Good reads from around the Web.
The RDR era has arrived. A three letter acronym hasn’t caused so much excitement since as a tiny chap my co-blogger The Accumulator first heard EMF’s Unbelievable in 1990 and started wearing his baseball cap backwards.1
Fund manager Rob Davies has written a very clear outline of what RDR means for you on his Munro blog.
Noting that few will choose to pay the £250 an hour that a truly independent financial adviser could charge, Rob concludes that:
The DIY approach is appealing for those with portfolios of less than £100,000 where a few hours advice could be equivalent to 1% of the assets. As with any product or service, more informed clients are more likely to make better decisions even if they use an adviser.
Basically, RDR really means that investors have to learn a lot more about what they invest in.
Over the past year or so numerous websites have sprung up hoping to capitalise on so-called ‘orphaned’ investors looking to take charge post-RDR.
To my mind, calling investors shut out from the financial service industry’s grasp ‘orphaned’ is a bit like saying Snow White was orphaned because she ran away from her evil step-mother.
But then we’ve long been advocating that most of us can manage our own investments, provided we take the time to do some research.
Common sense and history suggests simple portfolios will deliver adequate returns for most savers. Simple portfolios major on diversifying among the main asset classes and periodically rebalancing, and so sidestep many of the pitfalls plunged into by unwary DIY investors.
Unfortunately a lot of personal finance journalists seem to prefer to make life complicated. Pointing readers towards a sophisticated online tool that promises to help you reach some perfect asset allocation for your risk level – for a big fee – makes for a better story than pointing them to a blog page.
Or maybe I’m just miffed that we weren’t mentioned in the FT’s roundup of five fee-charging websites for DIY investors:
A clutch of online services has sprung up for “RDR orphans”, who want guidance with their finances but cannot justify spending £160 an hour – the average cost of post-RDR advice, according to BDO.
Some of these sites are backed by established firms, such as big advisory practices or insurance companies. Others are start-ups. However, even the ones that offer advice by phone are not a direct replacement for an individual adviser.
There is a clear separation, too, between those that recommend actively-managed funds (bestinvest, Fundexpert) and those that advocate an approach based on index-tracking (Money Guidance, Nutmeg). There are also different business models, from flat fees to trail commission.
I’m not slighting those services, incidentally. While I think all have drawbacks as well as strengths – not least their fees – I’m not one of those zealots who thinks everyone can do it themselves. Some people will need their hands held. As we’ve discussed before, the Internet offers lots of interesting possibilities here.
It’s just that I think getting an education and then creating something like our Slow & Steady Passive Portfolio is going to serve an neophyte ‘orphaned’ investor better in the long run then plugging some numbers into a website and buying without understanding.
Still, you could do much worse than start with those online tools. As the ever excellent Merry Somerset-Webb explains, again in the FT, banks are lining up to make a mint from offering advice post-RDR:
Let’s pretend we have £200,000. We go to Lloyds and invest in the stuff they suggest. That’s £5,000 (2.5 per cent of £200,000). At HSBC the same investment would cost £2,425 (£950+£975+£500). At Nationwide it would be £6,000 and at RBS £3,000 (£500+£2,500).
Are you stunned? I am. And this, remember, is before you take into account the advice fees. You don’t have to take this option, of course, but if you see an adviser at, say, RBS it is hard to see him suggesting otherwise. There’s another £1,000 gone.
What might you get in return for these vast fees? Odds are they’ll have a soft spot for funds run by another part of their business. So you’ll get to pay those fees to the bank too. Let’s say you end up in funds with total costs of 1.2 per cent a year (this, by the way, is a generously low estimate on my part). There’s another £2,400 gone (assuming your adviser doesn’t suggest you use the money to pay down your mortgage instead, of course).
As Merryn says, the good news is that post-RDR, all these costs are transparent. Get out your calculator and you can add up how much it will all cost you.
The bad news is that few people will.
From the blogs
Making good use of the things that we find…
Passive investing
- Choosing simplicity in the new year – Abnormal Returns
- Couch potato returns for 2012 – Canadian Couch Potato
- REITs: A word of caution – Vanguard blog
Active investing
- Benjamin Graham: Lucky or skillful? – Greenbackd
- Testing Terry Smith’s view on income investing – Mindful Money
- Case study: N Brown – UK Value Investor
Other articles
- Gold priced in pound sterling [graphs] – Retirement Investing Today
- Isn’t it better to wish the best for others? – Objective Wealth
- 2013: The year I plan to fail – Tim Hartford / Undercover Economist
- Slavery: An epicurean business model – The Psi-fi blog
Product of the week: Cheshire Building Society is offering 5% interest on its Platinum Monthly savings account. You can save up to £500 a month. There are higher rates out there, but they require you to have a current account, too.
Mainstream media money
Note: Some links are to Google search results – these enable you to click through to read the piece without you being a paid subscriber of the site
Passive investing
- The most important chart of the last decade – Motley Fool (US)
- Five brutal years teach investors to sit tight – BusinessWeek
Active investing
- US sees record surge into equities [Graph] – Business Insider
- Try Iraq for a true frontier market [Search result] – FT
- Is the market’s good vibe a reason to stress? – Yahoo Finance
- Cambria Automobiles: Potentially cheap – iii
Other stuff worth reading
- Ghastly personal finance gurus – Economist
- Global house prices: Winners and loses – Economist
- 2012 ‘shockers’ have lessons for 2012 – Roth@CBS
- One in four people age 65-74 still a wage earner – Telegraph
- Annuity rates could rise by 25% – Telegraph
Book of the week: Just out – The Physics of Wall Street
Like these links? Subscribe to get them every week!
- Apologies for a 20-year old cultural reference. Believe me, if you are under 30 you did not miss much. [↩]
Comments on this entry are closed.
Very interesting, I wasn’t aware of the ‘RDR’ changes. To blindly overcomplicate your investments while paying for the privilege isn’t a good combination – that’s why your Slow and Steady Passive portfolio is so sound. Thanks for the mention!
Not in the FT? Better get advertising Monevator in there old chap…
For those who don’t subscribe to the FT this is a link to the website it referred to that offers free risk profiling and cash flow planning
http://www.money-guidance.co.uk/
I handle my own investments and I buy individual stocks from an online discount broker. I buy and plan to hold the stocks to avoid broker fees. Sink or swim on my own but no commisions, loading fees or biased advice because the broker gets a commision from certain funds when he sells them. Even if my return is not as good as a large investment firm I should still be ahead because of fees I have avoided.
After reading your “Snow White” observation, I think I might need a new keyboard!
@Rob (Munro Blog):
1. Thanks for a very clear post on RDR.
2. You say: “The best figure to use [for fund costs] is the Total Cost of the Offering (TCO)…” Is this the same measure as another TCO, total cost of ownership? I’ve seen the latter used for investment funds.
3. Sorry, I would have asked directly on your blog, but it seems it doesn’t accept comments (sensible). Anyway, I think the question is of general interest since The Investor linked to your post.
@The Investor:
1. Thanks, as ever, for your post.
2. That FT round-up of fee-charging, online services for “RDR orphans” is poor. It doesn’t even attempt to answer the question in its headline, “Should RDR orphans turn to the web?” There is no comparative evaluation of the sites: it doesn’t help that a different writer describes each one. And it’s just that – uncritical and selective description.
3. I can only agree with OldPro above: it’s advertising-driven. What a shame.
@ gadgetmind:
I hadn’t thought this is one of ‘those’ sites…
Alex, yes TCO is total cost of offering/ownership.
Thanks for the feedback. Never really thought about allowing comments on the blog. It would give my compliance consultant and the FSA the herby-jeebies so probably a non-starter.
Best to stick to good sites like this one.
Monevator is a great site for the DIY investor – there is a wealth of information and really useful *links* to informative and interesting sites.
In terms of a clear and simple DIY investing approach, I have tried to set out the basis of a DIY income investing approach on my website, which contrasts (and to some extent complements) the index-oriented approach generally favoured on Monevator (a hat tip to the HYP portfolio, of course).
It might be useful for Monevator to compile a resource post based on similar DIY ‘how-to’ websites?
Hmmm… At the very high risk of being shot down in flames, I’d like to add my tuppence-worth of comments about the “post-RDR world”. Whilst we in the advice industry have been well aware of the FSA’s objectives for a long time, many comments seem to lead to the conclusion that the regulator hasn’t really informed the public at large about the changes. Here are a few pointers:-
1. Commission remains on non-investment based life assurance. I think that is fine, as the £200-odd commission on a 10-year term life assurance policy for a young family suffering from want of coin, and thus not in a position to pay me a fee (see below) isn’t disproportionate to the time involved in advising them. For substantial cases, it’s worth stripping out the commission factor and paying a fee as this means a commensurate reduction in the premiums paid.
2. If you are an “execution-only” shop, probably trading on the web, then commission remains, including the annual “trail commission. That’s why big firms are able to offer “loyalty bonus” kick-backs.
3. So, commission is only “turned off”, on investment-based products that continue to offer it, when the purchaser receives advice, whether “restricted” or “independent”.
4. I have never been in favour of “ad valorem” charges; that’s where, like many IFA’s, restricted advisers, and the banks, charge percentages. How do you measure the value-for-money, and why should richer investors continue to subsidse poorer ones through what is now known as “adviser charging”? I much prefer the transparency of an hourly rate – mine is £125 at present – with an estimated cost, as everyone knows where they stand.
5. You will find that many practitioners have charged in this way for years – “I need to be paid for my time and expertise” and, all being well, many will continue to do so.
Perhaps a simple example will prove helpful?
Take self-invested personal pensions (SIPPs). Sure, you can do your own thing, transferring old insurance company-based plans, etc, into an on-line SIPP and managing your investments as you see fit, for better or worse.
Millions are unable to do this due to a lack of understanding, disinclination, indolence, etc.
Well, what should you expect an IFA to do in this scenario?
I have to undertake a “fact-find”, discuss and come to understand “attitude to risk” and “capacity for loss”, verify identity and address, and establish the facts about any existing pension provision to start with.
Once all of the letters of authority have had a response, it’s time for the “number crunching” exercise. I need to understand the arcane world of personal pension charging structures (back in the early 1990s, there were 92 life offices offering personal pension plans; where are they now?), whether ot not there are any worthwhile guaranteed annuity rates or other special features attaching to a specific policy, etc. etc. I don’t, personally, take much notice of investment performance (often poor) as, clearly, this is no guide to the future.
Once engaged, by-the-way, my clients have full FSA/FOS/FSCS protection in case I foul up!
Having done all that, it might prove to be right to transfer into a SIPP. We tend to use one “administration-only” SIPP from an independent actuarial firm based in Bristol, but there are lots of decent choices. If we proceed, there is rather a lot of paperwork to deal with, as you may imagine.
Transfers-in are arranged and an initial asset allocation (driven by attitude to risk, capacity for loss, and time-horizons) agreed. A discount stockbroking facility is often arranged, too.
Then the investments, etc. are purchased and the SIPP is set up.
All of this normally takes between 4 and 7 hours, sometimes a lot longer, so the implementation bill will be between £500-875, and, importantly, I am normally paid by invoicing the pension fund, unless the client prefers to pay me direct.
After that, everything is charged for on a time-related basis, and this can cost an hour or two in fees a year, again charged to the “pot”, depending on what the client wants/needs.
Now, I’m based in a Somerset village, not in a flash office in a major city, so my costs are easier to control, but we still have to account for regulatory fees of about £5,000, professional indemnity insurance of about £4,500, training and compliance costs of a similar amount, rent and salaries. So, my fixed costs have to be met from the hourly rate, but nowadays, what with the internet and everything, we have clients throughout the UK, many of whom we have never, and are unlikely to ever, met!
If anyone wants to know more about the “Post-RDR” world, I’ll do my best to answer and, if I don’t know, I’ll look it up.
@Mark — Thanks for your extensive glimpse into the world of professional IFA life.
Regarding (2) and (3) as I understand it this is still set to change in a year’s time, subjective to consultation with whoever replaces the FSA. (Certainly fears about it seem to knock Hargreaves Lansdown’s share price for six every few months! 😉 )
I’m not sure exactly what point you’re making regarding your post though? I personally don’t disagree that there’s potentially a lot of work in advising clients. And I certainly don’t disagree that the average person can’t / won’t / doesn’t (usually all three!) take any interest in educating themselves about their finances.
But that’s separate from the issue of banning commission.
I don’t take any interest in my lower intestinal tract, but I’d prefer the Doctor to operate according to my best medical interests, not because he gets 7% from medical firm A but only 3% from medical firm B.
Lots of industries have their own conflicts of interest, of course, but time and time again commission has been shown to distort the financial services industry to the extent that it leaves millions of people collectively many billions down on the deal.
From what you’ve written you sound ahead of the game. I don’t think decent IFAs have anything to fear from RDR.
In my experience (not extensive, but probably typical) decent IFAs are in short supply, however. In fact, I’ve even considered taking evening classes for a couple of years and getting the qualifications myself, as I think it could be a lucrative field to enter for those who are happy to earn a high flat hourly rate (i.e. Nearly everyone else with a job) instead of tending to a farm of clients I’ve bunged into expensive funds for decades of recurring fat fees that in many cases those clients were oblivious to.
I’m sorry if I didn’t make my point very clearly. What I was dtiving at is that there are quite a lot of non-greedy IFA’s out there who don’t charge outrageous fees and, generally, do the best job they can for their client(s).
You are right about the possible change to “trail commission”; this is being thought about by the FSA/FCA (“Financial Conduct Authority”). I do understand, however, that if an individual so requests it from a fund manager, such trail commission can be “turned off” at anytime if the intermediary isn’t providing a loosley defined “service”. That, in my opinion, could seriously undermine certain intermediary business models, naming no names.
Personally, I do think that there is a clear conflict of interest in an intermediary recieving trail commission. We do receive this from a variety of sources (ISAs/some pensions/OEICS/Unit Trusts/discretionary fund managers) with regard to some existing clients (but not all); we have to provide a service to those clients (which, I hope, we successfully do), but have decided not to do this in future.
I note that, according to HSBC analysts, some 22% off all net inflows to mutual funds towards the end of last year went into so-called “managed funds”. HSBC thinks, and so do I, that as these funds are “closet trackers” and thus less likely to need to be disturbed due to underperformance (yeah, right!), intermediaries have been busy “locking-in” trail commission prior to its abolition. Hey, ho, it’s human nature, I guess!
@Mark — Thanks for the clarification, and your further points. Interesting point regarding intermediaries locking clients into funds in the last quarter. Could be good news for investors in the likes of Jupiter and Aberdeen. Maybe not so good for their clients!
“Analysts at HSBC have suggested the popularity of balanced funds towards the end of 2012 was due to advisers attempting to maximise commission income before the implementation of new rules following the Retail Distribution Rview (RDR).” Writes Alasdair Pal for “IFA Online. Pal went on:-
“Funds in thr IMA’s Mixed Investment categories – which house most balanced funds – were noticeably more popular just before the commission ban, the bank said.”
“Given balanced or multi-asset funds are, theoretically, less likely to underperform, the bank argued, clients were less likely to request a switch, allowing the adviser to keep commission for longer.”
“Under rules set out by the FSA, commission was banned on retail products from 1 January.”
“However, advisers are in most cases allowed to retain the trail commissions on products arranged before 1 January, provided client assets are not “disturbed”.”
“Because IFAs can continue to receive trail commission on assets written prior to 1 January, IFAs have been advising their clients to invest more money in balanced funds”, the note read.”
“If a client is invested in a balanced or multi-asset fund, he will have little reason to move out unless the fund underperforms.”
“This is likely to result in lower churn and, hence, IFAs will be able to retain the trail commission coming out of these funds for a longer period.”
“Post RDR, IFAs won’t have the incentive to thrust money into thse types of funds and , hence, we might see some impact on net sales.”
What I would like to know is who are these “IFAs”?
I have just – at the suggestion of my accountant – made contact with a IFA. One i found through my mortgage broker. I’ve literally come off the phone from him. Thanks to my learning at Monevator HQ i was able to get to the point quickly. I explained my desire to stick with index-trackers NOT funds yet he seemed to think he could convince me otherwise – when we meet next week in my home! I explained the odds of picking the next Neil Woodford is a waste of my time so i will stick with the honest index-trackers as opposed to a fund manager who masquerades as an index-tracker with high fees. I told him i had no interest to pay for a fund managers car.
The problem is this. I know he cannot help me. Yet, i need help on a few financial matters. So where do i go? Keep calling them until i find an IFA who advocates index-trackers? Is this the equivalent of finding a winning fund manager? Where to start?
help?
… interestingly the experience with the IFA has made me question my long-trusting and helpful mortgage broker too! Should i be thinking about removing him from the equation too?
double help?
I think the IFAs who post on this site are a good place to start.
An IFA who can’t construct a portfolio of low-cost trackers (such as Blackrock Class D) alongside active for some areas such as small/mid cap, EM, etc. isn’t really trying.
However, if they can put together something using active funds that can get deep sub 0.5% pa fees, then let them take a shot.
Make sure you have a copy of Hale’s “Smarter Investing” on the coffee table.
I know that most of the money allocated to ETF’s and other passive investments come from intermediaries, particularly the large pension consultants. Many small IFA’s dont use them as they have been fed propaganda and financial inducements to flog active funds for decades and old habits die hard. On the other hand there are plenty of decent IFAs out there who charge by the hour (like me), regularly recommend passives (like me), often recommend closed-end funds like investment trusts (like me), and arrange low-cost ISA and SIPP “wrappers” for their clients (like me, too).
Depending on the sums involved, there are passive specialists out there that offer asset allocation models, but most smaller IFAs are still struggling to get ETFs (and, to a lesser extent, investment trusts) past the “compliance department” as they are twitchy about the FCA finding miss-selling if counterparty risks or investment trust gearing are not understood by clients, as two simple examples.
I think that’s rubbish, as I’m lucky enough to deal mainly with bright people who have a decent understanding of what they want and the potential pitfalls that can be found on the undoubtedly bumpy road that all “at risk” investments will travel on!
Keeep looking and you will find the service you need; otherwise “DIY”.
I mentioned Tim Hales book to him but he remained sceptical to a fairly factual argument!
The situation is that i need IFA to advise on certain issue surrounding a limited company i run and own; There are spare funds that could be used much smarter rather than sat in a current account earning little to nothing after inflation. So i wanted his advice on how i make that cash work better for my company. I also wanted to know how i go about setting up a company pension via a SIPP for myself (i would pick all the trackers and manage the asset allocation). I don’t really need financial guidance in that i know what to do with the money but managing it on behalf of a limited company is where i’m lost in the dark. i.e. Their obviously isn’t a company ISA but what options do exist. Thats the sort of thing i know 100% of zero on.
I’m also in the process of selling and moving house. I would like to keep my current home so i wanted to see if there was anything that can be done here too as the current property could serve as an investment for me and/or my company.
I have no idea if any of this is possible but picking a IFA who’s beliefs don’t resonate with your own seems like a stupid and obvious mistake not to make.
on a side note – If a individual can manage their personal portfolio. Can a individual also manage their own mortgage application and cut out the broker or is this a step too far? I’m happy with my broker but if this is the IFA i’ve been suggested i might be dazed by a seemingly healthy relationship.
AS you have a limited company, you should consider a SSAS (Small Self-Administered Scheme) too. Simply put these have similarities with SIPPs but perhaps more flexibility for company owners.
Be VERY wary of keeping residential property as a company asset; take independent taxation advice, probably from your accountant.
It is most unlikely that your mortgage broker will do anything other than a very good job for you – keep them.
I agree about shared outlooks/values. I won’t work for people I don’t like (which rarely happens in truth) and I’m not a preacher man trying to convert clients to my way of thinking (although that can, and does, happen!).
Remember, and IFA must act for his client, and the client should tell the IFA what they do and don’t want and the IFA should then be their researcher & facilitator.
Do look at a SSAS, won’t you?
Hope the helps, at least a little bit.
In the interests of full disclosure, I am an IFA!
Mark – what number can i contact you on?
I’m not sure if I’m supposed to do this, but it’s 01934 713227 or mark@rcgray.co.uk
I hope “Monevator” doesn’t “blacklist” me as I really am not pitching for business, honest!