# Starting a Pension /Broker choice: How can one balance Quality Advice Vs Cost?



## eupremier (18 Jul 2014)

Hi, Asking my peers here to sanity check my intention to commit to a Pension and asking for help in which route to choose. I have read some other threads and realise that one's holistic financial situation needs to be taken into account...

Quick summary of my situation:

I'm a (currently) single 38 y.o company director of 9 yrs with no dependants. 

Pay myself a tax-minimising amount of €3k /month net of tax.

My home is perfectly suited to any circumstance changes should they occur (family) and mortgage is 46% of realistic current market value. I overpay it each month and will clear it within 6years. 

As an investment, my business bought (and is occupying) a commercial premises early last year at the bottom of the property trough. Business mortgage is 34% of current building value. Local yields are 8% were I to let it. I see this as part of my retirement portfolio. 

I have no other debt and business is running okay (though not amazing). I see a Pension as just another investment, not an end in itself, but the only one that allows me to extract a €250k tax-free lump sum from my business, albeit down the road. 

I have 19k from an old employer's pension scheme which I can transfer. 

I have a good appetite for risk and no interest in Michael Mouse 6% returns. I did well on a 2yr BRIC bond in the past, burned-up a few grand in junk stock too. I have experience of the ups & downs of investment. 

I do not have the time nor the wealth (yet   ) for self-administered. I am intending on starting at €1k /month which is painful for now but manageable. 

Have spoken to 2 independent brokers and one high-street bank. 

Bank is offering <1% fees, full allocation but I get the impression that the fund options /after sale support /advice may not be the most dynamic and a kind of "sure isn't 5% only marvellous" type approach to things. Though, on the upside, no salesman commission and zero exit fees. 

Meanwhile, one of the brokers has a style I like and is keen to work the fund to leverage it as much as possible. Yes, he'll do the due diligence, risk appetite assessment etc but is keen that, all considered, I steer some of the fund into the, eh, more exciting funds! Eyes wide open though. 

However, he's suggesting a full allocation Zurich pension. 1.25% annual fees and early exit fees apply within first 7yrs. 0.25% of that is his commission. He justifies it saying that he spends his time researching & attending conferences etc so he can advise me... Is adamant that he's suggesting Zurich as it's marginally better for me versus a few others, he thinks they have good fund managers, diverse fund choices, full allocation, and not as they pay best?!?

I don't begrudge him making money, it's a fair point and he promises good access and regular fund reviews. Will he help my fund excel to the point where his fee is irrelevant? Crystal ball?

My question is: Is 1.25% too much? Am I being shafted? 

If I squeeze too much of a discount -does he lose interest over the longer term? Do I even need his advice... do I just go Zurich direct, for example, or, if not possible, to the cheapest broker going?

Any advice is much appreciated!


----------



## Marc (18 Jul 2014)

Lots of great questions in here.

I'll focus on just one choice you need to make if I may.

Do you want a financial broker who will set up a pension for you, or a Financial Planner who will work with you to help you to achieve your goals?

Let me give you a non financial example. Let's say you visit a butcher and ask them what would they recommend? My guess is that they will tend to recommend some sort of meat, very rarely will they say, hey better watch the cholesterol here why not go and visit the fishmonger, get some nice salmon? No, they are going to recommend that you buy some meat. It might be good meat, but they are never going to suggest you leave their shop and go and get some fish.

That's the job of a dietician.

Your bank will always be and many Financial Brokers tend to be more like butchers selling meat, financial planners are dieticians.

Now are you looking for a financial broker to set up a pension contract for you or a financial planner who will work with you over time to help you achieve your goals?

By the way I don't believe that people have "financial goals" they have lifestyle goals that have financial implications.


----------



## eupremier (19 Jul 2014)

Hi Marc,

Appreciate your point. 

I did have a company visit once promoting such a service which included an accounting & advice /mentoring role to help one build one's business in order that such lifestyle goals may be achieved. 

At the time, I think my real objection was the thought that my fledgling business couldn't justify the fees and that such fees would be better off being kept in the business. 

Certainly, it would be nice to have a skilled mentor to assist with planning, strategy etc. 

I would be interested in discussing that further but, right now, I'm ready to start a pension and I don't think a planner would advise against that given my current circumstances. Nor do I envisage my future financial planner slapping his forehead sighing, "you started a pension with Zurich, if only I met you sooner". Unless, of course, said planner was also a broker. 

Aiming high, goal wise, if I could stack away €5m and get 5% p.a -I'd be, like everyone, delighted. Is it possible, of course. Anything is... lot of work to do and a lot of luck required. I wouldn't bother with the hassle of business if I didn't dream of doing very well. I have a newfound admiration for public sector pensions after the learning a I've had recently... certainly makes one wonder about the stress of self-employment versus reward. 

My lifestyle goals would be well catered for by €250k / yr!


----------



## Branz (19 Jul 2014)

OP: I may be wrong here but you might want to reflect on the 5 bar target in the light of this
file:///Users/colmasuser/Downloads/sft-pft-guidance-note.pdf

Given what you have achieved thus far I don't see why you cannot go the Self Admin route.


----------



## Marc (19 Jul 2014)

Maybe an example might help.

I met a vet a few years back who had a pension with an Insurance Company and he agreed that a change of investment strategy was desperately needed. His broker had essentially picked themed investments as these had been launched by the insurance company and there was no overall investment strategy.

Furthermore the investment choices were restricted to a relatively narrow range of choices offered by the Insurance Company.

So we looked at the charge structure of the contract (admittedly this was an older contract but the principles are still broadly true today) in addition to a 5% bid offer spread he had an allocation rate of 95% and a policy fee and an annual charge of over 4%pa on initial units.

The transfer value was substantially less than the fund value and if he stayed with the pension company to avoid these penalties he continued to suffer from high annual costs and limited fund choices. A case of damned if you do and damned if you don't.

Now as I say, this is an extreme example based on a particularly egregious example of commission contracts from the early 1990s. But i review these things almost daily and I sound like a broken record. It's like the old joke about how to get to Kerry, you wouldn't want to start from here. Most people are in a shocking state. Now maybe there is a selection bias and I get more than my fair share of poor souls who have been abused by the system. But the fact remains that people are still being constantly abused by the system.

The root cause in my opinion is commission. Now restricted in the Uk, Holland, Denmark, Australia, South Africa.

The fact remains that most financial brokers in Ireland sell products for commissions. Some also offer the option of a fee. The same position existed in the UK a few years back when the regulator introduced an initiative called "treating customers fairly" something you might have assumed shouldn't need explicit regulation.....

The UK regulator found widespread examples of brokers who on paper offered a fee option but who would almost exclusively push the prospective client towards the commission option.

So, where does this leave you (or indeed anyone else in Ireland)

I believe that it comes back down to the very simple choice as I set out in my first response.

A product broker who sells you a pension product and is paid a commission from the ongoing product charges or

A financial planner who charges you a fee for advice and is free from the product bias associated with commission brokers.

An example of this

We use a company who cannot facilitate a commission payment on additional top up premiums each year to an executive pension. Obviously this isn't an attractive option for commission based brokers who would not get paid each year that you paid an additional top up.

Which is a shame as its a good contract which is well priced and a very broad choice of investment funds. In fact it might be exactly the ticket for you but you might never ever get to find out about it.

Do you see my point?

This is the kind of work that a Financial Planner should be able to arrange for you for a flat fee which should be an allowable business expense,  plus a percentage charge for ongoing advice. This is certainly how I would approach it.


----------



## eupremier (19 Jul 2014)

Hi Marc,

1) How do financial planners justify charging on a % basis for advice? Surely it should be flat fee based? As you like analogies: A doctor doesn't charge based on how much better you feel after a visit! 

2) Based on my €1000 /month proposal... how much money will my dear broker get out of this at 0.25% over the next few years? €300 /yr, right? If the advice in selecting investment funds is good, how bad?

Now, if there's a multiplier effect, please enlighten me!

How much would an FP cost by comparison, how much wealthier would they make me? Broadly speaking, I know this is crystal ball stuff...

I have the impression that an FP takes a macro view, do they get involved in the granularity of Pension fund baskets?


----------



## eupremier (19 Jul 2014)

@ircoha

Haha, I said 5 bar as one of the first questions an FP asked me were:

1) Why are you in business?

Aside from being my own boss, I said to be master of my own destiny. 

2) Put a € figure on that destiny... 

We teased out 5m... just finding a target and I'm a million miles from achieving it!! 

I cannot access your file? Can you check the link?

Self-admin needs constant work. There are enough people being paid 6 figures to do it for me! I'm prepared to pay a little each year to have it professionally managed.


----------



## Marc (19 Jul 2014)

1) I can only speak for myself.

I charge a liability risk premium because my liabilities are directly linked to the wealth of the clients I advise. Costs such as my levy to the Central Bank of Ireland and the premium on my professional indemnity insurance are both directly related to the assets I manage on behalf of my clients.


2) Can advisers select winning funds? Not in my 22 years experience. 
Do winning funds in one period repeat in subsequent periods? Not at all reliably hence the regulatory warning: past performance is no predictor of future returns.

Does active fund management add value? Not in any robust academic study it doesn't.

http://www.askaboutmoney.com/showthread.php?t=161447

Ask the broker to show you their documented investment process for fund selection.

Or just read this recent article from the Indo:

http://www.independent.ie/business/...etter-than-activelymanaged-ones-29648918.html

By contrast what is the potential value of working with a good adviser. A recent study in the USA estimated it at around 3%pa.

https://pressroom.vanguard.com/nonindexed/Quantifying_Vanguard_Advisors_Alpha_3.10.2014.pdf

Taxes are generally higher in Ireland than in the USA and for the right circumstances you could expect to add as much as 4.5%pa.

Do Financial Planners advise on the granularity of pension funds?

Again, I can't speak for all Financial Planners but you should at least expect a slightly better understanding of portfolio theory from a Certified Financial Planner compared to a typical broker.

But again, what is the process being used here to determine the optimum portfolio for you?
Picking funds at random/ based on past performance from the list offered by the insurance company?
Using the insurance companies own models? With the associated product bias and risk of shoehorning.
Mean variance optimisation?
Black Litterman model?

"he thinks they have good fund managers, diverse fund choices"

In my experience in many, if not most cases, there is no documented process for asset allocation and fund selection.


----------



## Steven Barrett (21 Jul 2014)

Hi Eupremier

Did the advisor really tell you that the annual management fee was because he has to attend conferences??  

You should be picking an investment strategy that you will stick to for a number of years. Constant selling in and out of funds only results in lost profits over the long term. 

I understand that you are looking for high returns, but it is unlikely that you are going to achieve double digit returns in the long term. The MSCI World Index has returned 6.43% per annum since 1999.

In the long term, the size of the falls are the things that get you. Take two funds, Fund A grows by 10% each year for 10 years. Fund B grows by 20% for 7 years and falls 20% in the other 3 (the sequence of growth and falls doesn't matter). Fund A will outperform Fund B by 42%. 

As regards the annual management fee, the advisor does need to paid for ongoing advice, work he will do for you during the year and as Marc says, the increase in indemnity insurance and levy's that we have to pay each year to the ICCL, Central Bank and Ombudsman. 


Steven
www.bluewaterfp.ie


----------



## finnegan101 (22 Jul 2014)

eupremier said:


> 1) How do financial planners justify charging on a % basis for advice? Surely it should be flat fee based? As you like analogies: A doctor doesn't charge based on how much better you feel after a visit!
> 
> 2) Based on my €1000 /month proposal... how much money will my dear broker get out of this at 0.25% over the next few years? €300 /yr, right? If the advice in selecting investment funds is good, how bad?
> 
> ...


----------



## Steven Barrett (22 Jul 2014)

Hi Finnegan

Yes, you are correct, it is only €30 in year one. The trailer commission accumulates over time. 

A lot of people believe that once the plan is set up, that's it. And it can be if you want it to be. But I do lots of work for clients after the initial piece of advice: 

- Proactive approach to any changes in legislation that affects the client. 
- Always being available to answer questions the client may have - I have a retired client who listens to Pat Kenny, Joe Duffy etc every day and then phones me to check if his money is alright!
- Making sure that your investment weighting stays within the parameters that you are comfortable with. 
- Ensuring portfolio volatility stays within the agreed parameters. 
- Giving an objective opinion on financial matters, sometimes stopping clients from doing stupid things. 

Steven
www.bluewaterfp.ie


----------



## Smoneen (22 Jul 2014)

eupremier said:


> Hi Marc,
> 
> 1) How do financial planners justify charging on a % basis for advice? Surely it should be flat fee based? As you like analogies: A doctor doesn't charge based on how much better you feel after a visit!
> 
> ...


----------



## Marc (22 Jul 2014)

The alternative, as I have stressed, is to arrange a nil commission contract through an adviser who is paid a fee.

There are several options that could work here that are not provided by Insurance Companies.

But most brokers deal almost exclusively with Insurance Companies since it is the Insurance Companies who can bear the strain on their balance sheet of paying an up front commission from an annual management charge on a regular premium policy.

And so this situation persists; prospective investors go to a broker for "advice" but are sold a product which pays commission.

I recently came across a situation where a broker had sold a pension and taken an up front commission on a very large premium. However, the pension wasn't fit for the purpose the client required. He therefore had to transfer the pension to another provider who could facilitate the options he required. He suffered a €40,000 penalty.

In another example the pension the client held did not facilitate the required investment strategy but if the client transferred the Broker would suffer a "clawback" of commission. This compromises the brokers ability to be impartial.

"it's difficult for a man to understand something when his salary depends on his not understanding it" Upton Sinclair

Therefore in some instances other options might be better for the client but are often discounted by the broker.

An Authorised Adviser should conduct a "fair analysis" of the market which should include non-insurance company options but in my experience many authorised advisers are also dependent upon commissions and so there is an inherent bias towards insurance company pensions in Ireland.

Looking to the future, the Central Bank of Ireland recently decided to remove the distinction between Authorised Adviser and Multi Agency Intermediary and we don't yet know what the effect of the replacement will be.


----------



## Steven Barrett (23 Jul 2014)

Marc said:


> Looking to the future, the Central Bank if Ireland recently decided to remove the distinction between Authorised Adviser and Multi Agency Intermediary and we don't yet know what the replacement will be.



It was changed to Investment Intermediaries and came into effect on 1 July. 



Steven
www.bluewaterfp.ie


----------



## Marc (23 Jul 2014)

From a recent IBA communication

You will note the terms Authorised Advisor and Restricted Intermediary and Multi-Agency Intermediary are not included in the new handbook. A date for the introduction of the reclassification of Intermediaries is to be discussed and agreed between IBA, PIBA and the Central Bank that will take into account any technical issues that may need to be addressed in relation to the Central Bank's Registers. We will keep you informed when this consultation takes place.


----------



## Orga (23 Jul 2014)

This is an interesting thread that has morphed somewhat into a discussion about the value of using a financial planner, a discussion that began from comments by a financial planner.

eupremier, that main question you asked was whether a 1.25% annual charge was too much for a pension. My view is that it's not unreasonable but that you could do better. You're in business so you understand the value of negotiation. So, I would suggest that you negotiate. To do that you're going to need more information and that means doing more research, speaking to others in the industry. Then, you will be better equipped to make a decision. 

In simple terms you should be examining risk, return and costs. Again, and very simply, the product of risk and return less your costs is your projected actual return. So, those are the key variables that you need to optimise. Finally, structure is important from the point of view of the taxes you pay.

If you can pick up a copy of the pensions manual (about 350 pages) from the institute of banking that is used for the QFA/APA exams then you will have the same minimum of information that brokers use. It would be a help (maybe ask your broker for a loan of theirs as you would like to learn more about pensions, because the IoB will only give it to you if you pay the 300bucks for the module).

I want to emphasise that the APA/QFA are the minimum competency standards and CFPs have a fuller curriculum. That said, it's truly shocking how low the minimum standards are set, and, in my experience, how those who are selling/advising on products are, in some cases, not at that standard in terms of their actual performance once they pass the exams.


----------



## Steven Barrett (23 Jul 2014)

Marc said:


> From a recent IBA communication
> 
> You will note the terms Authorised Advisor and Restricted Intermediary and Multi-Agency Intermediary are not included in the new handbook. A date for the introduction of the reclassification of Intermediaries is to be discussed and agreed between IBA, PIBA and the Central Bank that will take into account any technical issues that may need to be addressed in relation to the Central Bank's Registers. We will keep you informed when this consultation takes place.



PIBA said it was effective 1 July...


----------



## Marc (23 Jul 2014)

Ok lets get back to the original post



> he thinks they have good fund managers, diverse fund choices



Let's take a quick trip down memory lane.

What was the investment story at the turn of the Century? Most people will remember that is was the Internet Tech boom. Investors had made great returns in the years up to March 2000 and then -boom!!!

What about the summer of 2007? What did everyone in Ireland want? property right....and then Boom!

What about the summer of 2009?  Although stock markets had already started back up the media was full of stories of the collapse of markets and many people were piling into precious metals.

What about just recently? Everyone wants back into Irish Property again.

Now let's have a think about the diverse fund choices on offer.

Zurich launched their top tech 100 fund in August 2001 just after the big run up in tech stocks and too late to the party.

Zurich launched their Australasian Property fund in July 2007 and Europe Ex UK Property Fund in August 2007 pretty much at the top of the property market.

Zurich launched their Gold Fund in July 2009 after the gold price had been appreciating for about 6 years.

Now if I was cynical, and I am so that's how it is going to come across, I might think that Zurich is simply launching funds in order to exploit popular investment themes. We know that most private investor money flows in right at the top and after it us too late to benefit.

How is that in the best long term interests of a pension investor?

They have just launched a new fund of REITs which is only invested in two Irish REITs. Despite the fact that REITs have been around since the 1960s and the two property funds above are actually more broadly diversified REIT investments but Zurich are not promoting them to brokers because investors want Irish property and so they oblige.

Do they offer a good range of funds or a good marketing story for the broker?

Discuss


----------



## Fella (23 Jul 2014)

Much like gambling I believe the markets are probably very efficient so your guess is as good as a financial broker they could probably help you diversify a portfolio but I doubt they would perform better than anyone generally just buying random stock or shares , at the time you buy anything you lose the spread and comission but otherwise your value was neutral , prices are so efficient in liquid markets that if it's too cheap or too expensive it will be quickly balanced by arbitrage or weight of money . That's my guess on how they work , if rather lose my only money guessing than let someone else lose it guessing


----------



## finnegan101 (23 Jul 2014)

The QFA manuals from  the IOB are very helpful, but be warned of countless errors in them..
when errors and mistakes were brought to their attention, they were totally dismissive and just argued that the qfa exams are just a minumun standard so it doesnt matter if they are supplying wrong info!! 
but if anyone wnts a loan of a copy dont hesitate to ask...


----------



## Steven Barrett (24 Jul 2014)

Orga said:


> If you can pick up a copy of the pensions manual (about 350 pages) from the institute of banking that is used for the QFA/APA exams then you will have the same minimum of information that brokers use. It would be a help (maybe ask your broker for a loan of theirs as you would like to learn more about pensions, because the IoB will only give it to you if you pay the 300bucks for the module).
> 
> I want to emphasise that the APA/QFA are the minimum competency standards and CFPs have a fuller curriculum. That said, it's truly shocking how low the minimum standards are set, and, in my experience, how those who are selling/advising on products are, in some cases, not at that standard in terms of their actual performance once they pass the exams.



The QFA and the Continuous Professional Development (CPD) requirements that go with it are pretty low, although it has improved in recent years. I remember an hour CPD being given to a presentation on the new commission structures for life cover! 

When talking to an advisor, you have to assess them by what their level of professionalism. Do they put the time and effort into advising you or do you feel they are putting you into something that you feel every other client of theirs is in? Are you getting fund diversification and will they work for you? 


Steven
www.bluewaterfp.ie


----------



## eupremier (25 Jul 2014)

Thanks for this Orga...

BOI have offered .75% with zero exit fees & no salesman's commission.

The broker argument to counter that is "they're only interested in new business and you won't get regular advice along the pension journey". Though, said broker does 'rate' New Ireland on whom BOI depend for this type of product. 

Yes, I'm no stranger to the art of negotiation but I also know that if you push too hard you make the deal bad for the other side and the after-sales service will suffer. 

Hence, I was looking for advice from peers as to their views on what was balanced between cost and quality service. 

I suppose I was hoping that I could use this forum to validate my inclination that this guy was alright and avoid the need to read tomes myself in order to decide! I have enough on my plate keeping my business between the ditches without needing to all but qualify as an QFA/P myself! 

I did not know about Zurich's particular product until I met this guy. It sounds okay. He said New Ireland & Standard Life are also good but he chose Zurich over them as, for example, he cannot get full allocation with them but can with Zurich, is this true?

My understanding is that Zurich are at 1% and others here suggest the exit penalties exist through to 5years only. The broker gets .25%. 

It may be easier to knock the broker down as s/he's in front of me but the meat is in Zurich's cut. That's where savings could be made and where my pittance is not going to be singled out for poor service were Zurich to do a deal for me... 

Is it likely that Zurich would reduce their fee?

I very much appreciate your advice but I'm not sure you've fully sold me on the necessity of my reading those modules. I have decided to cede control of my Pension fund to others but will continue to duck and dive with other investments so long as God spares me... I do not intend depending on my pension solely. I think I have sufficient grasp of the fact that there are embedded costs in a Pension and jumping from one vendor to another frequently is expensive... I intend staying put for at least the exit-fee period and would only move if there was an outstanding reason and not because broker wanted fresh upfront commission...

So, with that in mind, are the Dubin based FPs here any better than the rebel Brokers down South?


----------



## Steven Barrett (26 Jul 2014)

eupremier said:


> So, with that in mind, are the Dubin based FPs here any better than the rebel Brokers down South?



There's rebel FP's too you know. Not as good as us Dubs though obviously.


----------



## Steven Barrett (28 Jul 2014)

Marc said:


> From a recent IBA communication
> 
> You will note the terms Authorised Advisor and Restricted Intermediary and Multi-Agency Intermediary are not included in the new handbook. A date for the introduction of the reclassification of Intermediaries is to be discussed and agreed between IBA, PIBA and the Central Bank that will take into account any technical issues that may need to be addressed in relation to the Central Bank's Registers. We will keep you informed when this consultation takes place.



Did you get a letter from the Central Bank this morning in relation to this? New Handbook of Prudential Requirements for Investment Intermediaries has been issued as at July 2014. Comes into effect in October 2014

 [broken link removed] 


Steven
www.bluewaterfp.ie


----------

