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Are huge charges inevitable?

Including Financial Independence and Retiring Early (FIRE)
Gilgongo
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Are huge charges inevitable?

#253163

Postby Gilgongo » September 22nd, 2019, 10:39 pm

I'm 52 and thinking of retiring in 5 years, so I thought I'd get my current investments (held by both myself and my wife) looked at by a professional with a view to living off them in perpetuity without too much maintenance hassle in the process.

We've got roughly 40% in a HYP (ISA), 20% in a Lunibasket L7 ITs (SIPP), 15% in cash and the rest in various ETFs (bonds, gilts, gold, and index trackers) in SIPPs and non-pension accounts. I also have a workplace pension that I'm contributing to that's currently worth about 5% of the whole. Overall, the current portfolio could have a bit more international exposure perhaps, but it's reasonably diverse.

The pro recommended consolidating around a mix of active and passive funds, one portfolio for each of us (we have different attitudes to risk).

The combined AMCs and other charges on the portfolio right now are costing about £2,000 year. For the convenience of a simple collection of diversified funds over the current hodge-podge of holdings (not to mention the management of the HYP), I'd expected to pay a bit more in charges. But the proposed portfolios would rack up over £4,000 per year, adding an extra AMC of about 0.35%

That's a fair headwind, but should I just accept is as the price of doing business?

G

Alaric
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Re: Are huge charges inevitable?

#253167

Postby Alaric » September 22nd, 2019, 10:58 pm

Gilgongo wrote:The pro recommended consolidating around a mix of active and passive funds, one portfolio for each of us (we have different attitudes to risk).


Were the funds OEICs rather than ETFs or ITs? Were individual shares ruled out?

If you have the confidence to ignore the recommendations of financial advisers, it can be very much cheaper.

Because of the perhaps legitimate fright by IFAs of falling foul of compliance regulations, what they recommend is biased not by what they objectively think, but the opinions and prejudices of the FCA who are notoriously poor at failing to spot problems right on their doorstep.

Dod101
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Re: Are huge charges inevitable?

#253171

Postby Dod101 » September 22nd, 2019, 11:24 pm

I have no interest in the value of your portfolio, but if you are paying say more than 1% of it that is too much. I have never used an IFA except to get some broad ideas of asset allocation. I also listened to his other ideas but went off and did it myself. There is undoubtedly a learning curve (which can sometimes be expensive) but I think worth it overall. After all at 52 you will probably have at least 30 years of investing to look forward to. You do not want to be paying a lot for each of these years surely? So a DIY approach is almost certainly the better one. Mistakes, problems etc in the early years you should simply write off as tuition fees!

Huge fees are not inevitable, to answer your question. Alaric is right I think.

Dod

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Re: Are huge charges inevitable?

#253174

Postby AsleepInYorkshire » September 22nd, 2019, 11:31 pm

Gilgongo wrote:I'm 52 and thinking of retiring in 5 years, so I thought I'd get my current investments (held by both myself and my wife) looked at by a professional with a view to living off them in perpetuity without too much maintenance hassle in the process.

We've got roughly 40% in a HYP (ISA), 20% in a Lunibasket L7 ITs (SIPP), 15% in cash and the rest in various ETFs (bonds, gilts, gold, and index trackers) in SIPPs and non-pension accounts. I also have a workplace pension that I'm contributing to that's currently worth about 5% of the whole. Overall, the current portfolio could have a bit more international exposure perhaps, but it's reasonably diverse.

The pro recommended consolidating around a mix of active and passive funds, one portfolio for each of us (we have different attitudes to risk).

The combined AMCs and other charges on the portfolio right now are costing about £2,000 year. For the convenience of a simple collection of diversified funds over the current hodge-podge of holdings (not to mention the management of the HYP), I'd expected to pay a bit more in charges. But the proposed portfolios would rack up over £4,000 per year, adding an extra AMC of about 0.35%

That's a fair headwind, but should I just accept is as the price of doing business?


One question if I may. If your chosen professional gets it's wrong will s/he give you all their fees back?

One observation. If your chosen professional is so good at selecting stocks why does s/he need your business?

One conclusion. Seems like one side is taking all the risk and the other is just letting them.

One thought. Think about this ... Woodford! And if you're not aware of that little disaster please Google it.

Believe in yourself first

AiY

xxd09
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Re: Are huge charges inevitable?

#253220

Postby xxd09 » September 23rd, 2019, 9:26 am

I do not think you can have it both ways -either you are hands off and trust your IFA ( expensive) or you are hands on which is cheaper-a lot cheaper
£4000 pa over 40 years (age 50-90) is £200000!
Most people here are hands on-personally it’s my hard earned money and I want to be the person living off it not someone else!
So you have time -start to learn more,boards here,Monevator has a good board,Lars Kroijer book and videos plus books by John Bogle
Your Portfolio cannot be that bad or the IFA would have told you so-IFA,s are the only financial advice givers in the financial community with a Fiduciary responsibility to you ( like doctors and lawyers) .The rest are salesmen
Take your time and learn-run your Portfolios every so often past an IFA. If you are on the right lines he has to say so-if there is a big hole in your plans -he will tell you
First consultation probably free as he wants your business
Repeat this procedure as required till you are confident in your own judgement
Good luck
xxd09

Dod101
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Re: Are huge charges inevitable?

#253222

Postby Dod101 » September 23rd, 2019, 9:53 am

xxd09 is giving you good advice, although of course £4,000 over 40 years is actually £160,000 although the principle is the same. I cannot quite get my head to agree that consulting an IFA is the same as consulting a doctor because of course with an IFA there is no 'correct' answer. So much depends on his judgement and whether that fits with his reading of your attitude to risk for instance. It seems to me that an IFA has much more 'wriggle' room than a doctor has.

It is years since I consulted an IFA and I guess things have changed since I last did but I used one more for advice on asset allocation than on choice of investments. I did though let him have some money to invest for me at one point, but quickly decided that I could lose money just as well as he could. It is a real dilemma though. I know of a recently widowed lady who has been left with a portfolio and is paying a perfectly respectable IFA/fund manager to handle it for her. She will not I think want to handle it herself so she has little option but to pay the high fees and actually she does not I think have much idea even how to judge the results.

Dod

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Re: Are huge charges inevitable?

#253243

Postby scrumpyjack » September 23rd, 2019, 11:04 am

But if you put your money into good Investment Trusts they are being run by competent managers who know far more about investing than IFA’s do.

The IFA may well be very helpful in advising you about your own financial situation and planning how to arrange your financial affairs, but once you have decided to put £X into equities the IFA is not going to add any value. Paying him or her to second guess the IT investment managers is a counterproductive waste of money, IMO.

Leave it to someone else to pay for his cruises!

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Re: Are huge charges inevitable?

#253244

Postby tikunetih » September 23rd, 2019, 11:07 am

Gilgongo wrote:The pro recommended consolidating around a mix of active and passive funds, one portfolio for each of us (we have different attitudes to risk).


- Listing the model portfolios along with their component charges figures should help solicit feedback

- Ignoring the cash element, what's the weighted average ongoing expenses figure for the portfolios?


Whatever these figures are, substituting cheaper comparable components for the more expensive ones may allow you to reduce the costs, possibly considerably.

Chrysalis
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Re: Are huge charges inevitable?

#253291

Postby Chrysalis » September 23rd, 2019, 1:27 pm

No, huge charges are not inevitable, but they are hard to avoid if you are handing your portfolio to someone else to manage.
I have used IFAs but through hard experience I will now only use a financial planner on a fixed fee basis, to do specific planning and review work. This will typically cost maybe £1-3k, depending on the scope of the work. That’s one off, not every year.

I will never hand over my portfolio for someone to manage. It’s just not necessary when you can select a highly diversified low cost index tracker on a DIY platform for less than 0.5% in total costs. (I know others here have different and more active investment strategies but I model myself on Lars Kroejer’s grandmother and spend my time doing other things!)

Please don’t be fooled into thinking this level of charges are anything other a rip off which will line the IFAs pocket at your expense.

Chrysalis
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Re: Are huge charges inevitable?

#253293

Postby Chrysalis » September 23rd, 2019, 1:29 pm

You actually seem to have a pretty clear idea of what you want to be invested in. What’s stopping you just sorting it out yourself?

tikunetih
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Re: Are huge charges inevitable?

#253333

Postby tikunetih » September 23rd, 2019, 4:10 pm

Gilgongo wrote:I'd expected to pay a bit more in charges. But the proposed portfolios would rack up over £4,000 per year, adding an extra AMC of about 0.35%


You need to explain the situation in more detail.

1. Because of your use of the terms "extra AMC", I assumed you meant that the specific proposed portfolio of collective investment vehicles suggested by the IFA has, in combination, total fund charges equating to an additional 35bps vs. your existing portfolio. Since you currently hold a good chunk of individual securities (which attract no management fee) you might - although not necessarily, as it depends on whether your existing ITs can be replaced with lower cost options - expect an uplift in charges vs your current portfolio if moving to 100% collective vehicles, since all holdings would then attract management fees, albeit some with extremely low fees hopefully.

2. Whereas, it appears from other posters referring to the IFA that they think this additional 35bps is what you'd be paying the advisor to manage this portfolio for you on an an going basis, hence their ire.... ;)


1. and 2. are quite different things and you'd address the issues in different ways.

So, I suggest you lay out the situation with a bit more clarity so we understand it clearly, else we're all just guessing making our suggestions nonsense.

Chrysalis
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Re: Are huge charges inevitable?

#253353

Postby Chrysalis » September 23rd, 2019, 4:56 pm

I assumed the extra charges were made up of a combination of 1 and 2. but clarification would be helpful!

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Re: Are huge charges inevitable?

#253360

Postby Luniversal » September 23rd, 2019, 5:19 pm

Gilgongo wrote:I'm 52 and thinking of retiring in 5 years, so I thought I'd get my current investments (held by both myself and my wife) looked at by a professional with a view to living off them in perpetuity without too much maintenance hassle in the process.

We've got roughly 40% in a HYP (ISA), 20% in a Lunibasket L7 ITs (SIPP), 15% in cash and the rest in various ETFs (bonds, gilts, gold, and index trackers) in SIPPs and non-pension accounts. I also have a workplace pension that I'm contributing to that's currently worth about 5% of the whole. Overall, the current portfolio could have a bit more international exposure perhaps, but it's reasonably diverse.

G


It may help to know that the Basket of Seven, on a conservative forecast, is likely to pay out 5.5-6% more this year than in 2018. If inflation stays in the 2.5-3% range (RPI), purchasing power will grow by about 3%.

Since the notional start date of Nov. 11, 2000, B7 income has compounded at about 7% pa in money terms or just under 4% pa real; so the current year is undershooting a little.

Gilgongo
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Re: Are huge charges inevitable?

#253427

Postby Gilgongo » September 23rd, 2019, 8:34 pm

Thanks! Lots of food for thought in the replies. I've arranged to talk to the IFA to clear up a few things prior to him finalising his report, so maybe something might come out of that (the report doesn't state what the overall percentage charge p/a for the new portfolio would be, for instance. And other things).

Meanwhile, to address some specific questions (I hope!):

tikunetih wrote:other posters referring to the IFA that they think this additional 35bps is what you'd be paying the advisor to manage this portfolio for you on an an going basis


Sorry, should have made that clear - it's just one-off advice. The increase is simply the extra charges the proposed new portfolio will attract once I set it up. Oh and it's 43bps - I got it wrong in my original post!

tikunetih wrote:- Listing the model portfolios along with their component charges figures should help solicit feedback

- Ignoring the cash element, what's the weighted average ongoing expenses figure for the portfolios?


Here's the detail. The weighted av. AMC for my portfolio appears to be missing, BTW.

Proposed portfolios:





Our current portfolio is pretty spread out across accounts, but the current aggregated total charge calculated in the report is £1,544.66 for me and £452.63 for my wife. Quoth the report: "The total estimated cost of your current investments and pensions equate to £1,997.29 and will increase to £4,155.67, which is an increase of £2,158.38 per annum. This is an increase of 0.43%."

Alaric wrote:Were the funds OEICs rather than ETFs or ITs? Were individual shares ruled out?


The IFA can't advise on direct holdings.

xxd09 wrote:If you are on the right lines he has to say so-if there is a big hole in your plans -he will tell you


Ah, good point!

Also just to be clear, I don't think I've wasted the money I've spent on the IFA's advice, since a number of things have come to light about my finances that I don't think I would have otherwise thought about. His "stress tests", Monte Carlo and other analyses have also been very useful. The main issue I have is with the portfolio charges and what I'm "buying" with them :-)

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Re: Are huge charges inevitable?

#253437

Postby Chrysalis » September 23rd, 2019, 9:31 pm

That sounds more reassuring. So is the idea that you will buy the portfolio that he has selected? And you’re moving from a proportion of single company shares to everything being held in actively managed collectives?
To me, the charges seem high, but I only invest in index trackers and the highest fund charge I have is 0.25%. Active management is going to be more expensive. I personally am convinced by arguments that it’s hard to select the managers who will outperform the market, so my strategy is simply to buy the market cheaply. Your position may differ, of course.
I can’t really comment on whether you could find a lower cost active strategy.

Gilgongo
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Re: Are huge charges inevitable?

#253443

Postby Gilgongo » September 23rd, 2019, 10:18 pm

Jabd2001 wrote:So is the idea that you will buy the portfolio that he has selected?


Indeed. But when I consider the ongoing charges, I have to ask myself what I'm really "buying" with that compared to doing what I'm currently doing. For example I had, for the sake of the management hassle, considered jacking in my HYP (which is in an ISA and has 30 holdings currently yielding about 4.8%) and just converting it to a few passive trackers and maybe ITs, suitably diversified. I might try asking the IFA to talk me out of that in fact :-)

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Re: Are huge charges inevitable?

#253453

Postby Alaric » September 23rd, 2019, 11:26 pm

Gilgongo wrote:The IFA can't advise on direct holdings.


I would have thought that made the advice biased in favour of selling shares and buying OEICS. Is he allowed to recommend holding Investment Trusts or ETFs?

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Re: Are huge charges inevitable?

#253470

Postby Gilgongo » September 24th, 2019, 7:23 am

Alaric wrote: Is he allowed to recommend holding Investment Trusts or ETFs?


I suspect not. In the analysis of my current portfolio, my ITs are classed as "stocks"

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Re: Are huge charges inevitable?

#253475

Postby Chrysalis » September 24th, 2019, 7:38 am

I don’t really understand why he can’t advise on ITs or indeed individual shares. I thought regulated advisers could advise on anything....

Dod101
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Re: Are huge charges inevitable?

#253478

Postby Dod101 » September 24th, 2019, 8:22 am

I do not know what an IFA can or cannot advise on but if he can advise on say OEICs but not on individual shares then you do not want him because that is removing much of the market, and on the whole OEICs are more expensive than say investment trusts, which I am sure will be called shares/equities, (because that is what they are) It seems that the IFA has helped you with your general finances. Why not just leave it at that?

You can do the rest yourself. In fact it sounds as if you have done the rest, but if I were you I would now sit down with a pen and paper and write down what you want from your investments as a list of priorities. eg, income first followed by growth to meet inflation, absolute security of the portfolio, no need to worry about income but I need long term growth as will want to access these funds to pay off my mortgage in 5 years. These are just examples of priorities but that exercise will help clear your mind. Then you can decide how to go about realising them, but I would advocate a DIY approach. most of your answers will found somewhere on this site.

Dod


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