One of the great things about a blog is the comments, emails and other feedback from readers.
Best of all are reader success stories like the one I have for you today.
Like everything good, the rewards of blogging are not always obvious at first. You share your insights and try to make the world a better place but its not obvious that its making any difference. The world carries on, seemingly regardless.
But then I get feedback that makes me realise that people are actually putting the messages of The Escape Artist into action. So I want to share with you an email I recently received from a reader about how they fired their wealth manager.
Taking control of your own investments (including pensions) is one of the single most important actions you can take on the path to financial independence. The cost savings accumulate into hundreds of thousands of pounds over an investing lifetime. I showed how some could easily save a million pounds here.
But its not just the cost saving that matters, its also the mindset. The person who delegates looking after their money to others is often subconsciously evading responsibility for their own future.
The irony is that most people think they are hiring a financial adviser / wealth manager in order to stand a better chance of beating the market. This is like a racehorse owner hiring a bigger jockey to improve performance. The financial adviser’s fees are the extra weight carried. The horse (your portfolio) is now less likely to keep up with the other horses in the race. More likely, it will fall at one of the hurdles or finish last.
Some think they are hiring a financial adviser in order to guide them through complexity. But its easy to construct a simple, efficient portfolio. The complexity has been created by the financial services industry in order to confuse the public and justify its fees.
I have no problem with financial advisers that give truly independent fixed-fee based advice. The problem is that they are a minority. Incentives matter. Any financial adviser paid a % of funds under management (most of them) has a huge incentive to gather assets and keep the client in a state of dependence on the adviser.
Have you ever wondered why the advisers fees are deducted direct from your portfolio? Is this for convenience? Whose convenience? This is not some minor administrative detail; its central to the entire business model. If the customers had to physically write them a cheque or get their credit card out to pay fees, most would be horrified at the sums involved. The game would be up.
Awareness is the first step to change. I’ve helped a number of people calculate their total investing costs. This is harder than it sounds. The total costs borne by the client are not just the fees of the financial adviser, they also include the fees of each of the underlying fund managers and then dealing costs: the bid-offer spread, dealing commission, stamp duty and price disturbance on trades which can only be estimated. But its material: active fund managers churn their portfolios as they seek to minimise personal career risk.
If you do not know how much (ie a specific number of pounds / euros / dollars) you are paying in fees, that is a clue that you are being screwed. As Warren Buffet puts it: if you are at the poker table and you don’t know who the patsy is, then its probably you.
Everyone should try to calculate their total investing costs themselves. If you can’t decipher the endless bumph and small print, don’t give up. That’s normal and no accident (the financial services industry likes it that way). Persevere until you get the answers. Once you know the true cost, it becomes obvious that you need to break up with your wealth manager.
This is important. The rewards are huge and its really easy. Get help if you need it: ask a financially sophisticated friend to help you. Or hire an accountant or a financial coach. But don’t take it just from me, let’s hear from a reader of the blog.
Enjoy
The Escape Artist
Hi TEA
Just thought I’d just drop you a line & let you know that I finally broke up with my ‘Wealth Manager’.
I braced myself for all of his compelling arguments why I should stay.
There were literally none!I expected it to be complicated to set up a SIPP myself.
It was easy!I thought that setting up a regular investment in a tracker fund would be difficult.
It was simple!Everything is absolutely transparent now.
I can see how much I’ve saved.I can see the effect of major events, like the recent stock market wobble.
I feel like I’m in control.I no longer have to try & fathom out the meaning of quarterly reports which I suspect were deliberately baffling.
I can just log in & see if the number at the bottom of the page has gone up or down!I only saw the annual management charges on the funds when I requested a list, prior to ditching the ‘Wealth Manager’. I think they were all between 2 & 5%. That on top of a hefty ‘set up’ fee too. Yikes!
It’s embarrassing to think about how gullible I was, although in my defence, the “Wealth Manager” was introduced to me through my employer. This was at a time when the company was obliged to offer ‘Stakeholder Pensions’ to all employees. This put him in a position of trust from where he was able to mount a Trojan Horse type attack on my pension!
Now that I’m in total control of my pension, its much easier to see what needs to be done before I can push the eject button at work.
Obviously my so called ‘Wealth Manager’ was never going to let on that it was all so easy!
So thanks for shocking me into action & I look forward to more motivational dispatches from the front line of financial independence!
Regards
Mark
The Escape Artist 
mmm my isa i do myself and fees are low with ETF and Trackers
But i have a personal pension with Aviva i took out 30 years ago. i have £43,000 in there and will be adding about £3,000 a year for the next 10 years proberbly- no more- as i prefer to add to my isa instead. the charge is 0.87% i dont like it but weighing up moving to a sipp for 10 years and investing myself would prob bring the charges down to 0.60% so i dont think its going to be worth it for 10 years. also aviva have a very nice managed commerial uk property fund which is doing very very well so im inclined to stick with it. There hasnt been much money in the fund the past 30 years only until recently.
any thoughts anyone?
Hi dawnmartyne,
Purely going by the figures you provided (£43K current value, £3K pa added, costs 0.87% now vs. 0.60% by going it alone, time: 10 years) I think you would be better off by going it alone. Better off to the tune of around £1,600 saved in fees over these 10 years – surely this sum is worth having or rather ‘not paying someone else to do what you could do yourself’?
I know that 0.27% doesn’t look much to most people to justify actually getting up and doing something about it but in £ terms this is a difference of over £100 per year – and it rises as time goes on due to you adding money each year.
I’ve moved my Halifax Stakeholder pension into a SIPP with AJ Bell Youinvest for less of a difference in £ terms than that – any money I don’t spend on fees I can use as I see fit (spend, invest, save).
I think it would be worth having a look around for alternatives, e.g. SIPP’s, as the back of the envelope calculation I just did showed the costs could be like this over 10 years:
Aviva – £5,340 (0.87%) – as per your post
You – £3,730 (0.60%) – as per your post
SIPP – £2,350 (0.43% – 0.34%) – depending on value of SIPP
Please be aware that moving a pension needs to be thought through carefully as you may lose certain benefits – however this should be in the paperwork you received when you signed up for it.
Regards, Pinch
many thanks Pinch for your response -your back of envelope figures bring it home.
oh golly you got me thinking now !!!! i was kinda hoping to hear ‘dont bother it wont make a big difference’
yeah i got a guarantee on a small part of it but its only on about £3,500
maybe ill only put in about £12,000 over the next 4 years and leave it alone but keep on filling the isa. id like to keep saving and investing for the next 5 years and then when im 55 yrs work part time as i will proberbly will have enough to finish and retire for 60yrs old by then???
Hi dawnmartyne,
Whether or not the switch makes a (big) difference depends entirely on whether you have made any other provisions for your retirement. However, I do think that there are better uses for the money you could save by moving away from Aviva.
As for working out whether you have/will have enough for your project of working part-time and for your retirement have a look at these articles:
1) http://www.mrmoneymustache.com/2012/01/13/the-shockingly-simple-math-behind-early-retirement/
2) http://www.mrmoneymustache.com/2012/05/29/how-much-do-i-need-for-retirement/
MrMoneyMustache is an american blogger writing about personal finance – although this is aimed at Americans and is from 2012 the math behind the calculations is universal and applies everywhere.
All amounts are in USD – convert it into Pounds Sterling with this converter: http://www.xe.com/.
As for keeping up investing over the next 5 years – I would hope that you do keep this up for much longer than only 5 years!
Regards, Pinch
hi pinch
many thanks for your concern
my Aviva pension is a smaller part of my retirement savings and investments/ the rest of my money is in cash and shares isas. I plan on remaining invested and drawing from isa and get an annuity with Aviva pension
ive calculated a 3% real return [low!] on my entire retirement portfolio , after inflation and fees ,and with 5 more years of additional savings and investing by 60 yrs old I should have 25 times my required income in the total pot.
AND a 4 year income cash buffer in case markets are bad.
I only need to draw for 7 years until state pension kicks in and then drop my withdrawel rate to half
does that sound like a good plan????
Hi dawnmartyne,
As for the money currently held in cash:
I would have a look around at where it is currently held and trying to make sure that I get the highest interest rate possible for the time remaining – whether this means that parts of the money need to be drip fed into regular savings accounts (at the moment TSB offers 5%, Lloyds offers 4%) or fixed savings accounts or fixed ISA’s or something else is up to you and depends on your personal financial circumstances.
I have found the following link to be a good starting point for this kind of research:
http://www.moneysavingexpert.com/
Despite the .com handle it is an English site aimed at people living in the UK and as far as I can tell is pretty up-to-date.
As for the 3% return rate:
I would always work out the worst case scenario so maybe try working it out on even less than 3% and see where this leaves you – just in case.
I like the 4 year cash buffer and once state pension kicks in and you also drop your withdrawal rate this should leave you with money spare to re-invest.
Good luck in your endeavours!
Regards, Pinch
I would never hire a financial planner myself, and some of my good friends are financial planners! I just know from working with them that they don’t really provide any value or do anything for you that you can’t do yourself without some fairly basic knowledge. So why bother paying them for this “service”?
I’ve considered asking a wealth manager for assistance with estate planning and tax discussions, but frankly any I know through business are inept or shady to the nth degree. I wouldn’t trust either with the funds.
My accountant thinks I’m clean bonkers for going alone and investing in the stock market. But I do pay him to be very cautious.
Hi TEA Two of my oldest friends work in finance, one a fund manager, one an adviser dealing with only High Net Worth individuals which, of course, he should be whipped severely for even admitting. When i challenge them about fees, they either go very, very quiet or guffaw into their pints. They only go quieter and more serious if I ask them about fraud, insider trading and such like in The City. That is not something they joke about. One said if the authorities were serious about these things and acted on the little they do know, the City would be finished overnight. And the authorities know much, much, much more than us average mug punters. Sad, really. Let’s hope the rise of other funding methods allows an alternative.
Well done to Mark on making the break with his FA – hey, I just realised that’s an acronym frequently used to express what FAs are alleged to offer. It is a difficult step to contemplate though, or so I’m finding. Only recently has it really started to dawn on me that the costs are perhaps not that reasonable, especially as my pension fund is well over 100k now – my combined costs are 2.6%.
It is all in one SIPP and as I am taking a slightly early retirement my plan is to stop investing now, or in only small irregular amounts, and not access the fund as I have a good DB pension. I have an ‘adventurous’ profile – partly because the DB pension will do all the hard work – which the FA has spread over 50 funds across a bewildering range of asset classes and geography. We have been switching these (cost free) pretty much on an annual basis, so I never really know what I own, to be frank, other than what I can gather running my eye down the 24 page report I get from old mutual every 6 months. It also finally dawned on me the graphs showing the outstanding ‘performance’ of my fund includes my regular investments – no wonder the thing is going up when I’ve been effectively adding £1325 quid to it every month. I’ve no idea how this compares to what I’d have earned if it had all just gone into a Vanguard Lifestrategy 80 acc – but I’d not be surprised to learn it was no better or even worse.
They do say though that good advice is worth its weight in gold, and I am grateful to my FA for getting me sorted with a proper plan. Like lots of people I had not even heard of SIPPs until he suggested I set one up. He definitely did well for me there, moving me from a crap endowment policy or similar linked to my Woolwich mortgage as was (remember them?). For ages I presumed the FA fee was only due on the purchase of funds, not annual in the portfolio value. What a mug, eh, but I think I’m pretty typical.
And I recognise myself in the characterisation of being emotionally tied to the FA too, feeling grateful he’s helping me do something sensible with my money, feeling he’s fighting my corner and protecting me from myself, should I be so stupid to feel I could make my own financial decisions. And there is something in that – I read in Tim Hale’s Smarter Investing book (I think it was…) that typical German self-investors lose 7.5% compared to simple index investing.
Anyway – I could go on… The question I have about breaking up with your FA is what do you have to do with the fund he has helped build up? It is the case because he has advised the investment he is permanently entitled to his fee until I move it unadvisedly elsewhere? So is the process to open a new SIPP or ISA and switch the funds in from the IFA managed account?
Sorry for the long post – I’m seeing the FA in Friday…
Ian
Many thanks for your comment. This is a very typical situation. Your comment shows honesty with yourself (and with other readers) so thank you and well done for that.
Here’s what you need to think about:
1) The truth (as you are starting to realise) is that you have been mugged. You are paying fees of £2,600 per year for a relatively small part of your overall pension. If the income yield on your portfolio is 3%, then you are paying fees of 87% of your income from the portfolio every year!! (2.6 as a % of 3.0). For what?
2) It’s as easy to open (or move) a SIPP as it is to open a bank account or change electricity supplier. Would you pay someone £2,600 every year until you die just to open a bank account for you?
3) No, your FA is not permanently entitled to the annual fee. You can easily move the money away from him and stop bleeding from this open wound.
4) Your FA is not your friend and they are not fighting your corner. They are fighting their own corner and you are in the ring taking a beating from them. Yes, endowments were overly complex and expensive…but so is your current portfolio…spreading a £100k pot over 50 funds is ridiculous.
5) You are in charge of your own life. You can choose to manage your own SIPP (remember this stands for Self-Invested Personal Pension). You are clearly intelligent. Anyone capable of writing and using a computer is capable of managing a simple portfolio for themselves.
6) If the saving from moving your £100k pot is 2.45% (the Simplicity Portfolio costs 0.15% per year vs your 2.6%), this is a £2,450 saving every year. This is the cost of a wonderful holiday. Why are paying for your FA to have a holiday every year rather than your own family having this?
Please don’t take this as criticism Ian….I really appreciate the mini case study as it illustrates perfectly what I am talking about and will help many other readers. But you deserve better.
I wish you all the best and would love to hear back from you when you have taken control of your own money.
TEA
Splitting 100k over 50 funds is basically creating you a tracker fund (allowing for different asset classes of course) but at 10 times the cost.
Good article and enjoyed the comments. I don’t have an FA and have been DIY for three years…made a few mistakes along the way, will probably continue to do so, but I feel in control and happy not paying ridiculous charges.
If you think FA’s back home are bad you should see them here in ex-pat land. My DIY journey started when I nearly got suckered in by one those 3 years ago. nearly signed up to a long-term savings plan but fortunately did just enough research to realise would be tied in to 20 years of a really bad deal with horrendous charges and fee structure. He tried to get me to sign up to a heavy monthly saving amount on the basis I can always reduce the amount at any-time, however I noticed in the small print on the annual management administration charge and his cut would always be based on the higher amount. So I turned him down which he did not like.
he threw every argument at me about why this product was right and why I needed him rather than DIY. Although I knew I would not sign up and was going to go it alone, I didn’t have the knowledge to put up a convincing argument back at him. I often wish I could repeat that discussion now with what I have learned in three years…I’d wipe the floor with him and especially the bit where he told me ETF’s and funds had to have a wrapper to put them in so would always need a FA or savings product.
OK they are not all as bad as that but I have never regretted my decision at all.
Thanks for a good read.
Kris
Thanks for the comment…it is truly incredible that financial advisers get away with stuff like that…well done for standing firm and rejecting that nonsense
Following up from my meeting with my IFA last Friday,,,
I looked more closely at my pension provision before the meeting and I actually have a ‘collective retirement account’ (CMA) with old mutual. This virtually the same as a SIPP but restricts the investment types to OEIC and funds (no ETFs or property for example). OM is a funds supermarket, allowing access to funds from a range of fund managers. I’ll have to investigate carefully all the details of transferring my pension funds to another platform. According to the OM documents this is free, but it is done by cashing up the fund prior to transfer to the new provider, and I want check this doesn’t expose me to a tax risk of some kind. But I think I am OK. It turns out Club Finance offer access to the OM platform if you appoint them as the advisor (0.05% p.a.). The OM platform charge (they call it a “product charge” for the CRA) is then about 0.38% pa. This is a route that avoids the hassle of leaving OM, but the fees seem high – I was charged a flat rate of £72.40 last year. I think this is because the funds are on ‘charge basis 2’ – new funds have to be on charge basis 3 which is reflected in the Club Finance charges. Some good things about OM is that there are no charges for purchases, switches, or transfers in or out – and the drawdown fee is about £60, though I can only find a document dated 2012; this has probably changed under charge basis 3.
So it is a bit baffling, but I think staying with OM via Club Finance will be too expensive (though obviously not as expensive as staying with the IFA), but I will consider it further.
My meeting the IFA was cordial, but became a little rushed after he had a call to deal with a family emergency and our meeting ended a little sooner than I had planned. But I did discuss the key point of me considering leaving his firm to manage my own investments. He says that’s fine, of course, as it is my money, but he believes he adds value that it would be virtually impossible achieve alone. Of course, he would say that. For evidence he pointed to the increased yield of my portfolio compared to the FTSE 350 – it is about 18% above that in a period since 2011, and since the last review in January it is 1.2% up after charges and taking into account the investments made, vs. a 3.5% loss cf. the FTSE 350. I also said I didn’t accept it was possible to pick outperforming funds on the basis of fund manager performance, and I proposed to get a simple platform and populate it with a few wide reaching index trackers. His position on this was that this approach ‘can only track the market’ and much better performance can be achieved with him and his approach, as he has demonstrated. He has a large backoffice team of researchers, he says, and his approach to fund selection is ‘much deeper’ than simply trying to identify key fund managers. He drew an analogy with champions league football managers – wasn’t it clear there were people who could deliver high performance year on year? Hmm – well, I must say on balance I’m not convinced. There is a lot to be said for transparency and simplicity and after a lot of effort I am still struggling to make sense of it all. What I’d really like is one killer fact I can point at – a sort of smoking gun, for example that points unequivocally to the net losses I might conceivably have had on the fee paying basis compared to say my proposed self-invested portfolio of a few index funds (Vanguard funds say – I have started to try and model this in excel but I suspect it is a futile exercise). I suspect this smoking gun is simply the 1.2% IFA fee though, and with lower fund and platform charges I think I can reduce my overall costs by perhaps as much as 2.1%. Knowing this fact is probably all I need to know to make a decision.
It seems to me that my best option,from studying the various platform choices and so on via Monevator’s guide, is likely to be to transfer my pension fund to Interactive Investor (I was also looking at Alliance Trust Savings) assuming there is no weird tax pitfall from the odd set-up I’m in at OM.
So I’ve not jumped ship so far, but I have identified a clear difference in philosophy between the IFA and me: he believes he can pick funds on some analysis of fund and manager performance, and I think the evidence is all against this; it is irrational for me to continue to pay fees for him to do something for me that I don’t believe is possible.
Ian…thanks for following up. You don’t need a smoking gun to persuade your IFA…don’t waste your time because you will never persuade him. But guess what? You don’t need him to agree…because ITS YOUR MONEY! So you are in charge!
Lets do a little worked example. You said you have a £100k pot, so saving 2.1% a year in fees (probably an underestimate but lets go with your figure) is a saving of £2,100 in year one.
Not bad for filling out a form or two. But it gets better. If the portfolio grows 5% a year, the saving becomes £2,205 in year 2. If we assume you live 40 years more then all these future years cost savings are worth £153,184 in today’s money (using a 2% discount rate).
If you would rather keep that extra £153,184 rather than donate it to your IFA and fund managers, then its time to fill out some forms.
The ‘smoking gun’ was more for pusuading myself rather than the IFA, Yes, it is startling when framed like that. Worse, in fact as my fund is more like 125k. I’ve not got a 40 year horizon though, more 25 to 30 at the upper end, but even a 10 year time frame is going to make a significant difference, something like 30k I think.
Another concern I have is the impact of fees being drawn in periods markets are in decline as I think this it makes it doubly difficult to recover the losses. Again, I’ve failed so far to capture this precisely, but I think the losses suffered from the fees are essentially amplified – that is I suspect that an annual charge of 2% taken monthly on a volatile investment has a greater impact than getting 2% less interest on a cash investment, but maybe my mathematical intuition is wonky.
Just taking up the invitation to get back to you once I’d completed my SIPP reorganisation. I’m now fully invested under my own steam with interactive investor.
There were a few hitches I experienced on the way, such that it took a lot longer than I thought it would. I started the process at the end of sept 2015 and it was the end of January 2016 until everything was settled. The transfer itself takes a few weeks organised by exchanges of papers between the two providers, however after my patience wore thin I finally discovered that the funds transferred to the new provider were £1 less than the statement of transfer they had received. So everything had stalled and the originators were unresponsive to calls from the recipients. Once I called round them all it was finalised in a day or two. This probably slowed things down by a month, though even with the Christmas season slowdown, four months to do this transaction seems rather long to me.
On the upside this meant I had lots of time to ponder what I’d actually do about the investments I’d choose when I finally I had to make my mind up about the transferred funds. There is no end to the information one can consume on this topic, but the one or two simple, core ideas I’ve adopted are those common among the typically recommended sources for self-managed investing, such as the books by Tim Hale and Lars Kroijer and the go-to UK blogs Monevator and (of course) TEA. To summarise these I’d say the best approach is to buy a small number of low-cost investments which are as widely diversified as possible over the world, and balance these with cash and bond holdings to reflect your attitude to risk and your time horizon.
Implementing the details of these straightforward insights I’ve found is unfortunately not that straightforward, but I think I have got a good deal of the way to a satisfactory portfolio now. I basically modified Tim Hale and Lars Kroijer model portfolios a little. I decided I would not go 100% equities and used one of the LK medium risk blends with 33% minimum risk investment (UK gilts) 17% ‘other government and global corporate bonds’ and 50% global equity. I took some hints from Tim Hale’s examples and split the minimum risk investments between an inflation linked gilts index fund and a short-term gilts ETF. And I took Lars Kroijer’s suggestion to not bother with REITs, commodities or anything fancy despite what Tim Hale says. Lars K suggests using one simple global fund but I split my investment between a developed world fund, an emerging markets fund, and a UK all-shares fund as this worked out slightly cheaper, plus I liked the idea of having the investments spread around a bit, this part of the portfolio amounting to about £60k. The bonds were 3 ETFs and one fund. I think maybe this was over-complicated, but given I wanted inflation linked gilts, short-term gilts, global sovereign bonds and global corporate bonds this is the only way I came up with to do it. BTW – the purpose of including corporate and global bonds is a Lars K suggestion to provide a level of risk exposure higher than UK gilts but lower than global equity. The biggest headache was keeping track of the names of products and their identifiers and market ticker symbols, and working out what the funds were actually doing. Often products seemed to me to have very similar names with similar objectives, but could be quite different. In one case I gave up trying to identify an accumulation version of a fund and bought into the income product –perhaps an Acc form doesn’t exists – db x-trackers II Global Sovereign. Another fund doesn’t return a price on several platforms (BlackRock Emerging Markets Equity Tracker D ISIN GB00B84DY642 ticker: G6HZ) and I’m still unsure that I have identified the correct ticker to use. GoogleFinance identifies this product as MUTF_GB:BLAC_EMER_MARK_6LA0I2 but it still returns a price of £0.00. However it ticks along fine on my holdings screen and has 500M funds under management so it seems OK.
So I divvied up my SIPP cash investment and went all-in. I considered £/cost averaging but in the end decided the additional time agonising, the trading costs (£10 a go on interactive investor) and the fundamental uncertainty were not going to make that much difference at the end of the day (which will be when I peg out in, hopefully, at least 30 years’ time). A couple of surprises were firstly that while the ETFs traded immediately, which I expected, the funds took AGES. I placed the orders mid-afternoon on Wednesday and was expecting them to trade by 4pm the next day but only one had traded by Friday and the others not until Monday. Secondly, with all the fuss about the markets over the beginning of the year, I was feeling smug that my funds had been converted to cash in mid-December. Surely I’d be quids in, I thought. When I looked at the FTSE for the day my funds were converted to cash (14 Dec) and the day I made the trades towards the end of January there was only 7 points difference! So much for all the agonising on TV about the global market meltdown.
So all I have to do now is nothing, which might be the next tricky problem for me, but I should be OK. Another important development is that I’ve got one of my daughters and her husband interested in working towards FI. They’ve now set up SIPPs and started regular investments and are carefully plotting a course towards a sound financial future, way before the time of life I wised up to the need to make this a priority.
Hi Escape Artist,
Thanks for the post although I realised my comments are a few years late!!
I have come to my senses and now transferring my UK pension plan into a SIPP.
My current provider (Fidelity) charges an annual fee of 0.35% for a SIPP. Although better than my outrageous fees before, it still seems unreasonable to charge me when I am investing myself.
Is this low cost typical or are there any zero cost SIPP options out there?
Best,
Patrick