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.