A school friend of mine, came to see me yesterday with some paperwork. He had been reviewing his financial affairs.
Like me , he is 53 and had been excited by talk of the new Pension Freedoms.
The problem
His pension pot is worth around £150k, his wife had around £15k, he was not funding his pension, she is.
His money is invested with Aegon, he is currently paying 1.75% on his money, his money is in the Mixed Fund. His wife is saving into a workplace scheme and paying 0.68% -she is in a default fund.
My friend wanted advice on how he could use the pension freedoms to help him and his wife have a better life.
The proposal
The proposal was for his money to be invested in a range of 15 active equity and bond funds, most investing in growth stocks. The average management charge of these funds was 0.79% (there was no disclosure of the impact of transaction costs). On top of this he would pay a one off transition fee to the adviser of 3% and costs associated with the Aviva Corporate Wrap product.
The impact of these charges, were he hold the investments for 10 years would be 3.7% pa (plus the transaction costs). I spotted a bout 15% of the proposed money would be with Vanguard, but a quick resort to the Miller’s True and Fair Calculator showed that in total, this chap would have to see a return of around 4.5% on his money (over ten years) before he saw any nominal growth on the portfolio.
Buried deep within the investment report were some calculations which suggested (based on some realistic growth assumptions) that the anticipated growth of the portfolio of funds in real terms was – 0.2%.
The title of this blog is “how can this be?” and that’s what my school friend asked me.
What would happen?
The adviser, was suggesting he take an oversight fee
The stockbroker who managed the portfolio of fund would take a fee for portfolio construction
The fund managers would take their management charges
Those processing the transactions would take their charges
The insurance company would charge for the wrapper
Taken together, the stated total cost was 3.7% plus transaction costs.
It nearly worked…
My friend was due to sign on the dotted line in the next few days, this nearly came to be because the proposal looked so good.
The packaging of the investment report, the credibility of the adviser, the brands of the fund manager and the mind jumbling jargon that underpinned the report nearly did the trick.
The adviser had clearly dotted every regulatory “i” and “t”, he probably had a string of letters after his name and could show a lot of CPD.
It was a very credible report, it nearly worked….
But not quite.
Included in the report were some separate proposals for my friend’s wife. The suggestion was that even though she continued to pay into her workplace pension (an occupational DC plan) , the money she had accumulated could be taken out and re-invested in a similar arrangement to her husbands with an AMC of only 1.4%.
The only consistency I could see in this proposal was that the overt charges were increasing by just over 100% in both cases, her funds would be invested in a passive fund with an AMC of 0.1%, 100 out of the 140 bps per annum would be paid to the adviser.
I think it was the inconsistency between the advice given to him and his wife that tipped this chap off to there being something not quite right, that got him to get in touch.
What could I do?
I explained what was being recommended and converted the percentages into pounds shillings and pence
I asked my schoolfriend what he had been getting for his 1.75%
I asked him whether he could explain why he would benefit from using these funds
Finally I asked my friend what his financial strategy was for drawing on his savings?
What could he do?
My schoolfriend did not know what strategy he should adopt, that is why he had gone to the adviser. He was still no clearer about how he and his wife were going to make ends meet in later life.
As for the product suggestions, he wanted to know what choices he had. He had not seen the broker who set up his Aegon pension for nearly 15 years. I suggested he phoned up Aegon on the number on his latest statement and ask to be put through to someone who could treat its customer fairly.
No cause for redress!
I felt sorry and angry in equal measure, sorry that so much of my friends’ savings had been taken in charges which delivered no value for money. Angry that at a time when the ABI are conducting a review into legacy, nothing has been done to help this chap get a decent deal – what is fair about paying 1.75% of £150,000 for so little?
But this is nothing compared to my repulsion for the business ethics of the adviser proposing to take £4,500 upfront and allow my client to pay well around £4,000 pa to have his funds managed by people he does not know in funds he does not understand.
To my friend, his pot of £150,000 is a substantial asset, he was looking for advice on how he could spend it. Instead he got investment advice he neither wanted or needed.
So he’s thinking about it…
Fortunately , my friend is now going to go away and do some independent research.
Why does this still happen?
So long as we see this kind of financial thuggery , pensions will continue to have a bad name. The trouble is there is no way to whistle blow. The report my friend had looked fully compliant, all the numbers I have quoted were within it. Nothing was not disclosed. Yet for all that, my friend was about to walk from a bad contract into an awful contract without any consumer protection whatsoever.
It is a triumph of regulation. 95% less advisers and as long as you follow the rules you can give bad advice with impunity. More knighthoods and lordships clearly on the way 😉
That is a great example of bad products wrapped in technically good advice.
Really what should drive this kind of product out of the market is competition, not regulation which just adds more overhead, which is probably a part of why the base costs of pensions are so high to begin with making growth in the current economic climate so difficult to achieve.
I suppose part of the issue is also bad products. We intend people to want to use stocks/shares and other such vehicles for investment, but at a time where inflation and returns are so low then those asset classes seem a bit high cost for the volatility and likely returns.
A high-street locked away cash isa would be better all around right now overall. Low returns, but also near zero costs.
Deregulation has made pensions much more attractive over the last decade, but I’d argue they need to go a lot further within the accumulation/flexibility phase to encourage competition to drive costs down naturally rather than through expensive to create, and follow, legislation.
Henry surely this is as much part of the value debate as it is about legacy charges. My wife and I have used the same adviser for years. We are charged 110bps p.a. for which we get a minimum of two update/strategic meetings a year, tax planning, detailed reports, investment updates and recommendations and increasingly important access to cashflow modelling software. I don’t begrudge this charge because I believe we get great value from this professional approach to financial planning. Most of our assets are on a platform where the charge is c 35bps including the product wrappers. For me the platform provides a consolidated view of all our investments just about 24×7 which I value although I think it’s slightly overpriced. The third element the fund manager’s charges is where the value is more questionable. Aside from some tracker/index funds most of the fmcs are in the range 75-100bps although on a couple of specialist funds the fmc is 150/175bps. It’s this aspect where I struggle particularly as we know these aren’t the total costs. In total we’re probably paying somewhere around 230bps across the portfolio for advice, platform, products and fund management/transactions – probably 30-50bps more than I would say represents good value. Regrettably your friend seems to be getting poor value now and lowsy value in the future. However it doesn’t have to be like that and hopefully with more transparency we will see more clients actually starting to get value from their pension -particularly as competitive pressures grow on fund managers and platforms.
Thank you for posting this article.
The sad reality is that a technically compliant report does not need to result in suitable advice in order for the advisers and directors to sign it off. When directors who don’t take ownership of both the compliance and suitability issues rely on the compliance department to deliver suitable advice (these are often people who aren’t qualified within the advisory framework), unsuitable client outcomes will frequently occur.
I presume that the adviser receives no remuneration for the work undertaken to date without the implementation of the recommended contract switches? (ie a cross subsidised fee structure where the people who implement pay over the odds)
I really feel for your friend and I’m glad he popped in to see you to review the report. Sadly regulation does not make it easy for the investor to understand the total costs but things are getting better….All these ‘extra’ charges do mount up and combine this with low growth rates and there are real issues over the next 10 years. I like the current total charge approach to workplace pensions calling for 0.75% all in especially when there are some good low cost passive funds available. I suspect your friend was bedazzled by the promises of active this and more bells and whistles on that. One only has to look at the likes of Warren Buffett and his comments & attraction to some specific low cost vanguards funds as he has tried to educate the general investor on the importance of low total charges in a low growth world…..
Surely if the report did not accurately reflect the full charges associated with the proposal it was not compliant, you can’t pick and choose what you include.
I think the report was compliant- it made it clear that the charges were higher than the expected growth. The client would have bought into that on the back of a beautiful document
Henry The introduction of the New Model Adviser omited the provision of an agreed model. Like so many futile arguments these days they start with a bias and find examples to reinforce the bias. Very few solutions result just ever stronger bias
Henry, I am genuinely considering kissing you in relief when and if we meet. For 20 years now we’ve been presenting the view that most packaged personal pensions are compliant at the suitability level but not compliant at the fiduciary level (and I am not saying that all advisers have any or an equal level of fiduciary responsibility). However the media has wondered if we’re mavericks, the regulator might have wondered if we are deliberately harming confidence in financial services and our peers have always ducked a straightforward debate. I could go on about exit charges too which I think you missed? but overwhelmingly we want to say thank you.
Henry. Good example of why the FCA are looking very carefully at this on the “what has changed pre/ post RDR” front? The adviser in question does not seemed to have really embraced the true expectations of post RDR and it would be interesting to establish if the charges apply to small/ medium/ large cases and how the adviser actually justifies it in front of the client. This looks like a very transactional advice driven proposition which sadly is a legacy of a “older world”.
(on a separate note can you change the wallpaper to something new? Christmas was great but I have had enough of it now!)
This demonstrates what concerns FCA now:
http://www.fca.org.uk/static/documents/post-implementation-review-rdr-phase-1.pdf
And this one too:
http://www.fca.org.uk/static/documents/thematic-reviews/tr14-21.pdf
Reblogged this on Pension God and commented:
Yes but Steve Bee says it’s OK as long as it’s a pension. What are IFAs supposed to live on? Just that warm feeling from doing the right thing? They’ve got expensive lifestyles and have to maintain them somehow. Skimming off the great unwashed is OK if people like Henry stop mentioning it – why scare the golden geece?
Lets start by saying I basically agree with the comments/criticisms. But is there an alternative? Years ago (last century) when I did the FPC, the “best advice” planning suggested an individual should build up 3 months salary in a bank account (rainy day fund); protection for themselves and family; unit trust savings … and then some time later direct purchases of shares once they had become sophisticated and achieved, or on their way to, their goals and objectives.
Nowadays we have the encouragement to ‘save’/invest in ISAs and auto-enrolment DC pensions. But what would the charges be if we had to do the saving and investing without the current ‘high – charging’ fund management industry?
If an individual decided to save say £100 and used it to buy shares directly, what would be the impact of charges (and tax relief). How would the individual quantify the cost of research before deciding which share to buy; and with which stock broker; and on-going research as to when to sell (and buy again). Also would the individual stick with one company, or buy into loads of companies in order to benefit from diversification? How would the individual monitor the returns and against what would it be compared? Would they hire an actuary/FCA to tell them whether they were on target to meet their financial goals? (Flip, how did they get the knowledge to know what their goals are?) What would be the costs of buying and selling shares? Costs of depositing a dividend cheque in the post (hopefully telegraphic transfer)? Time spent reading company reports? New challengers impacting on the industries of company shares they already hold?
Frankly the costs of running a portfolio without professional help is costly. The issue I would like to know is “How Costly?” And would it be cheaper or more expensive then the example Henry gave? I suspect that up to a certain monetary amount, the costs of saving for and buying a “pension income” outweighs the benefits (that is an individual pays out more than one gets – except an often made comment is that it is the tax relief that supports the fund management industry; and that without the tax relief the system might just topple over.)
Perhaps, just maybe, pension savings should not be made if the fund is not going to grow to a certain size by a certain age. Once the fund size is large enough, there should be economies of scale to bring down the charges (maybe???)
The other area is that with changes to Solvency II, compulsory purchase of annuities/pension freedoms, cost of entering the fastly expanding DC markets, there are a huge range of losses that have to be covered off … somewhere.
Plenty do OK reading Citywire and various other sites. They buy a few investment trusts, ETFs and trackers and monitor. It is interesting and fairly cost effective if on the right platform. At least then you have no one to blame if it goes pear shaped, but you learn as you go and save a fortune in advice fees.
Please do bear in mind that most advisers are not like that. The fees of 3% up front and a retainer whilst also using a discretionary fund manager are extortionate. Good advisers will always consider whether there is any value in switching. Sometimes there isn’t. AEGON notoriously have high penalties on transferring away as well on some of their pension plans which means sometimes the best course of action is to stay until retirement and then move to an annuity or drawdown. There is so much that is wrong here and should be identified to the adviser making the recommendation. Don’t give up though. Your friend should seek out three good advisers in his area and get their recommendations on planning for retirement. Hopefully he should see some commonality in their approach and most importantly clearly set out comparisons of leaving the pension where it is or switching it. The aim of all reports should be to demonstrably improve on his current situation. He can then choose the one he has most trust in. Fees should be around £500 for any set up costs and 0.5% to 1.00%pa ongoing (depending on any DFM involvement).
I’m hoping that the good advisers are challenging the costs being incurred by their clients because of their reccomendations. But I find no appetite among those I speak to – to revisit past advice and rectify where necessary, not do I see financial advisers at the Transparency TaskForce or hammering at the door at the FCAs asset management review.
Instead I hear advisers moaning about the emphasis on costs and charges. So long as the advisers (and institutional consultants) sit on their hands, so the iniquities are perpetuated.
The costs and charges within many funds I see reccomended go completely ignored – except when customers find the True and Fair calculator (Which I thoroughly reccomend)
For years I have argued that no one should be allowed to call themselves an ‘adviser’ unless they levy a direct charge for the advice and take no other fee, directly or indirectly, fro the asset pool. If there are fees paid to anyone, the adviser must disclose each one and should not be allowed to receive commission rebates from any firm whose products he recommends. Anyone else should be required to call themselves what they really are; a sales agent. Let’s stop pretending this is advice when it is little more than a sales pitch.
Thanks Norma – that’s definitive.