which case more the fool them!

    I don't disagree that the OP could have achieved better returns for less cost elsewhere or taking the DIY approach, but he could equally have been charged an awful lot more and achieved far lower returns through a rogue IFA or poor DIY decisions. At the end of the day a 1% charge by the IFA is not 'excessive' IMO, which is the original question.
    • Mordko
    • By Mordko 17th Apr 19, 9:08 AM
    • 191 Posts
    • 48 Thanks
    Mordko
    I decided my asset allocation before choosing my funds. In order to match my asset allocation I required 7 different funds. For reference this is my asset allocation (and I have no idea how to format on MSE even though I've posted thousands of times!)

    UK Large Cap 14%
    UK Small Cap 12%
    Europe ex UK 20%
    US All Cap 26%
    Asia inc Jpn 10%
    Emerging Markets 13%
    Tech 5%

    I suspect I could get the UK Large and Small cap in one fund, and maybe include the Europe as well. But overall it's fine for me.
    I can see why you only rebalance every 5 years with only 3-4 ETFs, I'd be interested to know your asset allocation.

    I think the OP putting £350k in one fund wouldn't be advisable unless it is a multi asset fund. And even then I'd have to seriously questioning it.
    Originally posted by Lokolo
    If it was me, I would have removed Tech too. a) itís duplication for Apple and Google which you already have aplenty b) you are splitting by geography and then you have an industry sector. Seems inconsistent (and leads to duplication) c) 5% allocation is kinda meaningless and just ads complexity.

    I have 35% US, 28% Canada (where I spend money), 20% other developed and 17% EM. I am probably a little high on the home market, but thatís how it was set up, has tax advantages and there would have to be a major reason to change. Higher EM than most, perhaps too high but it actually has done well and you do eke extra benefit from rebalancing.

    I also have a fixed amount of approx 150k pounds allocated to fixed income (mostly short term government bonds) and cash, but thatís a separate pot.

    For rebalancing I follow the 5/25 rule. My Google Sheet sends me an email when anything is out of whack. Itís very rare.
    • fred246
    • By fred246 17th Apr 19, 9:08 AM
    • 1,479 Posts
    • 879 Thanks
    fred246
    People should charge for what they do. If they charge £3600 that works out at 18 hours at £200 per hour. I think £200 is excessive. That would be 18 hours of work to check a portfolio. How can anyone take 18 hours to check a portfolio? Anyone charging a percentage is always trying to cover up profiteering.
    • Mordko
    • By Mordko 17th Apr 19, 9:24 AM
    • 191 Posts
    • 48 Thanks
    Mordko
    That is purely subjective and can only be determined by the OP. It's a matter of 'value' rather than pounds & pence.

    Again, this is purely subjective. How do you measure good or bad? Based on your other comments you seem to be suggesting that the IFA's only role is to consistently match or beat a given benchmark and that is the primary determinant of what you would consider 'success'. Given no-one can do this consistently I doubt any IFA would be willing to be measured on that basis - unless they advertise themselves as investment managers, in which case more the fool them!

    I don't disagree that the OP could have achieved better returns for less cost elsewhere or taking the DIY approach, but he could equally have been charged an awful lot more and achieved far lower returns through a rogue IFA or poor DIY decisions. At the end of the day a 1% charge by the IFA is not 'excessive' IMO, which is the original question.
    Originally posted by menziesthefish
    I think IFAs primary role, when dealing with investments, is to hold hand of those who can’t be bothered about their own and their family’s future and can’t read a book or two with readily available guidance.

    I also think that any annual IFA charges for “managing” pension money are wrong. If you pay for a violin lesson, the teacher charges for his time even if you continue to get the benefit of what you’ve learnt. Same goes for lawyers and everyone else.

    If IFA were to charge full amount for his time up front, at least it would be transparent: “I charge 10,000/h and portfolio set up will take a few hours. I take zero responsibility and have no incentive for your portfolio to do well, except to make it complex so that it looks like I’ve done something.”

    And if you really want them to actually manage your money day to day and pay annual fees, at least their incentives should be strongly correlated with the benefit they bring. Say, 10% of the value by which they outperform a benchmark. And if they underperform then IFA should take a corresponding loss.
    • menziesthefish
    • By menziesthefish 17th Apr 19, 4:06 PM
    • 14 Posts
    • 9 Thanks
    menziesthefish
    I think IFAs primary role, when dealing with investments, is to hold hand of those who can’t be bothered about their own and their family’s future and can’t read a book or two with readily available guidance.
    I don't think there's a need to be condescending. If you have 'read a book or two' and have single-handedly secured your and your family's future by making a fortune self-managing money, well done. Genuinely.

    In reality though, most people (such as the OP) do not have time to dedicate to such things as they have busy working lives and would prefer to spend what little free time they have with their family, friends etc. It is the same reason that people pay for an electrician rather than learn how to install their own lights, or do their grocery shopping online so they don't have to spend hours fighting their way round the local supermarket on a busy Saturday with screaming kids. It's a matter of personal priority and valuing certain things more than others. It doesn't mean they 'can't be bothered', that's a little short-sighted.

    I would also argue that the primary role of a good IFA, when looking after someone's investments, is behavioural management and education, not just 'hand-holding' as you put it. It's to stop the investor panicking when markets fall, or getting carried away when markets spike. Human nature is the biggest determinant of poor performance when self-managing investments; people's obsession with trying to time the market, pick the next 'big thing', follow the trends etc. All of things that make the big crashes so severe and the bubbles so big - though I'm sure you avoided all of those thanks to your books
    • Linton
    • By Linton 17th Apr 19, 5:36 PM
    • 10,585 Posts
    • 10,939 Thanks
    Linton
    An IFAs role should primarily be about the customer. Which specific investments are chosen is a relatively minor detail.



    To invest sensibly you need to have an objective, and a viable strategy for getting there. This needs to be developed in the context of the customers financial, tax and personal situation, and their ability to understand and cope with risk.


    Just starting off is difficult for many people. Count the number of posts we have had along the lines of "I have inherited £500K, what do I do with it" with no other information. From the replies in this thread it would seem many of the more vocal people here would say "put it all in VLS60, job done". But the job isnt done, it hasnt even been started. A good IFA should help the customer to develop and document objectives. The customer may well need advice as to what is and isnt realistic, omissions rectified - eg "what should happen regarding your spouse if you die early" and areas of uncertainty clarified.


    Once both the IFA and the customer understand what is wanted then some strategy can be developed. The answer may be simply to leave the whole lot in cash - eg if the objective is to buy a house in 5 years time. To have any chance of meeting the objectives there may be a need for a high equity component in the investments. If so the customer will need to understand the risks involved. If these cannot be accepted there may be a need to hone or redefine the objectives - eg delay planned retirement. At the more detailed level there is the problem of tax. This could lead into consideration of the various containers in which investments can be held.



    Then we can get to the point of selecting investments. Some people here apparently think the IFA should look for maximum return. This could be disastrous. A better aim is to chose those investments which together can provide the return required to achieve the objectives at minimum likelihood of failure. A fee system based on achieving returns above benchmark is clearly stupid.


    Now we have the question of ongoing support. With the type of approach outlined above it is important to undertake regular checks that the progress continues to be compatible with meeting the objectives. Should things go off course possibly relatively small tweaks to the investments may be required, perhaps ongoing contributions increased, or it may be necessary to take a deeper look, possibly leading to change of objectives. Or the customer's circumstances may change making the original objectives inappropriate. One cannot simply passively ignore the investments for 20 years and hope it turns out all right.


    Of course the IFA does not have "zero responsibility". If the customer suffers losses due to advice that can be shown to be inappropriate for the circumstances compensation can be claimed, which is why IFAs have high insurance costs.



    Of course the process outlined here probably will not be justified for somone putting £5K/year into a pension they hope to take in 30 years time. For this type of investor I would agree that anything other than a simple multi-asset fund and minimal or zero advice is probably inappropriate. On the other hand, in my view for someone with a life-changing pot of money and no experience of serious money management working through an IFA is essential. To suggest that they would be better off simply reading a book and putting all the money in a tracker is totally irresponsible.
    • k6chris
    • By k6chris 17th Apr 19, 6:00 PM
    • 412 Posts
    • 743 Thanks
    k6chris
    Just to build on Linton's excellent post, the reason not to pay IFAs based on financal results is that is encourages excessive risk taking. If you want to reward me with a percentage of any growth above some benchmark, I am going to select a volatile portfolio of 'high risk - high return' investments that may indeed 'beat the market' - but may well tank. I could make a very nice living by 'reccommending' a variety of HR-HR portfolios to a number of different people, safe in the knowledge that a few of these will pay handsomely. My risk is spread - yours is not. Anyone want to pay me 10% for all market beating growth from a 100% Bitcoin recommendation??
    "For every complicated problem, there is always a simple, wrong answer"
    • Aegis
    • By Aegis 17th Apr 19, 6:10 PM
    • 5,076 Posts
    • 3,405 Thanks
    Aegis
    It's worth looking at the proposal's financial's as well. Take a £1 million portfolio and assume for the sake of argument that the IFA can squeeze an extra 1% a year out of the portfolio compared to the selected benchmark. On that basis, the 1% outperformance would be £10,000, and 10% of the outperformance would be £1,000. Advisers are not going to be keen to take on the risk of a £1 million portfolio for £1,000 a year guaranteed, let alone one where they have to pay money back if the portfolio underperforms a benchmark.
    I am an Independent Financial Adviser
    Anything I say on the forum is for discussion purposes only and should not be construed as personal financial advice. It is vitally important to do your own research before acting on information gathered from any users on this forum.
    • OldMusicGuy
    • By OldMusicGuy 17th Apr 19, 6:39 PM
    • 893 Posts
    • 1,940 Thanks
    OldMusicGuy
    Everything Linton says is what many of us recommend to people on here. Decide your objectives and understand your attitude to risk before you do anything. You don't need an IFA for that if you are prepared to do a bit of reading and thinking. I always say you should do that before consulting an IFA, based on my own experience.

    My experience of using an an adviser to help me define a portfolio was not good. I am very risk-averse, so without understanding what risk really meant (and with no knowledge of investing), I would always tell an adviser I'm a 1 on a scale of 1 to 10. That meant the advisers made very poor investments for me because they did what I asked. Now I understand more about how investments and funds work, I would be more adventurous. My biggest mistake was not investing in more equity-biased funds in the first phases of my pension investments (which was 30 years ago).

    So although a lot of people say "it's too complicated" or "I don't have time" I would always urge a different approach. This is one of the most important aspects of your life and you should make time to understand at least some of the basics. You can then decide if it makes sense for you to use an IFA or maybe you can go the whole hog like many of us do and DIY.

    Regarding charging, I've said it before and I'll say it again. There is no downside for % age-based rates and I don't think that's right. I think a better charging model would be a flat rate servicing fee and then a %age of any gain they deliver compared to a benchmark portfolio. Thus they get a share of any over-performance but a flat fee if they under-perform.
    • shinytop
    • By shinytop 17th Apr 19, 6:59 PM
    • 240 Posts
    • 255 Thanks
    shinytop
    Regarding charging, I've said it before and I'll say it again. There is no downside for % age-based rates and I don't think that's right. I think a better charging model would be a flat rate servicing fee and then a %age of any gain they deliver compared to a benchmark portfolio. Thus they get a share of any over-performance but a flat fee if they under-perform.
    wouldn't that just encourage the advisor to go high risk every time as there is still no downside for him/her; just an upside based on gambling with someone else's money.

    I haven't got any better ideas though...
Welcome to our new Forum!

Our aim is to save you money quickly and easily. We hope you like it!

Forum Team Contact us

Live Stats

143Posts Today

1,020Users online

Martin's Twitter
  • Have a great Easter, or a chag sameach to those like me attending Passover seder tomorrow. I?m taking all of next? https://t.co/qrAFTIpqWl

  • RT @rowlyc1980: A whopping 18 days off work for only 9 days leave! I?ll have a bit of that please......thanks @MartinSLewis for your crafty?

  • RT @dinokyp: That feeling when you realise that you have 18 days of work and only used 9 days of your annual leave! Thanks @MartinSLewis h?

  • Follow Martin