This blog’s written for the advisory community, but if – like me – you are considered a target for wealth management – you might want to read it too.
Consumers approaching the tipping point from saving to spending their pension pot are urged to take advice. Much is made of the low take up of Pension Wise and subsequent take up of regulated advice. I myself turned 55 in November and took advantage of a free consultation with TPAS (which was helpful). This article is about the concerns I have in engaging an adviser to manage my “wealth”.
Firstly, flattering as it is to be considered “wealthy”, I am not. I have no equity in my house, having rented for many years and “invested” what equity I had in a wooden boat. I have little cash and some directly owned shares which I feed into an ISA as I pay higher rate tax. I have a family and a boat and I intend to look after both.
What I have in “wealth” is the best part of £400,000 which is invested by Legal and General at a cost to me of around £1,000 a year. This £1,000 is an all in cost – including the cost of buying and selling stock within the portfolio.
I have had various quotes from advisers to manage my money, they have increased the cost to me by between £3000 and £9,000 pa. Relative to my “wealth”, this may not seem much, but I have decided to limit the drawdown of my money to 4%pa to ensure that I have a reserve for contingencies (long term care). A total cost of management of £10,000 pa is only 2.5% of my capital but represents over 60% of the income I am planning to take. What is more, I will be paying a marginal tax rate on my income of around 30% but will have to pay for the advice out of taxed income at 40%.
I am also concerned VAT which I charge for advice, but doesn’t appear on two of the quotes I have received. It is hard to understand why VAT is payable for advice on a non- insured product when it’s doing precisely what the insured product’s doing!
These are the total cost of intermediation and I appreciate I’m being asked to pay for asset management, transactions, the platform and a discretionary management agreement (as well as for financial advice) but when the cost of ownership equals the utility of ownership – something is wrong.
I feel as if I am being made to feel wealthy so I spend money like a wealthy person. But an income of £16,000 pa is not much to live on, it is a splendid addition to a living wage, but is not a wealthy wage!
I have a second concern about the offers of advice I have been given – succession. The advisers I have spoken to have been as old as I am. Statistics I have seen suggest little succession planning in the wealth sector. I am at risk of having to pick a succession of wealth managers. That sounds disruptive to my planning. I know from my own experience as a pensions consultant that switching advisers costs my clients, that’s why they appoint my firm and not me! There are also issues around personal accountability.
My third concern over appointing an adviser to manage the way I spend my pension savings relates to the precarious circumstances of my own health. I am healthy today but there is a history of mental illness in my family that suggests I may suffer from rapid cogitative detoriation. I have responsibilities not just for myself but a number of dependents (and a boat!). I am attracted to being in a trust where other trustees can step up if I cannot manage.
I have shared these concerns with the advisers I have talked to. All three have empathised with me but point out that these are systemic and they can’t do much about them. Costs are costs, advisers retire and people like me lose their mental faculties.
I think that financial advisers could do more. There are many people like me. I am at the top end of the problem the FAMR is trying to address. I am classed as wealthy but I do not feel secure, I am healthy but I am slowing down, I am scared about extreme old age and don’t want my money running out before I do.
You may say I worry too much but I’ve been in the business of financial planning since I was 23 and I don’t know many financial advisers who started out when I did.
To sum up, I do not trust any of the offers I have been made to deliver against my insecurities. By comparison, I have a small defined benefit pension that is paid by trustees, costs me nothing in advisory fees and requires nothing from me but the provision of my bank details.
I could of course buy an annuity and might end up doing just that. But I do hope that something comes up in the next few years which works for me as well as those who manage my money.
Surprised to read you trade stocks. I always had you down as a passive man.
Share save mainly! I’ve never sold a stock in my life. Pity, I owned a fair few shares in Bradford and Bingley
You express my feelings exactly Henry. It took us 3 years to find an IFA. Eventually we tracked someone down who seemd to care about our outcomes more than his fees. He gives practical advice, we are in control. The funds selected are all passive. The costs are transparent and quite modest compared to many quotes. A local firm in Hampton Wick. And he is young enough that I think he will not retire before I am too old to care.
But the feelings you have are why so many people do not take advice. The industry seems a long way from being intent on being customer led rather than lining my pocket led
The 2.5% you quote seems an aweful lot to me. You should be able to get good management and advice for half that. What you really need to establish is that your DFM adds performance well above the cost of management. Unfortunately few managers do which is why so many investors are seduced by passive funds. Give me a call if you want some real help!!
Source – David Ferguson – Nucleus; probably a lot more if transaction costs are included
Henry
You should try being an IFA for a while you would learn a great deal and your fear would evaporate once you understood where they add value.
Providing a spectrum of solutions from protection to annuity from savings to tax from birth to marriage death and inheritance is a wider remit than place work place pensions with the lowest bidder so paying for that advice has a number of appropriate payment mechanisms they are not blurred but defined as the solution develops
Paying VAT is not a defining characteristic of a professional no more than children’s clothing or books are not fit for purpose because they don’t pay VAT they are seen as essential
Why not lobby for individual advice you give to be VAT free or is it a luxury that should be taxed?
Have a great Christmas
John
John
I am lobbying for advice to be VAT free – several blogs on here.
I would like life to be VAT free but it isn’t! I am lobbying for advice to be VAT free
I had my own IFA practice in the 1990s and was a self-employed insurance salesman before that. I am still unclear about what my clients thought of me and I doubt much has changed – for all but the lucky ones who are advised by proper advisers – like you
Hi, I have always enjoyed your articles and sometimes been moved to reply and today actually am! Having just read back my comments I now realise why countless people read and few respond, it is really tough. So much to say etc so I am now even more impressed by the contributors on this board and apologise in advance for errors and omissions and trust the sentiments shine through.
I can beat you, I started at 22 as an Industrial Branch consultant for Refuge Assurance and now at 53 consider myself a pension/employee benefit nerd operating in the Corporate space. I am replying because I face the same challenges in not dissimilar circumstances to you.
I have three observations. A primary concern I have re mainly those who call themselves Wealth Management consultants is their slavish addiction to percentage based fees, the firm I work for bases fees on complexity, time spent and added value. Shop around and be aware that the name WMC in a lot of cases is just a name with nothing behind it. Good old fashioned IFA is the brand you want and a firm that has genuine relationships with Providers across the spectrum from DFM down.
Second, I have witnessed on countless occasions and back in the day was party to transformational help for clients – this is an open forum and everyone I am sure limits comments etc but even from what you saying allows me to think some of what you at are planning should be challenged and the assumptions you at making equally so. 4% withdrawal in what climates, against what benchmarks, where is your cash flow model, has your DB CETV been looked at with an eye on the commutation equations, attitude to risk, holistic view including LTC and if healthy now why no mention of good old fashioned insurance, why aren’t you paying in huge amounts having enhanced affordability via withdrawing tax free lump sum particularly if you can do so through salary exchange, adviser chares can be taken form your fund not post tax – I could go on and as said before people jump all over me I fully understand all facts are not being shared and war and peace could still be written I am just making a point, . A relationship with a good IFA can radically help you and it worries me that people do not take advice. A great deal of the free stuff I do is trying to remedy bad advice or no advice.
In recent months it would not be an over statement to say I have saved clients hundreds of thousands in tax because they know nothing of LTA, LTC IP2014 etc. We have transformed lives by being prepared to do what it says on the tin and advise on CETVS both to move and no leave it.
Do not not take advise.
Third point and yes biased because I am what I am and believe it. Appoint a good IFA firm with a Corporate function and get your employer to pay a retainer for services such as financial education, pre retirement etc. Again loads of reasons but main ones in this context directed at a member are – if the IFA/firm are being paid a retainer that will reflect in lower fees for members – you will have built a degree of relationship a long way before your tipping point – if IFA/firm are confident of getting business and based on previous two they should be then no cost or pressure of acquisition. It takes tress away from all parties.
Have fantastic festive period
I have to admit to having no cash flow model! Thanks Kevin – I take your point and look forward to progress on the decumulation front in 2017! Let’s hope the Green Paper gives us some hope!
I would leave out active/passive if I could. I would leave out tax if I could. I would leave out the extraordinary point that bond markets (and so annuities) are at, if possible.
There is some specific advice you may need (say around tax).
The investment advice you get from advisors is very typically highly coloured by outdated risk models that do not take count of the extreme point where bonds (and some other assets) have recently got to. It is hard to step away from the Regulator’s best model..
So then you find an inspired advisor who tells you this and then says “but I can’t tell you the best equity/property/infrastructure investment vehicles”. (Oh, try this factor investing…”)
The indisputable facts are that there will always be winners (most likely by chance) and plausible advisors to recommend them. Worse still, the majority of punters WANT/NEED to believe in some of them.
In the intermidible meantime, fees kill. Just do the arithmetic – if you cumulate for 40 years & de-cumulate for 30 years, how much does 1%p.a fees affect your retirement income. Folk would be a tad unhappy if you said the “because you a are wee bit stupid, we are going to half your pension”.
Even if there are advisors & managers that can prospectively produce superior returns, what hubris suggests that you can choose them from the host of plausible contenders?
Be afraid!