Financial advise fee calculation... Have I got this right?
Discussion
Looking at arranging a pension through my business (sole director and employee). I went to a recommended person who turns out to work as a partner for a well-known 'high end' group provider of pensions who actually I had never heard of but later googling suggests this group is often considered expensive.
For comparison I re-visited an IFA I had used some years ago, who also drew up some options.
Trying to compare the fees though has me tied up, and I would very much appreciate if anyone can confirm my understanding of the likely fees is about right. I have obtained the fees from what I could interpret from the KeyFacts sheet supplied in both cases.
For simplicity I have assumed £3600/ year with no growth (so fees only on contributions) for a total of 27 years.
Option A:
4.5% of the sum invested in the first 5 years – initial advice, fees, adviser payment
+
0.5% per annum for ongoing advice
+
3% of each regular contribution after the initial advice is paid for (so i have assumed starting in year 6)
TOTAL FEES = £9990
Option B:
0.7% per annum service charge
+
1.98% per annum fund management (this is the total spread across a number of funds)
+
0.14% per annum platform fee
+
0.5% per annum for ongoing advice
+
£150/ month for the first 5 months paid to adviser
TOTAL FEES £36,403
In this example the IFA offers the poorer value for money. Unless I’m completely bonkers…
For comparison I re-visited an IFA I had used some years ago, who also drew up some options.
Trying to compare the fees though has me tied up, and I would very much appreciate if anyone can confirm my understanding of the likely fees is about right. I have obtained the fees from what I could interpret from the KeyFacts sheet supplied in both cases.
For simplicity I have assumed £3600/ year with no growth (so fees only on contributions) for a total of 27 years.
Option A:
4.5% of the sum invested in the first 5 years – initial advice, fees, adviser payment
+
0.5% per annum for ongoing advice
+
3% of each regular contribution after the initial advice is paid for (so i have assumed starting in year 6)
TOTAL FEES = £9990
Option B:
0.7% per annum service charge
+
1.98% per annum fund management (this is the total spread across a number of funds)
+
0.14% per annum platform fee
+
0.5% per annum for ongoing advice
+
£150/ month for the first 5 months paid to adviser
TOTAL FEES £36,403
In this example the IFA offers the poorer value for money. Unless I’m completely bonkers…
Edited by Buffalo on Friday 5th August 14:13
Buffalo said:
Looking at arranging a pension through my business (sole director and employee). I went to a recommended person who turns out to work as a partner for a well-known 'high end' group provider of pensions who actually I had never heard of but later googling suggests this group is often considered expensive.
For comparison I re-visited an IFA I had used some years ago, who also drew up some options.
Trying to compare the fees though has me tied up, and I would very much appreciate if anyone can confirm my understanding of the likely fees is about right. I have obtained the fees from what I could interpret from the KeyFacts sheet supplied in both cases.
For simplicity I have assumed £3600/ year with no growth (so fees only on contributions) for a total of 27 years.
Option A:
4.5% of the sum invested in the first 5 years – initial advice, fees, adviser payment
+
0.5% per annum for ongoing advice
+
3% of each regular contribution after the initial advice is paid for (so i have assumed starting in year 6)
TOTAL FEES = £9990
Option B:
0.7% per annum service charge
+
1.98% per annum fund management (this is the total spread across a number of funds)
+
0.14% per annum platform fee
+
0.5% per annum for ongoing advice
+
£150/ month for the first 5 months paid to adviser
TOTAL FEES £36,403
In this example the IFA offers the poorer value for money. Unless I’m completely bonkers…
You may have missed fund management fees in your evaluation of option A.For comparison I re-visited an IFA I had used some years ago, who also drew up some options.
Trying to compare the fees though has me tied up, and I would very much appreciate if anyone can confirm my understanding of the likely fees is about right. I have obtained the fees from what I could interpret from the KeyFacts sheet supplied in both cases.
For simplicity I have assumed £3600/ year with no growth (so fees only on contributions) for a total of 27 years.
Option A:
4.5% of the sum invested in the first 5 years – initial advice, fees, adviser payment
+
0.5% per annum for ongoing advice
+
3% of each regular contribution after the initial advice is paid for (so i have assumed starting in year 6)
TOTAL FEES = £9990
Option B:
0.7% per annum service charge
+
1.98% per annum fund management (this is the total spread across a number of funds)
+
0.14% per annum platform fee
+
0.5% per annum for ongoing advice
+
£150/ month for the first 5 months paid to adviser
TOTAL FEES £36,403
In this example the IFA offers the poorer value for money. Unless I’m completely bonkers…
Edited by Buffalo on Friday 5th August 14:13
Not sure I understand what the service charge is in option B if the platform & adviser fees are separately identified. Who would you be paying this to and for what?
Edited by iantr on Friday 5th August 16:39
iantr said:
You may have missed fund management fees in your evaluation of option A.
Not sure I understand what the service charge is in option B if the platform & adviser fees are separately identified. Who would you be paying this to and for what?
Thanks. Not sure I understand what the service charge is in option B if the platform & adviser fees are separately identified. Who would you be paying this to and for what?
WRT OpA: There is no mention of any funds in the KeyFacts sheet (i.e none were picked during the initial meeting, so no reference point yet) - so you might be right about fund management fees potentially missing. Annoyingly though, I cannot find any note that says further fund management fees would also be chargeable, and I can find no information on fund fees on their fund literature. Given the different in fee cost so far between Option A & B this is a big ommision! And makes me wonder what the 3% per regular contribution is being paid for if that isn't a proxy of fund management?
WRT OpB. The service charge seems to apply to the whole pension account, regardless of funds within it; I assume this will be paid to the pension account holding company. The platform charge comes under 'investment charges' and is additional to the individual fund charges (the funds are external/ unrelated); I assume the platform charge is also paid to the pension account holding company (i.e. in addition to the 0.7%). The adviser charges get paid directly to him, I assume.
So far both options seem very adept in their layout of the KeyFacts sheet, that actually the charges are not clearly defined at all!
Buffalo said:
Thanks.
WRT OpA: There is no mention of any funds in the KeyFacts sheet (i.e none were picked during the initial meeting, so no reference point yet) - so you might be right about fund management fees potentially missing. Annoyingly though, I cannot find any note that says further fund management fees would also be chargeable, and I can find no information on fund fees on their fund literature. Given the different in fee cost so far between Option A & B this is a big ommision! And makes me wonder what the 3% per regular contribution is being paid for if that isn't a proxy of fund management?
WRT OpB. The service charge seems to apply to the whole pension account, regardless of funds within it; I assume this will be paid to the pension account holding company. The platform charge comes under 'investment charges' and is additional to the individual fund charges (the funds are external/ unrelated); I assume the platform charge is also paid to the pension account holding company (i.e. in addition to the 0.7%). The adviser charges get paid directly to him, I assume.
So far both options seem very adept in their layout of the KeyFacts sheet, that actually the charges are not clearly defined at all!
OpA certainly do charge fund management fees. The 3% per contribution is not related to fund management. You might ask the partner precisely what this is for if you're paying separately for ongoing advice. It would be interesting to ask him/her to set out all of the fees and charges and to identify which are retained by the provider and which are effectively retained by him.WRT OpA: There is no mention of any funds in the KeyFacts sheet (i.e none were picked during the initial meeting, so no reference point yet) - so you might be right about fund management fees potentially missing. Annoyingly though, I cannot find any note that says further fund management fees would also be chargeable, and I can find no information on fund fees on their fund literature. Given the different in fee cost so far between Option A & B this is a big ommision! And makes me wonder what the 3% per regular contribution is being paid for if that isn't a proxy of fund management?
WRT OpB. The service charge seems to apply to the whole pension account, regardless of funds within it; I assume this will be paid to the pension account holding company. The platform charge comes under 'investment charges' and is additional to the individual fund charges (the funds are external/ unrelated); I assume the platform charge is also paid to the pension account holding company (i.e. in addition to the 0.7%). The adviser charges get paid directly to him, I assume.
So far both options seem very adept in their layout of the KeyFacts sheet, that actually the charges are not clearly defined at all!
OpB - the service fee sounds expensive to me (especially as it is in addition to the platform fee), although others here may have better info on current market rates. I'd point this out and ask if there is scope to revisit. Fund management fees at 1.98% is definitely on the high side. Is this to pay for a discretionary fund manager (someone who allocates the assets, chooses funds, rebalances) AND for the underlying fees charged by the fund managers themselves? If so you might ask your adviser if other models are available. 3%+ in annual fees is way too high in todays world, in respect of both its impact upon returns and the availability of cheaper alternatives.
This industry makes me wince at times.
55palfers said:
Why don't these people just bill nice transparent hourly rate for actual work done on your behalf?
This is somewhat driven by the nature of the different services provided.The adviser - whose job is to understand your financial situation, objectives etc and with whom you should expect a personal relationship - can certainly work on an hourly rate. Most will offer this nowadays. The % of contribution model offered by OptA is very hard to justify IMHO. Advice is quite expensive to provide properly, so hourly rates aren't cheap and more hours are required than you might think. I think that adviser charging is well on the journey to becoming more transparent and understood, but there are still too many throwbacks as we see here!
The platform isn't (in the main) a personal service. They have significant technology, regulatory and operating costs to recover, but these costs won't be associated with an identified individual. The question of whether they should charge a flat fee rather than a % of assets - often referred to as an ad valorem fee - is a really difficult one for the service providers to answer. Accepted norms like this have been challenged in this and other industries. In reality smaller account holders - or those who transact frequently - are effectively subsidised by larger accounts. FWIW I think that platform fees are largely reasonable nowadays and provide good value to holders.
Fund managers are also providing largely impersonal services. They are managing pools of money assembled from many underlying investors. Ad valorem fees are perhaps more easily justified here. Although fund management fees are visible and widely questioned, the reality is that mutual funds deliver massive economies of scale for their underlying investors. The industry does a terrible job of helping people to understand this!
Some points,
[In the event that you do want to agree a percentage fee, make sure THEY provide you with worked examples before you sign. There's no reason why you should have to try to work it all out for yourself.]
- Percentage fee? No way!
- I'd expect an initial meeting without charge to scope the project and relationship
- After that I'd expect to receive a Fixed Fee proposal from the adviser for "set up" of the arrangement
- I'd expect a separate fixed annual fee proposal for "known ongoing work from year to year"
- I'd expect an hourly rates proposal for "additional advice outside the scope of this project".
[In the event that you do want to agree a percentage fee, make sure THEY provide you with worked examples before you sign. There's no reason why you should have to try to work it all out for yourself.]
iantr said:
OpA certainly do charge fund management fees. The 3% per contribution is not related to fund management. You might ask the partner precisely what this is for if you're paying separately for ongoing advice. It would be interesting to ask him/her to set out all of the fees and charges and to identify which are retained by the provider and which are effectively retained by him.
OpB - the service fee sounds expensive to me (especially as it is in addition to the platform fee), although others here may have better info on current market rates. I'd point this out and ask if there is scope to revisit. Fund management fees at 1.98% is definitely on the high side. Is this to pay for a discretionary fund manager (someone who allocates the assets, chooses funds, rebalances) AND for the underlying fees charged by the fund managers themselves? If so you might ask your adviser if other models are available. 3%+ in annual fees is way too high in todays world, in respect of both its impact upon returns and the availability of cheaper alternatives.
This industry makes me wince at times.
For OpB, the 1.98% is split 1.81% for one of the two funds suggested (Premier Multi-Asset Global Growth), the other is 0.17% (HSBC FTSE 100 Index) - I've been overseas a while and so UK funds are new to me, I'm still having a look at things myself but I was quite surprised to see the difference in rates. These are referred to as the Total Annual Fund Charge, in addition to the Platform Fee, within a Fund Supermarket. I assume therefore that these percentages go to the managers of the individual fund (perhaps with a skim for the actual retirement account provider?). The other charges listed pay for all the other people involved and their "expertise"...OpB - the service fee sounds expensive to me (especially as it is in addition to the platform fee), although others here may have better info on current market rates. I'd point this out and ask if there is scope to revisit. Fund management fees at 1.98% is definitely on the high side. Is this to pay for a discretionary fund manager (someone who allocates the assets, chooses funds, rebalances) AND for the underlying fees charged by the fund managers themselves? If so you might ask your adviser if other models are available. 3%+ in annual fees is way too high in todays world, in respect of both its impact upon returns and the availability of cheaper alternatives.
This industry makes me wince at times.
Trying to set up a pension and navigate through the maze of charges is really frustrating. I'm sure the KeyFacts sheet was intended to provide information to the client in a factual manner, but I have not found that to be the case here.
Ozzie Osmond said:
Some points,
[In the event that you do want to agree a percentage fee, make sure THEY provide you with worked examples before you sign. There's no reason why you should have to try to work it all out for yourself.]
I think I might consider writing a response to the IFA in OpB that essentially covers these points. I don't think that would be possible for OpA, given what I have researched on their business model since the first meeting. In both cases though the initial meeting was free (great!). - Percentage fee? No way!
- I'd expect an initial meeting without charge to scope the project and relationship
- After that I'd expect to receive a Fixed Fee proposal from the adviser for "set up" of the arrangement
- I'd expect a separate fixed annual fee proposal for "known ongoing work from year to year"
- I'd expect an hourly rates proposal for "additional advice outside the scope of this project".
[In the event that you do want to agree a percentage fee, make sure THEY provide you with worked examples before you sign. There's no reason why you should have to try to work it all out for yourself.]
I definitely feel that 'confusingly full disclosure' applies here. THe key Facts sheets in both cases are mixes of paragraphed words (in which certain charges like the 0.14% platform fee were hidden), the main charge fees in tables, and inset shaded boxes with examples of fees that you might pay that are completely irrelevant to the actual individual (my) case. So, the reason that I set up my own spreadsheet was to put in my proposed payment schedule and have a feel for the numbers.
TO be honest, it makes me think of just starting a SIPP and start from scratch myself...
Edited by Buffalo on Monday 8th August 15:40
Buffalo said:
TO be honest, it makes me think of just starting a SIPP and start from scratch myself...
If you do that with someone like Charles Stanley Direct or HL, you can choose one of their funds/portfolios that include asset allocation and fund selection. May be worth considering as an OptC.Buffalo said:
Looking at arranging a pension through my business (sole director and employee). I went to a recommended person who turns out to work as a partner for a well-known 'high end' group provider of pensions who actually I had never heard of but later googling suggests this group is often considered expensive.
For comparison I re-visited an IFA I had used some years ago, who also drew up some options.
Trying to compare the fees though has me tied up, and I would very much appreciate if anyone can confirm my understanding of the likely fees is about right. I have obtained the fees from what I could interpret from the KeyFacts sheet supplied in both cases.
For simplicity I have assumed £3600/ year with no growth (so fees only on contributions) for a total of 27 years.
Option A:
4.5% of the sum invested in the first 5 years – initial advice, fees, adviser payment
+
0.5% per annum for ongoing advice
+
3% of each regular contribution after the initial advice is paid for (so i have assumed starting in year 6)
TOTAL FEES = £9990
Option B:
0.7% per annum service charge
+
1.98% per annum fund management (this is the total spread across a number of funds)
+
0.14% per annum platform fee
+
0.5% per annum for ongoing advice
+
£150/ month for the first 5 months paid to adviser
TOTAL FEES £36,403
In this example the IFA offers the poorer value for money. Unless I’m completely bonkers…
How long are you saving/investing for? Without this no one can really help in giving an opinion. As has been mentioned, the investment/fund charges are missing from option A.For comparison I re-visited an IFA I had used some years ago, who also drew up some options.
Trying to compare the fees though has me tied up, and I would very much appreciate if anyone can confirm my understanding of the likely fees is about right. I have obtained the fees from what I could interpret from the KeyFacts sheet supplied in both cases.
For simplicity I have assumed £3600/ year with no growth (so fees only on contributions) for a total of 27 years.
Option A:
4.5% of the sum invested in the first 5 years – initial advice, fees, adviser payment
+
0.5% per annum for ongoing advice
+
3% of each regular contribution after the initial advice is paid for (so i have assumed starting in year 6)
TOTAL FEES = £9990
Option B:
0.7% per annum service charge
+
1.98% per annum fund management (this is the total spread across a number of funds)
+
0.14% per annum platform fee
+
0.5% per annum for ongoing advice
+
£150/ month for the first 5 months paid to adviser
TOTAL FEES £36,403
In this example the IFA offers the poorer value for money. Unless I’m completely bonkers…
Edited by Buffalo on Friday 5th August 14:13
Option B look like it is taking the p
s though with a 1.2% annual adviser charge (0.7% + 0.5%) on top of a 2.12% platform/investment management fee and £750 thrown in on top for good measure.You would be paying 3.32% a year (plus the £750) on the increasing value of your entire pension fund. Avoid.
In my original post I put a timeframe of 27 years in my calcs. I'm 38 now. While I do have pensions from employment over the past couple of decades, this will be my first UK pension and first as a company director. How long will I need it for? Who knows... I would like to think my business will keep going...
Buffalo said:
In my original post I put a timeframe of 27 years in my calcs. I'm 38 now. While I do have pensions from employment over the past couple of decades, this will be my first UK pension and first as a company director. How long will I need it for? Who knows... I would like to think my business will keep going...
Sorry, my fault, missed that in your OP. Ouch, that was stupid.Over such a period the annual charges are far more important than the initial one.
1% a year over 27 years is 27% straight, much (much) more when compounded.
PM me if you like. I'll give you the true costs, but can't advise you which way to go...
Buffalo said:
For OpB, the 1.98% is split 1.81% for one of the two funds suggested (Premier Multi-Asset Global Growth), the other is 0.17% (HSBC FTSE 100 Index).
Doesn't that mean the charge will be somewhere between 1.81 and 0.17 depending on your allocation - you don't ADD them.If you had ten funds each charging 2% then your overall charge is 2% not 20%!!
As an aside - this all seems absolutely outrageously expensive to me.
Sure - you can't escape fund fees and platform fees but IIRC there is ALWAYS an option to take an hourly rate from an IFA.
If you really HAVE to use one, I would do the following.
Pay up-front to get a long term plan in place. (Minimum 5 years.)
Then put everything into the cheapest SIPP you can find.
LEAVE IT THE HELL ALONE.
Although once a year - check in. See whether YOU think the funds are performing as hoped and if you remain comfortable with the allocations.
If happy - leave it to next year.
Maybe 5 years later pay once again an hourly rate for a meeting to get a professional opinion on your mix of investments.
Also the whole robo-advice fiveraday (Ginge R on here) nutmeg type products seem FAR FAR FAR BETTER VALUE if you really want a more active approach.
IFAs trying to select funds, or even give you stock picks are snake oil salesmen, IMHO. They don't have a clue and you can do just as much research as them from your desk with regards selecting a fund.
What is more helpful is advice on:
- Asset allocation - should I be more cash/bonds/equities?
- Life insurance.
- Perhaps mortgage although I would ALWAYS use Sarnie for this.
My background is equity investing and I cannot stress how unqualified an IFA is, if they are recommending individual stocks - run a mile.
For my personal account trading say you have £100k split across ISAs and a SIPP - you can use Institutional Investor at £80 a year fee for the ISA and £96 for the SIPP - then each trade costs £10 or something.
So say you do 10 trades a year (which is probably too much) then your total fees are 0.28% of the fund.
Even better - if you have £200k - the fees stay the same so it's just 0.14%.
Because guess what - THE f
kING SIZE DOESN'T MATTER.IFAs getting paid a % of the AUM is utterly mad. They don't do any more work for £200k than for £100k.
Rant over.
walm said:
Doesn't that mean the charge will be somewhere between 1.81 and 0.17 depending on your allocation - you don't ADD them.
If you had ten funds each charging 2% then your overall charge is 2% not 20%!!
You are correct - that was a typo in writing here. In my spreadsheet I had correctly worked out their respective costs (i.e. I did not sum the %s), although I have just looking at the spreadsheet again now that I used the full yearly sum twice rather than allocate a 50/50 split. Adjusting that made only a few hundred pounds differences to the thousands there though.If you had ten funds each charging 2% then your overall charge is 2% not 20%!!
Thanks for all the replies. I think I've made up my mind to take out a SIPP and do it for myself.
The thing I realised looking back through all of this, is I am actually a reasonably experienced investor. I've lived in other countries where attitudes to retirement funding is different to here, so I've got some good experience and my existing pensions in those countries are still doing ok. I've also traded shares for years and made good profits and smart moves ahead of trends (and also some dumb ones!). The reason I sought advice from pensions advisers was that there were a lot of new things to me now: first company, first UK pension, first time back in the UK for several years, etc. I found it harder to get more obvious information through online/ mag resources (I often found that the same articles would be regurgitated across different platforms, but without any further explanation).
I don't particularly want to make a very "needy" pension system, I'd rather it was more passive (couple of reviews a year at most) and I've got other things to do. But the hidden charges I've navigated through in this exercise, and the needless mystery surrounding something that should be quite plain, simple and encouraged have really bothered me. Overall it's left me feeling rather disappointed - certainly not willing to give a pile of cash to a third party for no real reward.
The thing I realised looking back through all of this, is I am actually a reasonably experienced investor. I've lived in other countries where attitudes to retirement funding is different to here, so I've got some good experience and my existing pensions in those countries are still doing ok. I've also traded shares for years and made good profits and smart moves ahead of trends (and also some dumb ones!). The reason I sought advice from pensions advisers was that there were a lot of new things to me now: first company, first UK pension, first time back in the UK for several years, etc. I found it harder to get more obvious information through online/ mag resources (I often found that the same articles would be regurgitated across different platforms, but without any further explanation).
I don't particularly want to make a very "needy" pension system, I'd rather it was more passive (couple of reviews a year at most) and I've got other things to do. But the hidden charges I've navigated through in this exercise, and the needless mystery surrounding something that should be quite plain, simple and encouraged have really bothered me. Overall it's left me feeling rather disappointed - certainly not willing to give a pile of cash to a third party for no real reward.
JulianPH said:
Sorry, my fault, missed that in your OP. Ouch, that was stupid.
No worries! Having read a few PH posts before posting mine, I noted that the most common reply was "how long is your investing period", so it did make me remember to add it to the background in my own post!JulianPH said:
Over such a period the annual charges are far more important than the initial one.
Certainly it was useful to lay out the numbers in spreadsheet form and realise what the low 0.x% equated to in monetary terms. Given that the whole point is to put more money in the pot, it can be quite surprising just how much those small fee points add up to over time!OP - I don't think you have factored in compound growth in your calculation. Adding it in a 7% per annum and assuming you would feed in the £3,600 at £300 a month the charges for OptA will take £125,000 out of your investments.
If you are putting the £3,600 in as lump sums the charges will be higher than this.
It is a shocking figure.
If you are putting the £3,600 in as lump sums the charges will be higher than this.
It is a shocking figure.
JulianPH said:
OP - I don't think you have factored in compound growth in your calculation. Adding it in a 7% per annum and assuming you would feed in the £3,600 at £300 a month the charges for OptA will take £125,000 out of your investments.
If you are putting the £3,600 in as lump sums the charges will be higher than this.
It is a shocking figure.
I did in my spreadsheet - although I used a slightly lower figure. I just used the contributions value here for ease really. But yes, it is a massive amount for what doesn't strike me as a great deal of work.If you are putting the £3,600 in as lump sums the charges will be higher than this.
It is a shocking figure.
It's bonkers really. My business is completely unrelated to finance, but in the service I provide I have tried very hard to remove all mark-ups and other hidden charges, which I used to resent paying when I was the client. I make my money on my agreed fee and one small administration charge - expenses are charged at cost, etc. The reason was that I couldn't, with a straight face, justify adding charges and mark-ups that I didn't agree with even though it was an industry norm. Slowly, my clients seem to be appreciating this approach themselves. Probably there is some parallel to my beliefs here. I don't mind paying for expertise and judgement, but fees should be fair, related to the work involved, clearly demonstrated as appropriate, and straightforwardly reported prior to signing.
Buffalo said:
...fees should be fair, related to the work involved, clearly demonstrated as appropriate, and straightforwardly reported prior to signing.
That's the bit that grinds my gears.My old IFA was entirely passive.
I was chucking him thousands a year in kick-backs for doing nothing most years.
Every now and again I would ask for a potential re-balance and he would check the latest top quartile performing funds over the last three years and suggest a swap.
An hourly rate makes much more sense IMHO.
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