Background
Most IFAs, wealth managers and stock brokers generate the bulk of their business profits from charging clients ongoing fees, commonly as a percentage of the amount of assets they are ‘looking after’. These fees can be very significant sums of money, amounting to thousands of pounds per annum. What should you expect in return for such fees?
Discretionary or Advisory?
Traditionally stockbrokers look after your money on a discretionary basis and IFAs on an advisory basis. In between is the option to participate in a common managed portfolio with others, so called managed portfolio services.
In the case of a DFM (discretionary fund manager) the portfolio can be altered at the manager’s discretion without reference to you. It must of course be kept in line with your agreed risk preference and objectives and these would need to be validated with you at least annually, probably at a meeting. There will usually be evidence of trading stocks during the year and comparing the portfolio to an agreed benchmark ought to give you some idea as to whether or not the broker is worth their salt! The setting of the benchmark is a thorny subject and if you leave it to the broker it may well be rather a “soft” target.
Advisory managers review your portfolio at fixed intervals, usually only when a review meeting is due and then make proposals for changes that you need to agree with before they proceed. Some advisory managers will offer more frequent reviews, say quarterly. Obviously if you have more reviews, you would pay higher fees.
If you are participating in a managed portfolio service, your advisory manager gets your agreement to use the ‘bulk’ service of a DFM and the underlying portfolio which you share with many other investors is managed to clearly agreed objectives and against a set benchmark. This ought to offer economies of scale so if you have that sort of offering, you would expect to be paying your personal adviser less.
Promises, promises
All advisers must, as a matter of law, tell you what service they are going to deliver in return for your ongoing fees. They must also be able to demonstrate at all times that they” know their client” a regulatory requirement going back 40 years now but recently beefed up by new European legislation (unlikely to be cancelled post Brexit).
Taking these requirements into account, it is not appropriate (and here I am being polite!) if you find that the promised annual review under your agreed ongoing service terms comprises a bulky pack of valuation documents with a short note from your adviser saying all is well and nothing needs to be done. Yet in my experience that is not uncommon.
The main reason why that is unacceptable is that it is very poor value for money. If the portfolio was discretionary, then you may at least have had some trading (hopefully to your advantage) over the year, but if it is advisory, then the adviser will have done absolutely nothing at all apart from print the documents and send them to you. NotHarry counts a past professional training in management and cost accounting among his qualifications and can say with some certainty that the cost of producing an annual valuation and posting or emailing is only a couple of hundred pounds. So if you are paying several thousand pounds for your service and you have not had any other contact with your adviser over a year, you are being taken advantage of.
Furthermore, if you have not had a meeting with your adviser, they cannot possibly have satisfied the regulatory “know your client” rules. If a year has gone by, the world may have changed for you and the markets will have changed for sure.
Finally, if your portfolio is advisory, even if every fund you hold is still suitable, variations in performance across a well diversified portfolio will mean that you might need to bank profits, or rebalance the asset mix. In NotHarry’s 30 or so years of looking after people’s portfolios on an advisory basis, there may have been occasions when no changes were required, but that would have been agreed after a discussion with the client, apart from the odd exception where the investments were very low volatility or already managed internally (the managed portfolio service).
It is worth noting that switching investments involves the adviser firm’s back office in a certain amount of fairly thorough work (to avoid errors), so it costs money. This can be a reason why less ethical advisers don’t recommend fine tuning portfolios too often.
Finally, I have to report that most IFAs are financial planning specialists and even Chartered Advisors may never have taken an advanced examination in investment management, nor studied economics, statistics or psychology in any depth. Some will have a lot of experience which may be an adequate alternative, but the truth is most IFAs actually don’t know what they are doing when it comes to investment management. The ethical ones accept that and will have contracted in support from experts, but they will be the minority.
Summary and Check List
- If your service contract says you are entitled to annual or more frequent review meetings, make sure you have them. Expect such meetings to last at least an hour and allow you to explain your current situation and ask questions
- Challenge proposals for ‘no change’ unless this has been explained and you have agreed.
- Expect advice to bank profits, rebalance asset mixes, dump bad funds (all advisers pick a poor fund once in a while) and to participate in interesting new investment opportunities – this is what you are paying for if you are working on an advisory basis.
- If you are really concerned, ask for a time based breakdown of the work done for you over a period. Don’t believe that your adviser looks at your portfolio between reviews if you are not working with a discretionary fund manager – they generally don’t.
- Find out about what expertise is being brought to bear in maintaining your portfolio. Outside help costs money, so that might justify the fees you pay.