What value does an IFA bring to investments?

[rudbeckia]

I'm looking to invest c.£100k (an inheritance). I've found an IFA I like, and have paid £500 for the initial report, which didn't really say anything earth-shattering. It basically advised we have too much in cash and that we should transfer our cash ISAs and premium bonds into stocks and shares.

The IFA would charge £1500 to make the investments (in addition to the £500 report cost) and I'm wondering whether to self-invest instead and save that cost?

Although I'm new to self-investing, we've always used an IFA for smaller amounts, I've been reading up on investments from a variety of sources (books, finance blogs and mumsnet!) and I'm tempted to come up with my own strategy and use a combination of ready-made portfolios from (probably) Hargreaves Lansdowne and Vanguard, working with the risk profile the IFA assessed for me in his report.

What would be the downsides to this? I suppose what I'm asking is it worth £1500 to have the IFA do this for me? I haven't signed up for an ongoing fee with the IFA.

I have a separate company pension, and the money isn't something I rely on, but obviously I wouldn't want to take more risks than necessary (given that anything other than cash can go down in value of course).

Bumping hopefully for the evening crowd...

The short answer is that by doing it yourself you bear all the investment risks and if it all goes pear-shaped you have no-one else to blame and no recourse to compensation.

Some very good investment products or funds can only be accessed through an IFA. The IFA should be maximising tax efficiency by recommending appropriate tax wrappers for your investments. If you have cause for complaint there is a robust process that can be used in the Financial Ombudsman Service and possibly recourse to the Financial Services Compensation Scheme.

If the on-going service fee is a percentage of funds under management then it is in the IFA's best interest to be keeping an eye on your money for you and aiming for capital growth - the better it performs the better for you both.

Thanks sunseed.
Are you an IFA too? Does my IFA's fee sound about right please?

Yes, I am and yes, it does. Total charge for advice and implementation is 2% of the sum being invested. Some advisers will charge up to 4.5% depending on what type of business is being conducted.

One reason for using a percentage rather than a fixed price fee is because the larger the investment, the more risk burden on the adviser and the higher their professional indemnity insurance costs.

Would you consider taking much risk on the principal - you seem to suggest you might considering you say the money 'isn't something you rely on'? Reason I ask is, peer to peer lending could be a good, and cheap (no fees generally), way for you to get on the self-investing ladder, and returns average 5-6% p.a - it's an asset class with increased risk, however. Have you heard of P2P lending before?

Thanks, yes, I have heard of P2P lending but ruled it out as too risky overall. It might be worth considering as a very small percentage of my portfolio. Thanks for both your replies.

Yet another one of those “is an IFA worth it?” question. Have you done any research? There’s lots of material, press articles, forum discussions, etc. on the subject. The Money Saving Expert website and forum are a good starting point, IMHO.

On Indemnity: do bear in mind that IFAs do not guarantee a given return. Unless they suggest you invest in something blatantly inappropriate for your needs (e.g. 100% emerging market equity when you need your funds next year), or unregulated/dodgy/etc., you cannot go after them if the investments return less than you’d have hoped. In other words, my gut feeling is that it’s not particularly hard to avoid, even with just DIY investing, the kind of investments which would entitle you to compensation from an IFA. I do, of course, appreciate that these things are subjective, and there’s nothing wrong in wanting to pay for professional advice.

@Sunseed, what very good investment products or funds can be accessed only through an IFA?

@Rudbeckia, you haven’t given much colour. What’s your horizon? Will you need the funds in a couple of years or is it a long-term investment?

It is banal, but do bear in mind that, if you pay, say, a 2% upfront fee, you need a return > 2% just to get back to the amount you initially had. In a low-interest environment, every little helps, like Tesco says. E.g. You have £100, you pay a %2 upfront fee, so you effectively invest £ 98. With a 2% return, you end up with 99.96, i.e. slightly less than you started with!

I imagine the IFA fee would be upfront, i.e. a 1.5% one-off fee, not 1.5% per annum, right?

Hi SLD. I'm investing so the money at least keeps pace with inflation and possibly to use some of the capital to move to a more expensive house in about 5 years time and/or help our dc buy property. By then I could also take a tax free lump sum as I draw my pension, so there are other income streams. Essentially, I'm losing money on it now because it's in cash. (I know the risk of losing with investments of course).

Yes, it's 1.5 per cent as a one-off, not ongoing. I'll take a look at the MSE forums too.

And, the example you give about losing 1.5% immediately by going with the IFA is exactly what I thought. Now our dc are adults, i have more time to read up. I'm intelligent and level-headed, and I'm struggling to see the value of the IFA when it's so easy to pick model portfolios, look at historic returns (while knowing the caveats) and self-invest.
Unless I'm missing something obvious?

We look after our investments ourselves. They are kept on an online platform so our self-invested pensions and ISAs are all in one place. There are thousands of funds available and I like the flexibility on checking up on it whenever or topping up, buying, selling and moving money around with a few clicks. All the info about the funds (mostly do funds rather than individual companies) is there too, e.g. their performance, risk profile, investments held, managers etc so you can make informed decisions. We enjoy doing it ourselves and have been happy with our decisions. Having said that, a lot of people don't understand the jargon or don't find it interesting so an IFA is a much better option.

I do all my own investing (it's all in a nominee account, so the platform is covered by the financial services compensation scheme, not sure why a pp implied you only get that protection with an ifa, you don't), all tax efficient (ISA's and SIPP), mix of individual company shares, etfs and investment trusts. Vanguard LifeStrategy in the SIPP.

I diversify through the etfs and have two US ones (a small business one and a high yield one) and a small company UK one, need to add wider global at some point. The investment trusts are wider ranging, I need to add to them this year really.

The single shares are all UK blue chip, ftse 100, dividend yielding shares. Same as you'd find in any ftse 100 tracker but without the charges you get in funds.

I always read the Motley Fool and now follow the Lemon Fool forum. Plus a load of other financial blogs!

Thanks! I'm not confident enough to invest outside funds at the moment and would almost certainly use a model portfolio.
Jojo - which platform(s) do you use, please?

I've started reading the MSE forums and will delve into those a bit more, especially to compare platform fees, but ease of use is also a factor and a reason why I like Hargreaves Lansdowne, even though their charges are higher.

Vanguard are also appealing, although they access a smaller range of funds. My inclination at the moment is to split the investment s across those two platforms, but are there others I should look at?

I use Interactive Investor; used to use Iweb share dealing. They are some of the most cost-effective platforms for my needs (yours can be different). Also look at AJ Bell.

I have mostly ETFs (physical only, no synthetic; look up the difference), i.e. low-cost trackers, and Terry Smith's Fundsmith, the only actively managed fund in my portfolio.

Terry Smith has some interesting points; I don't agree with all of them - after all, she's biased against passive investments.
www.fundsmith.co.uk/news/articles?taxonomy=Categories&propertyName=Category&taxon=what-terry-smith-is-saying

Some background: www.bloomberg.com/quicktake/active-vs-passive-investing

HL is a platform, Vanguard is a fund. So, what do you mean 'split across those two platforms'?

I use YouInvest, it's fine, easy to use, maybe a bit cheaper than HL.

Here's a comparison chart of costs etc:

monevator.com/compare-uk-cheapest-online-brokers/

If you know someone who already uses one you might find they have a recommend a friend bonus or something.

Here is information on Vanguard LifeStrategy: investor.vanguard.com/mutual-funds/lifestrategy/#/

So, you should be able to buy Vanguard through HL.

A guide to passive investing: monevator.com/category/investing/passive-investing-investing/

Info on low cost index trackers: monevator.com/low-cost-index-trackers/

I use AJ Bell YouInvest too. With regards to some reading material, the Financial Times publish some good books that help understand the basics.

Thanks again for all the information, I'll sit down next week and go through it all.

Unless I'm missing something, Vanguard Asset Management (which I believe is relatively new to the UK) is a platform offering g various finds, as opposed to e.g Vanguard Life Strategy which is a fund. There was an item in last week's Sunday Times talking about how platforms like this one are disrupting traditional platforms.

"Vanguard Asset Management (which I believe is relatively new to the UK) is a platform offering g various finds, as opposed to e.g Vanguard Life Strategy which is a fund."

Looks like it is (Vanguard Investor) - but it also looks like they only sell their own products. That definitely wouldn't suit me.