£30k commission for advice?

Question
This is more prehaps a comment and a request for you to write an article rather than a question. Like you I am concerned about paying the correct amount for the same advice but your recent articles on paying for advice, trail commission etc etc tend to concentrate on UT's/OEICS rather than Life Products where the differences can be somewhat starker and your article on FA's who get paid too much struck a chord.

We recently looked at a particular vehicle to take steps to protect a substantial amount of a family members capital from IHT. We saw both a tied and an IFA. One was going to charge a commmssion of c£30k which was no negotiable, the other would rebate 2/3rds of the commission back into the investment. Also the latter had access to a wider pool of investment opportunities. The advice offered and given was the same, the big difference was in their personal skills and the personality of the individuals involved and how they came across.

To me its a no brainer, but its the family members' capital and their choice. This is not dishonest, but it serves to illustrate prehaps that there are some people out there who whilst giving good advice are raking it in and preying on a certain type of person. I would certainly have to ask why, if they do have such good personal skills, are they joining a tied company but your FA article gives the answer and I also beleive the parent company takes ownership of the 'FSA red tape' issues. I only wish they were more transparent about where such a large amount of commission is going as it certainly isnt all going to the adviser as if an IFA can give the same service for 1/3rd the cost so can they!!!Answer
Interesting comments which highlight a very important point – the reason some financial advisers can ‘get away’ with earning sky high commissions is because of their personality. Someone with a strong, likeable, personality is more likely to be able to pull the wool over a customer’s eyes than someone who’s rather dull. It doesn’t mean you should use them though. And in my experience that likeable personality might well turn to indifference once they’ve completed the sale and pocketed the commission (it’s not just financial advisers, the same is true of all sales-based professions).

As for commissions, £30,000 is simply ridiculous. It’s exceptionally rare that any financial advice should cost more than a few thousand pounds in the hands of a fair, fee-based adviser. Advisers tend to argue that the higher the sum involved, the greater their potential liability if things go wrong and they end up having to pay fines or compensation – so they should charge more. While there’s some justification for this, if an adviser provides good, robust, advice then the likelihood of incurring future liabilities should be small. While I think it’s fair to charge a modest risk premium on larger sums, there’s no way that fixed prorated remuneration such as commission or percentage fees is fair when investing large amounts of money.

Do tied or independent advisers charge more? It really varies. In your example the independent adviser was cheaper, but it could easily have been the other way round. I personally wouldn’t touch a tied adviser with a barge pole. I’m sure there’s some good ones out there, but why buy from someone who can only sell products from one shelf? At least an independent adviser can choose from the whole store (although there’s no guarantee they’ll be honest or any good).

Where an adviser, tied or independent, works for a company then it’s normal for the employer to take a proportion of any commissions/fees earned to cover costs such as compliance, administration support and marketing etc. If an adviser works for themselves they’ll incur these costs anyway. In fact there are plenty of examples where independent adviser companies or ‘networks’ have been far too generous to their advisers, resulting in the companies eventually going out of business.

There’s quite a lot of information on the site regarding excessive commissions on insurance- based investments, but I agree, an article would help bring all this together. I’ll write one this week.

I’d urge your family members to get a quote from an independent adviser who charges an hourly fee and rebates all commissions. I’d expect the advice to cost them significantly less than the existing quotes.

Read this Q and A at http://www.candidmoney.com/questions/question155.aspx

Protecting against a weak pound?

Question
I am in my seventies and therefore more than usually interested in capital preservation. But I am concerned about the future of the pound and would like to have some hedge against its further depreciation. US Treasuries look interesting to me, as a pretty safe stronger currency haven. Do you agree?Answer
The pound has weakened recently, seemingly due to concerns over the extent of our government debt and economic fragility. It's hard to know whether the slide will continue, but if it does then holding overseas currency may well prove profitable if you subsequently sell before the pound recovers (assuming it does).

The safest way to play the currency movements is simply to hold the currency itself. You could, for example, open a US dollar bank account. While you'd lose a little on exchange rate margins when converting, the underlying money should be safe.

Alternatively you could consider an exchange traded currency fund. ETF Securities offers a range that allow you to track movements between several popular currencies.

Buying US Treasuries is another option, but rising interest rates and/or inflation could reduce their value, so you'd need to be comfortable with this added risk.

Having said all this, unless you plan to spend a lot of money overseas in future then I'm not sure you need to worry unduly about the future of the pound. A weak pound does obviously increase the cost of imports, including fuel, but it shouldn't have too great an impact on the costs of day to day living for most of us.

Read this Q and A at http://www.candidmoney.com/questions/question153.aspx

Better qualifications = better advice?

Financial advisers are being pushed to improve their qualifications. Seems a good idea, but will it result in better advice?.

If you have a financial adviser, there’s a fair chance that he or she will be studying for an exam of one kind or another. It isn’t all that long ago that advisers were first required to gain a qualification. It was called the Financial Planning Certificate – FPC – and a lot of advisers made a terrible fuss about having to get it. Believe me, it wasn’t hard.

The bar is about to be raised again, and once again there is an argument along the lines of “I’ve been doing this job for 35 years, and I’ve never had a complaint, so why on earth should I be put through all this?”

Part of me has no sympathy with this view, and wants to tell the old timers to stop watching East Enders and get on with the studying. Another part pauses, and wonders what really makes a good adviser. Then I reflect on some of the ones I came across before I came into the industry, and many I have met since.

They have a problem, which is that the regulator is convinced that they are simple sales people. The regulator clearly thinks that what we consumers buy is financial products. And the regulator is wrong. Some of us buy reassurance. We want to be told that we’re doing the right thing. Some of us buy back our own time. We could do more for ourselves but we are just too busy. Some of us buy convenience. We like someone else to keep an eye on things, pull it all together and, from time to time, to tell us where we stand. Some of us buy status. We actually like our neighbours to know that the chap who turned up the other night in the Jag was our financial adviser.

So the first thing an adviser ought to be thinking about when he or she meets us for the first time is what it is that we really want to buy. A good adviser has two eyes, two ears and one gob and if he uses them in that proportion he won’t go far wrong.

But the adviser’s head is full of rules and regulations that are about him, not about us. I can count on the fingers of one hand the number of good listeners I have come across among hundreds, if not thousands, of financial advisers.

So are we all going to get better advice when the person selling us a straightforward ISA has passed all the exams? Personally, I doubt it. Most of the people in the banks and insurance companies that brought the world to its knees last year were brilliant. Most had PhDs from the best schools. They lacked a couple of things that good financial advisers need, that must be learned, can’t be taught, and can’t be tested in an exam room. Common sense and common humanity.

Spare a thought for your adviser and his or her struggles with the studies, but if you’ve a choice between a qualified and a highly qualified adviser, choose the one you think is most interested in you.

Read this article at http://www.candidmoney.com/articles/article71.aspx

Flat as a base rate

Today’s decision by the Bank of England to maintain its base interest rate at 0.5% marks a year at this level. During this time we’ve seen the cost of borrowing generally rise slightly and a small decline in savings rates. Why?.

Today’s decision by the Bank of England to maintain its base interest rate at 0.5% marks a year at this level. During this time we’ve seen the cost of borrowing generally rise slightly and a small decline in savings rates.

Nervous lenders

Not all borrowers have been hit. If you’re lucky enough to have a mortgage linked to the base rate then it’s probably been quite a good year. But some other mortgage rates, along with typical credit card, loan and overdraft rates have crept up.

Why? Most likely because there’s been a sharp increase in the number of borrowers failing to repay what they owe. Banks’ willingness to lend does seem to be rising, slowly, but lenders are being picky and generally demanding a higher premium to compensate for a greater perceived risk of not being repaid.

Looking at the Government’s insolvency figures it’s not hard to see why. Over 2009 the number of individual insolvencies increased by more than a quarter on the previous year hitting 134,142, equal to around 1 in every 320 adults. These are worrying figures and there could be more bad news to come before it starts to get better.

Stingy cash ISAs

Meanwhile banks and building societies have mostly been pruning back the rates they pay on savings accounts, especially cash ISAs. I think the main reason behind this is simply because they can. They’re not as desperate to attract funds compared to a year ago and cash ISAs are an easy target; the tax benefits mean savers are a little less rate sensitive versus conventional accounts. A few higher rates (comprising mostly of temporary bonuses) have recently popped up to catch some money either side of the tax year end, but they’ll probably fade in a couple of months.

When will the base rate rise?

For as long as our economy is struggling then there’s big pressure on the Bank of England to keep rates where they are. An increase would almost certainly damage our prospects of recovery.

Rising inflation is a threat, as hiking interest rates is the usual weapon of choice to keep inflation at bay, but the drivers behind the recent rise, oil and VAT, don’t really warrant this approach. In any case, the impact of higher oil prices on annual inflation figures should start to recede over the year (if prices are stable) and the impact of the VAT rise will fall away next January.

I’d therefore be surprised if we see a rate rise this year. And if it does I can’t see it being more than 0.5%.

Meanwhile, what about my savings and debt?

If your debt is costing you more than you’re earning on savings then consider using some savings to repay debt, provided there’s no prohibitive penalties and you still leave some money set aside for emergencies. Otherwise it’s simply a case of hunting out the best deals, as always.

Read this article at http://www.candidmoney.com/articles/article70.aspx

Buying an ISA?

Thinking of investing in a stocks & shares individual savings account (ISA) before the end of the tax year? If so, there are two key factors that will likely determine how successful your investment is: What you buy and how you buy it..

What you buy is by far the more important. Invest in the wrong market at the wrong time and you’ll incur painful losses. Get it right and you’ll reap nice profits.

Of course, this is also the hardest decision to make. Unless you have a crystal ball you’ll never get it right all the time, which suggests that making smaller bets within a good spread of investments is more sensible that betting your shirt on a single investment – this is certainly the approach I take.

When deciding what to buy I think there are five main issues to consider:

Look for gaps in your existing investments

In general it makes sense to invest across the main investment types: cash, fixed interest, stockmarkets, commercial property and commodities. And, where appropriate, to hold a mix of investments in each, e.g. global stockmarkets, not just the UK.

Rather than simply opt for whatever’s performed well in recent years, take some time to consider the best way to complement any investments you already own.

What do you want to achieve?

Ok, the obvious answer is to make money. But do you need an income? How long can you afford to tie up the money? And, if markets do fall, how much could you stomach losing?

Your answer to these questions will impact on the mix of investment types that is probably right for you. For example, fixed interest is more suited to income and usually less volatile than commodities. And while emerging stockmarkets hold more promise longer term than developed, there’s a greater risk of large losses along the way – I reckon it’s at least a 10 year bet.

Rather than cover all aspects here, I’ll point you to our investment pages that contain far more detail, including the pros and cons of each main investment type.

Funds or shares?

Once you’ve decided on where to invest, you’ll need to choose between using a fund(s) and buying directly, e.g. shares. In the case of commercial property you have little choice; you can’t buy an office block in an ISA, so you’ll need to use a fund. But you could buy individual gilts and corporate bonds for fixed interest exposure and shares for stockmarket and commodities exposure.

There’s no right or wrong answer here. If you’ve got the time to research investments then picking your own shares is likely to be cheaper than using a managed fund and you could outperform the professionals. On the downside, it’s unlikely you’ll be able to get as much diversity (most funds hold 50+ shares/investments) and you might fail miserably.

Active or passive?

If you opt for a fund you have a fundamental choice between an active fund manager, who’ll likely charge you between 1-2% a year, and a passive (i.e. tracker) fund, probably costing less than 0.5% a year.

Tracker funds tend to work well in some markets but are less successful in others – in practice you’ll probably want to hold a combination of both active and passive funds. Before deciding, I suggest reading our trackers page to find out more.

Choosing a fund

When choosing a tracker the main considerations are: the index being tracked (i.e. does it provide worthwhile exposure to the area where you want to invest), whether the fund accurately tracks the index and charges.

As for actively managed funds, they key question is whether the manager is likely to beat the index (else you might as well buy a tracker). Studying the manager’s credentials, including past form (look for consistency) and whether their management style (e.g. aggressive or cautious) suits the current outlook, can help. But ultimately you’ll be taking an (educated) leap of faith.

Once you’ve decided what to buy then seek out the best deal. If you opt for shares then consider a stockbroker with low dealing charges that doesn’t charge for an ISA wrapper. See my answer to this question for more details.

When investing in a fund decide whether or not you need advice. If you do, then seek help from an independent financial adviser (IFA). But if you’re happy making your own decision (perhaps with the help of useful research and guidance) then using a discount broker, who’ll refund some of the commissions normally paid to an adviser, can save you money. Read our ISA Discounts Action Plan to find out more.

If you want to find out more about ISAs in general, including whether the tax benefits are likely to be worthwhile, please take a look at our ISAs page.

Read this article at http://www.candidmoney.com/articles/article68.aspx

Inflation-adjusted returns?

Question
The historical real return on different asset classes. I wonder if you could publish figures for the inflation-adjusted return on asset classes, cash, gilts, bonds, equities etc., over various periods with your comments on how they should be interpreted? Figures for cash are often given without any details of whether they refer to LIBOR,
'average' savings rates, or the best savings rates that could reasonably be obtained.

Thanks for a great site.Answer
I agree that inflation-adjusted return figures are potentially far more useful than unadjusted figures. It’s something I’d definitely like to feature, along with lots of other statistical ideas I have, however getting hold of the underlying data is sadly not cheap. I looked at this when building the site and the price tag runs into thousands of pounds. Until such a time the site generates sufficient revenue I can’t really justify the expense.

You’re right to point out that cash figures are quite often ambiguous. When not specified it’s most probable that the data used is either an average of savings accounts or the Bank of England Base Rate – you'd expect returns from both to be lower than had you consistently held money in ‘best buy’ accounts (of course, most people don’t!). Tax is also an important factor that’s rarely reflected in such data. Unless you save/invest via ISAs then interest and growth will likely be taxed. Growth investments tend to fare better than savings in this respect (unless you’re a non-taxpayer) as individuals might be able to use their capital gains tax allowance to offset some, or all, gains.

I do have inflation data so I'll look at incorporating this into the savings charts already on the site.

Read this Q and A at http://www.candidmoney.com/questions/question150.aspx

Discretionary Trust investments?

Question
I am a trustee to a discretionary trust containing £150,000 in cash. Any income will shortly be taxed at 50%, therefore Growth is the necessary requisite.

Could you please offer your opinion as to:

1. In these current troubled times should one be even considering investing in the stock market. Should one be waiting to at least the general election?

2. Would you seek advice from an IFA? (I note your comments regarding Bestinvest but they require a minimum of £250,000 ) or could you make recommendations as to how I should invest this sum?

3. What are your thoughts with regard to an investment in Insurance Investment Bonds?

I am not adverse to average risk and a period of 5 to 10 years would be acceptable.Answer
Successfully predicting stockmarkets is difficult at the best of times. And in the current climate it’s nigh on impossible. Nevertheless, my gut feeling (for what it's worth) is that UK markets will do well just to stand still over the next year, as tax rises and spending cuts will undoubtedly bite regardless of which party wins the general election.

There might be a small bounce if there’s a change of Government, based on sentiment that fresh blood is required to help pull Britain out of its debt-laden economic hole, but I think this would be short lived as there's no miracle cure.

However, it’s not quite that simple as a good proportion of revenues generated by companies listed on the London Stock exchange generate earnings from overseas, so the UK is definitely no island when it comes to the stockmarket. What happens overseas is very important too.

The types of UK stocks that make most sense in these troubled times are well established cash rich companies that pay healthy dividends, but as you point out these won’t be very tax efficient within a discretionary trust (unless held in an investment bond – more on that in a moment).

I wouldn’t be in a rush to invest, but I think a mix of global stockmarket, commodity, commercial property and, to a lesser extent, corporate bond investments should stand you in good stead over the next 10 years.

Unless you’re comfortable picking investments yourself then I would suggest taking advice from a fee-based IFA, but be wary that they don’t try and charge upfront fees that end up being as expensive as commission (i.e. 3-5% initially). An hourly rate of £100-200 would probably suit you better than percentage based fees.

Alternatively, Bestinvest may still be able to help. While its discretionary investment service has a £250,000 minimum, its regular discount broking service does give advice on portfolios of £50,000 and above. The advice is funded by the trail commission received on underlying funds, typically 0.5% a year, which is a good deal as you’ll still benefit from full initial commission rebates (saving 3% +) when you purchase funds. As far as I’m aware, they’re the only discount broker that currently offers advice on this basis – if anyone knows of another please let me know.

I’m not normally that keen on investment bonds as they’re not particularly tax efficient for most people. However, they can work well in discretionary trusts because they’re not treated as income producing (provided you don’t withdraw more than 5% of the original capital each year – cumulative if not taken). This means you could hold dividend/interest producing investments within an investment bond without fear of being clobbered by the extortionate discretionary trust tax rates coming into force on 6 April this year (42.5% on grossed up dividends and 50% on other income).

Both income and gains are taxed internally at basic rate tax within the investment bond, but the trust shouldn’t have any further tax to pay until the bond is sold (subject to the 5% withdrawal limit). And when the bond is sold the trust may be able to first assign it to one or more of the beneficiaries, who can then potentially benefit personally from the ‘top-slicing’ method used to calculate tax owed on gains and income generated from investment bonds (not possible while the bond is in the trust). You can read more on top-slicing on our life investments page.

Just beware that investment bonds tend to pay high commissions to advisers (often 4-6% of the amount invested), so an adviser who works on either a fees or commission basis might be especially keen on the latter (whereas an adviser working on an hourly rate should refund all commissions to you). Also, if you opt for this route make sure the bond allows you to hold investments from across the marketplace, not just those offered by the insurer issuing the bond.

If you’re happy holding pure growth investments and capital gains tax remains at just 18% (unlikely) then an investment bond would offer little benefit. Otherwise it could be helpful.

Finally, remember that if income is paid out of the trust then the beneficiary may be able to reclaim tax paid by the trust provided they’re not a top rate taxpayer. See my earlier answer for more details . But this doesn’t apply to distributions from investment bonds.

Read this Q and A at http://www.candidmoney.com/questions/question146.aspx