IFA charging 3% to switch investments

[thelegend1000]

Hi,

(posting under a new acc rather than my regular normal one)


Was speaking to my father in law at the weekend and he told me that his financial advisor wants to start moving his investments (circ 500k) into his & the wife's ISA. He has been told that there will be a charge of 3% (initially was 4% and they offered a discount)- considering this is from existing money invested and they pay 1% per annum fee to to the FA management fee, on top of the prudential investments costs of over 1%.

Firstly, they have had investments with their IFA for 10 years and they are all held outside an ISA , as they are approaching retirement age of 65. The IFA has suggested they start moving the funds into to ISAs. I have told my father in law to ask the IFA why only now after all these years are they moving the funds into a tax free wrapper... I can't think of any reason the IFA won't have done this over the years, other than incompetence. (as they might want to start drawing some income from these investments in retirement)

Secondly, the IFA is charging 3% fee to move existing investments into ISA (initially was 4% and they offered a discount ) bearing in mind they pay 1% fee to the advisor on top of the investment charges (about another 1%).. Isn't this expensive? Shouldn't it be included in the IFA 1% annual fee?


Personally, I don't use an IFA as I manage my own ISA & SIPP, so I'm not sure about the IFA fees, but to me they sound really expensive. What are your thoughts? and why wont an IFA have used the ISA allowances to shelter investments till now?

Thanks

[aka_kerrly]

To be honest I've been out of the financial services industry for a few years now but I doubt fees have changed that much.

3% initial + 0.5% annual was considered quite standard however I can remember dealing with some advisers who would want 5% initial, 1% annual and charge 3% for any fund switches and often would only switch funds around to create income for themselves.

How have the investments performed over the 10years, are they a complex mix of asset types or off the shelf collective Ut/oeics? Does the advisor provide analysis of the holdings or simply its up by X %.

I've got a horrible feeling your parents maybe paying top fees for a very standard service.

Youre right regarding the isa, I always used to advise to fill an isa allowance every year, even more so now you can take money out and top it up again without oversubscribing.

[JulianPH]

3% - 4% initial fee and 1% annual fee is very standard with financial advisers these days, but yes it is horrendously expensive for what is an incredibly simple task.

There adviser is effectively charging them £15,000 to move their money into the ISAs and then £5,000 a year every year going forward.

You are also right to question why the adviser has left 10 years of ISA allowance unused since he was appointed (and has been paid every year).

It is going to take them well over 12 years to get this money into their ISAs now.

You mention they are with Prudential, what product are they currently in?

I think they may have good grounds for a complaint and may be entitled to compensation based upon what you have posted. However, before looking at this I would need to know far more detail.

Feel free to PM me if you like.

[Derek Chevalier]

JulianPH said:

3% - 4% initial fee and 1% annual fee is very standard with financial advisers these days, but yes it is horrendously expensive for what is an incredibly simple task.

For a pot of £500k I would suggest a thorough retirement planning exercise (which is far from an incredibly simple task) from a well respected financial planner will cost 1% or under and for an ongoing fee (and I'll post about what I would expect for it if it were my money) 0.75-0.8% would be my target for an all in annual cost of around 1.2% p.a. If it were significantly more than this I'd want to understand why.

I say this with reasonable confidence re what other planners charge as I've been writing the wording for my website this week and have been researching firms that I respect, and as importantly publish indicative fees (only 5% apparently ).

[Derek Chevalier]

aka_kerrly said:

How have the investments performed over the 10years, are they a complex mix of asset types or off the shelf collective Ut/oeics? Does the advisor provide analysis of the holdings or simply its up by X %.

I would suggest the fund side is a very small part of the value that a decent adviser/planner adds

[bitchstewie]

If those are the percentages it almost makes me wonder why it's called a Financial Advisor rather than a life coach

[Helicopter123]

I'm with Julian in that this (on the brief evidence posted) does look like a possible complaint to me in that the funds should have been wrapped in an ISA long before now assuming the annual allowance was not being used elsewhere. An ongoing advice fee has been paid and yet advice to invest via the most suitable product has not been received, and this may have had a financial implication in that additional tax has been paid as a result.

What else has been missed would be the next question, with pensions and estate planning my immediate concern.

How have the returns on invested funds been monitored?

Regarding fees, 3% might be the norm for advising on an investment but when it comes to replacement business where a hefty ongoing advice fee is being paid, then this looks cheeky at best.

There are good and average advisers in the UK, and paying a higher fee is no guarantee you will end up with the former.

I would find a good (Chartered) firm in your area and seek a second opinion on the overall financial position.

[red_slr]

I don't get it. They have £500k invested and their FA wants to "move it into ISAs".

Given that you only have £20k PA per pn whats the point? Anything else will be taxed. For the couple that's £40k. Its not like we are in March and you can roll up 2 years so £80k. That I might understand.

I think clarity is required here.

if they are that close to retirement then I would be getting a second opinion. The problem is FAs will want paying for this.

[Derek Chevalier]

thelegend1000 said:

Hi,

(posting under a new acc rather than my regular normal one)


Was speaking to my father in law at the weekend and he told me that his financial advisor wants to start moving his investments (circ 500k) into his & the wife's ISA. He has been told that there will be a charge of 3% (initially was 4% and they offered a discount)- considering this is from existing money invested and they pay 1% per annum fee to to the FA management fee, on top of the prudential investments costs of over 1%.

Firstly, they have had investments with their IFA for 10 years and they are all held outside an ISA , as they are approaching retirement age of 65. The IFA has suggested they start moving the funds into to ISAs. I have told my father in law to ask the IFA why only now after all these years are they moving the funds into a tax free wrapper... I can't think of any reason the IFA won't have done this over the years, other than incompetence. (as they might want to start drawing some income from these investments in retirement)

Secondly, the IFA is charging 3% fee to move existing investments into ISA (initially was 4% and they offered a discount ) bearing in mind they pay 1% fee to the advisor on top of the investment charges (about another 1%).. Isn't this expensive? Shouldn't it be included in the IFA 1% annual fee?


Personally, I don't use an IFA as I manage my own ISA & SIPP, so I'm not sure about the IFA fees, but to me they sound really expensive. What are your thoughts? and why wont an IFA have used the ISA allowances to shelter investments till now?

Thanks

It's very easy for me to sit here and criticize other people's work and not knowing your parents' exact circumstances so I will try to be non-judgemental in my response.

To answer your immediate questions, yes 3% (£1,200) sounds like a lot of money to switch investments into an ISA. I'd ask for a cost breakdown (who is doing the work e.g. technical admin and how much time it will take them to do it, and other costs involved).

I'd also want to know what your parents were getting for their >£10,000 of retirement savings they are giving away to various "helpers" per annum.

All in costs range do vary, starting from around 25bps for a basic DIY implementation

https://www.pistonheads.com/gassing/topic.asp?h=0&...

add increasing as you add more "helpers" along the way. Are your parents really getting an additional >£8,750 p.a. of value from their current service?

As you say, it's also worth asking why the ISA switch wasn't considered earlier - if it was part of the original recommendation I'm not sure why an additional charge needs to be made now. If it wasn't part of the original recommendation more digging required.

One other thing, you mention "(as they might want to start drawing some income from these investments in retirement)" - I would've expected them to have a clear retirement plan and withdrawal strategy well in advance of retirement, If they have "too much" money and there's no chance of them running out, could they have retired earlier if that was one of their objectives?

Edited by Derek Chevalier on Saturday 1st June 09:31

[Derek Chevalier]

red_slr said:

if they are that close to retirement then I would be getting a second opinion. The problem is FAs will want paying for this.

Agreed, but I would suggest they can potentially get a better ongoing service for a lesser cost, so it may be worth taking an initial hit.

[DonkeyApple]

Derek Chevalier said:

I would suggest the fund side is a very small part of the value that a decent adviser/planner adds

I like that.

What is hugely under appreciated is the incredibly simple but absolutely invaluable power that a good advisor has to stand between the client and the markets and to retard the client’s natural need to go gambling and get set into the default ‘buy high, sell low’ regime.

The huge problem that the industry faces today is that it has spent the last decade giving its clients gaming platforms while knowing categorically that by doing so they will be encouraging their customers to go punting.

Some have done it deliberately because the trading fees are valuable plus it conveniently ensures the client is to blame for weak performance while others have been forced to do it in order to remain ‘relevant’ and competitive.

The reality is that selecting a solid set of core investments at the outset with no intent to change and incur trading costs unless needed by the ongoing tax/regulatory oversight remains a really robust and hard to beat investment formula. I would argue that what may have changed in recent years is the increase in risk of a Kodak or Nokia event where a blue chip can collapse far quicker than before because of the pace of commercial change in the modern world but this is just a small amount of additional oversight.

I feel that 1% a year, or thereabouts, to deliver a security and guarantee of funds, to keep abreast of the best tax actions and most importantly to stop the client from going gambling represents good value.

Where I really struggle is with the onboarding fees. For me, I simply do not understand what you are paying for, why and more importantly why anyone is paying these fees. Now I am not an IFA and I have not been a wealth manager for 20 years so I will clearly have gaps in my knowledge and understanding but I simply do not get how this has happened and how it is justified.

As a broker it costs me nothing (relatively speaking) to onboard a client, nothing to deliver to them a plan which is basically a template and putting them into positions costs basis points.

In the case of the OP it reads as if there is a half bar GIA where the positions are to be migrated, as allowances permit, into an ISA wrapper and that the charge is £15k?

What’s the annual ISA allowance? £20-40k? So in year one the charge is £15k to simply cross up to £40k of positions? A task that is carried out by the desk junior and with a market cost of nothing to pennies.

I find these upfront charges to be insidious. Sure, the initial onboarding has a cost in terms of time and the giving of professional, up to date tax and strategy planning but I going to be taking 1% every year for 20+ years and the reality is that I am not doing anything at the outset that I am not doing each year for my 1%. So if I am valuing my professional time and oversight at 1% per annum what is my justification for charging 3% upfront in year one?

I’d rather have no upfront charge for welcoming a new and valuable client who is going to be paying me 1% a year for decades to keep their investments and them on track. I’d rather explain that if they decide to leave within X years and the portfolio is within a predetermined performance threshold that I would be charging them an exit fee but I really struggle with how this side of the industry is getting away with charging new clients these massive initial fees or worse, seemingly in this case, levying these fees on existing clients with existing positions and plans in place.

[Helicopter123]

Derek Chevalier said:

red_slr said:

if they are that close to retirement then I would be getting a second opinion. The problem is FAs will want paying for this.

Agreed, but I would suggest they can potentially get a better ongoing service for a lesser cost, so it may be worth taking an initial hit.

Any professional will require payment for their services, accountants, solicitors, financial advisers.

[bmwmike]

What sort of guarantees does paying an IFA provide? For example if an IFA had neglected to use tax wrappers where appropriate, would a customer be due recompense and how is that achieved ?

I need to find something for a friend of mine so watch this thread with interest.

[Derek Chevalier]

bhstewie said:

If those are the percentages it almost makes me wonder why it's called a Financial Advisor rather than a life coach

I know some don't like the term life coach, I'm sure there are loads of titles people give themselves, but it (should) be where a lot of value is added. I'll give an example.

I was out with a former colleague recently, wife and kids, earning good city money but spending it all. There aren't that many old people in the city so he realistically has around 10 years to make a difference to his financial future.

He needs someone to sit with him and undergo a basic budgeting/planning exercise. To show him what sacrifices made now (does he really need to have so much shiny metal on the driveway?) can make down the road - financial freedom earlier or a better standard of living in retirement.

He might become a client, he might commit to a budget/savings plan, but much like having a New Year's resolution and joining the gym - it's not always easy to stick with it. But stick with it they must if they want to achieve their objectives and that's a big part of the job - gentle nudges/discussion etc.

Or he might not become a client, might not make the required changes, reach 60 and realise that it's far too late.

Some people are able to do this without an external help, others find someone to partner with them is what's required.

[Derek Chevalier]

DonkeyApple said:

Derek Chevalier said:

I would suggest the fund side is a very small part of the value that a decent adviser/planner adds

I like that.

What is hugely under appreciated is the incredibly simple but absolutely invaluable power that a good advisor has to stand between the client and the markets and to retard the client’s natural need to go gambling and get set into the default ‘buy high, sell low’ regime.

The huge problem that the industry faces today is that it has spent the last decade giving its clients gaming platforms while knowing categorically that by doing so they will be encouraging their customers to go punting.

Some have done it deliberately because the trading fees are valuable plus it conveniently ensures the client is to blame for weak performance while others have been forced to do it in order to remain ‘relevant’ and competitive.

The reality is that selecting a solid set of core investments at the outset with no intent to change and incur trading costs unless needed by the ongoing tax/regulatory oversight remains a really robust and hard to beat investment formula. I would argue that what may have changed in recent years is the increase in risk of a Kodak or Nokia event where a blue chip can collapse far quicker than before because of the pace of commercial change in the modern world but this is just a small amount of additional oversight.

I feel that 1% a year, or thereabouts, to deliver a security and guarantee of funds, to keep abreast of the best tax actions and most importantly to stop the client from going gambling represents good value.

Where I really struggle is with the onboarding fees. For me, I simply do not understand what you are paying for, why and more importantly why anyone is paying these fees. Now I am not an IFA and I have not been a wealth manager for 20 years so I will clearly have gaps in my knowledge and understanding but I simply do not get how this has happened and how it is justified.

As a broker it costs me nothing (relatively speaking) to onboard a client, nothing to deliver to them a plan which is basically a template and putting them into positions costs basis points.

In the case of the OP it reads as if there is a half bar GIA where the positions are to be migrated, as allowances permit, into an ISA wrapper and that the charge is £15k?

What’s the annual ISA allowance? £20-40k? So in year one the charge is £15k to simply cross up to £40k of positions? A task that is carried out by the desk junior and with a market cost of nothing to pennies.

I find these upfront charges to be insidious. Sure, the initial onboarding has a cost in terms of time and the giving of professional, up to date tax and strategy planning but I going to be taking 1% every year for 20+ years and the reality is that I am not doing anything at the outset that I am not doing each year for my 1%. So if I am valuing my professional time and oversight at 1% per annum what is my justification for charging 3% upfront in year one?

I’d rather have no upfront charge for welcoming a new and valuable client who is going to be paying me 1% a year for decades to keep their investments and them on track. I’d rather explain that if they decide to leave within X years and the portfolio is within a predetermined performance threshold that I would be charging them an exit fee but I really struggle with how this side of the industry is getting away with charging new clients these massive initial fees or worse, seemingly in this case, levying these fees on existing clients with existing positions and plans in place.

There are some that don't charge initial fees and (arguably) recoup the initial fees on an ongoing basis over the years - a client is far more willing to pay once they experience what great planning provides than commit to an upfront fee when they don't yet see the value - some see it as good business sense. Others charge a reduced fee and treat it as a loss making exercise (even though they are charging several thousand pounds). Yet others say to potential clients if they don't feel they have received value after the initial planning work they can walk away with no charge. Others go as far as to push that out to include the first year's fees.

If we separate the initial work into planning (a lot of which is adviser time) and implementation (admin), the costs to the business are skewed a big way to the former, although the fee breakdowns don't always reflect this.

To go through several meetings with clients, planning, budgeting/expenditure analysis etc and having the plan reviewed by a fellow planner (who also charges xxx per hour) that's a reasonable cost there.

Reviewing of existing investments, recommendations, report writing is usually going to be cheaper as is implementation (including liability costs etc).

Regarding charging additional money for existing clients - if it was part of the initial plan - i.e. you will save £2,000 into your pension per month until retirement, then that would need some justification, IMO - as you say it's a trivial task on most modern platforms. Even new money that wasn't in the plan (and may require some paperwork etc), this also could/should(?) be covered under the ongoing fee, especially for something like a GIA/ISA switch.

[darreni]

It’s impossible understand the ifa’s reasoning without more detail & the talk of complaints & compensation is premature without such detail.

Op, I’d suggest requesting that the IFA issue a written recommendation as to the benefits of his plan & the costs, risks & tax liabilities of such.

Once you have that, repost here & it’ll become clearer if your folks are being bent over.

[Helicopter123]

Derek Chevalier said:

DonkeyApple said:

Derek Chevalier said:

I would suggest the fund side is a very small part of the value that a decent adviser/planner adds

I like that.

What is hugely under appreciated is the incredibly simple but absolutely invaluable power that a good advisor has to stand between the client and the markets and to retard the client’s natural need to go gambling and get set into the default ‘buy high, sell low’ regime.

The huge problem that the industry faces today is that it has spent the last decade giving its clients gaming platforms while knowing categorically that by doing so they will be encouraging their customers to go punting.

Some have done it deliberately because the trading fees are valuable plus it conveniently ensures the client is to blame for weak performance while others have been forced to do it in order to remain ‘relevant’ and competitive.

The reality is that selecting a solid set of core investments at the outset with no intent to change and incur trading costs unless needed by the ongoing tax/regulatory oversight remains a really robust and hard to beat investment formula. I would argue that what may have changed in recent years is the increase in risk of a Kodak or Nokia event where a blue chip can collapse far quicker than before because of the pace of commercial change in the modern world but this is just a small amount of additional oversight.

I feel that 1% a year, or thereabouts, to deliver a security and guarantee of funds, to keep abreast of the best tax actions and most importantly to stop the client from going gambling represents good value.

Where I really struggle is with the onboarding fees. For me, I simply do not understand what you are paying for, why and more importantly why anyone is paying these fees. Now I am not an IFA and I have not been a wealth manager for 20 years so I will clearly have gaps in my knowledge and understanding but I simply do not get how this has happened and how it is justified.

As a broker it costs me nothing (relatively speaking) to onboard a client, nothing to deliver to them a plan which is basically a template and putting them into positions costs basis points.

In the case of the OP it reads as if there is a half bar GIA where the positions are to be migrated, as allowances permit, into an ISA wrapper and that the charge is £15k?

What’s the annual ISA allowance? £20-40k? So in year one the charge is £15k to simply cross up to £40k of positions? A task that is carried out by the desk junior and with a market cost of nothing to pennies.

I find these upfront charges to be insidious. Sure, the initial onboarding has a cost in terms of time and the giving of professional, up to date tax and strategy planning but I going to be taking 1% every year for 20+ years and the reality is that I am not doing anything at the outset that I am not doing each year for my 1%. So if I am valuing my professional time and oversight at 1% per annum what is my justification for charging 3% upfront in year one?

I’d rather have no upfront charge for welcoming a new and valuable client who is going to be paying me 1% a year for decades to keep their investments and them on track. I’d rather explain that if they decide to leave within X years and the portfolio is within a predetermined performance threshold that I would be charging them an exit fee but I really struggle with how this side of the industry is getting away with charging new clients these massive initial fees or worse, seemingly in this case, levying these fees on existing clients with existing positions and plans in place.

There are some that don't charge initial fees and (arguably) recoup the initial fees on an ongoing basis over the years - a client is far more willing to pay once they experience what great planning provides than commit to an upfront fee when they don't yet see the value - some see it as good business sense. Others charge a reduced fee and treat it as a loss making exercise (even though they are charging several thousand pounds). Yet others say to potential clients if they don't feel they have received value after the initial planning work they can walk away with no charge. Others go as far as to push that out to include the first year's fees.

If we separate the initial work into planning (a lot of which is adviser time) and implementation (admin), the costs to the business are skewed a big way to the former, although the fee breakdowns don't always reflect this.

To go through several meetings with clients, planning, budgeting/expenditure analysis etc and having the plan reviewed by a fellow planner (who also charges xxx per hour) that's a reasonable cost there.

Reviewing of existing investments, recommendations, report writing is usually going to be cheaper as is implementation (including liability costs etc).

Regarding charging additional money for existing clients - if it was part of the initial plan - i.e. you will save £2,000 into your pension per month until retirement, then that would need some justification, IMO - as you say it's a trivial task on most modern platforms. Even new money that wasn't in the plan (and may require some paperwork etc), this also could/should(?) be covered under the ongoing fee, especially for something like a GIA/ISA switch.

Derek, as a business owner, I would argue that the biggest cost to providing regulated advice today is the post sale regulatory risk. This is significant and is only growing. If not priced correctly, this will put firms out of business.

[Helicopter123]

bmwmike said:

What sort of guarantees does paying an IFA provide? For example if an IFA had neglected to use tax wrappers where appropriate, would a customer be due recompense and how is that achieved ?

I need to find something for a friend of mine so watch this thread with interest.

If you receive poor advice you can complain and then complain again to the ombudsman.

We also operate a restricted advice business (non IFA) where advice is specifically guaranteed. Selection of a sub optimal wrapper would be compensated. You would be put in the position you should have been had the correct advice been provided at outset. In practise there are strict procedures in place to get it right first time.

[darreni]

Helicopter123 said:

Derek, as a business owner, I would argue that the biggest cost to providing regulated advice today is the post sale regulatory risk. This is significant and is only growing. If not priced correctly, this will put firms out of business.

This times a thousand. Firms should price for the risk they are taking on, not just the initial work being done.

With the current pricing in the PI market, some firms are only just beginning to understand this.

[DonkeyApple]

darreni said:

Helicopter123 said:

Derek, as a business owner, I would argue that the biggest cost to providing regulated advice today is the post sale regulatory risk. This is significant and is only growing. If not priced correctly, this will put firms out of business.

This times a thousand. Firms should price for the risk they are taking on, not just the initial work being done.

With the current pricing in the PI market, some firms are only just beginning to understand this.

The side that I have always operated on has focussed for many years now almost purely on the AUM figure, building that with the right annual charges and good stickiness. To me, charging an upfront fee represents a significant barrier to entry to vital capital. As you both say, it’s the ongoing cost of looking after the AUM correctly that is at the core.

Having said that, it is a side of the market that is extremely London centric and doesn’t have the need for an army of regional salesmen and brand representatives which the IFA market requires and so maybe it is the case that without this upfront revenue there isn’t the means to fund this staffing requirement?