# Investec charges for managed pension portfolio competitive?



## mindlessmax (22 Aug 2018)

Hi folks

I am a 38yo company director and am planning to extract €250k from my company into a pension fund. I expect to be able to take about approx €40k p/a in the future. I have engaged with Investec who have put forward a proposal for a managed investment portfolio. I am trying to decide between the Davy Select Self Admin pension I read about on AAM where I would buy into a diversified portfolio of ETFs like Vanguard S&P500 tracker which are very low cost, or to go with a more closely managed fund with the likes of Investec. Costs are a key deciding factor, but not the only factor.

Based on my risk appetite, they have proposed a high risk portfolio which is suitable for me. In the summary proposal they specify that there is an annual management fee of 1% and a transaction fee of 0.5% and in the appendix they break this out as the following:

Year 1: 
Assumed growth: 8.7%
Total costs and charges: 3.38% (Investec 1.94%, Zurich 0.36%, Taxes 0.32%, Other: 0.75%
Net growth: 5.32%

Year 2+: 
Assumed growth: 8.7%
Total costs and charges: 2.1% (Investec 0.95%, Zurich 0.36%, Taxes 0.04%, Other: 0.73%
Net growth: 6.6%

Third party charges are listed as management fees for the invested funds and dealing charges.

My question is, the assumed growth rate seems high, and the charges also seem quite high to me. For a managed portfolio, do these charges seem reasonable to you, and what are your thoughts about what approach I should take? Thanks in advance.


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## North Star (22 Aug 2018)

Unfortunately you may have to dig a little deeper to get the transparency on charges that you require. Only when you have visibility on all charges can you assess whether or not you are being offered good value.
I suggest you email them looking for confirmation of the following;


Any initial set up charge?
For the €250k what will be the amount invested on day 1?
Are there any exit penalties or other restrictions?
What is the platform/pension wrapper charge per annum?
What are the ongoing cost factors (OCF) of the funds they are recommending? ( please note that annual charges may not cover the full amount of charges so ask for the OCF of the portfolio they are recommending
What are the advice fees they are charging you?
Is there VAT to be added to any of the above?

What margin do they take on foreign exchange?
Any transaction or other costs that you should be aware of?
you need to know what you will be paying in any once off set up charge (if any), and from then on you need to know the annual total of platform charges, fund OCF and adviser charges.

If there is any hesitation in providing these figures, then that should be a yellow flag straight away.

I hope that helps.  Vincent


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## Marc (22 Aug 2018)

A higher risk pension portfolio might have an expected real return of around 4.5%pa above inflation.
Using the ECB inflation target of 2% this would suggest a gross return of say 6.5%pa before charges.

An executive pension plus custody should cost around 0.4%pa wholesale.
A low-cost passive portfolio would cost around 0.2% with no dealing charges
Advice and portfolio management add say 1% in total

1.65%pa including VAT


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## mindlessmax (23 Aug 2018)

Thanks for your reply Vincent. I got answers back today on your questions:

Any initial set up charge? - No.
For the €250k what will be the amount invested on day 1? - 100%
Are there any exit penalties or other restrictions? - No
What is the platform/pension wrapper charge per annum? - Zurich and the 1% fee is split between Investec and Zurich 65/35.
What are the ongoing cost factors (OCF) of the funds they are recommending? ( please note that annual charges may not cover the full amount of charges so ask for the OCF of the portfolio they are recommending) - All charges are included in the breakdown provided. 
What are the advice fees they are charging you? - Nothing above the fees outlined above.
Is there VAT to be added to any of the above? - It is included in the breakdown provided.

What margin do they take on foreign exchange? - Ranges between 15 and 65 bps depending on transaction size.
Any transaction or other costs that you should be aware of? - No other charges other than those outlined


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## mindlessmax (23 Aug 2018)

Thanks Marc, I wouldn't be paying the wholesale price on the EPP, and assuming it isn't passive as it is managed with up to 20% change per year on average, the assumptions underpinning your estimate of 1.65% seem low, versus their quote which seems high to me. So would it be fair to say that for an actively managed fund with target growth rates outlined, that from year 2 onward 2.1% doesn't seem outrageously expensive (even if 3.38% seems high in Year 1 due to initial entry costs)?


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## Marc (23 Aug 2018)

This is really interesting as it is a post MIFID II ex-ante disclosure and is considerably more detailed than was required 8 months ago and why your supplementary questions yielded no further insights. The regulatory world has moved on...

However, the really good news for consumers is that in addition to greater transparency of up front costs, you must also be provided with an ex-post disclosure which adds up all the fees you actually paid. So, wait a year and you should know the real cost.

Just to be clear, my illustrative number complies with the same MIFID II regulations, so this is an apples and apples comparison.

So let’s break this down a little further.

The pension wrapper is being outsourced to Zurich at a cost of 0.60% more than a market leading executive pension with a commission payable between the broker and the pension provider. In order to provide “independent” advice no commissions can be payable so this doesn't seem to meet the regulatory definition of independent. By which I mean it absolutely doesn’t...

This commission would most likely apply to each future contribution but the disclosure is maybe only applying to the initial €250k.

So you should bank on adding an extra €400pa charge (1% of 40k pa) to each contribution.

The 1% higher charge in year one is not explained so it will be impossible to account for. I’d guess it’s an internal dealing cost for buying funds so again you’d possibly need to add that to each contribution. Again, a market leading executive pension would have no dealing costs in funds.

Note that it’s possible to claim 100% allocation at the pension wrap level but then to apply initial charges at the portfolio level. This is permitted within the rules even if the net effect is a 99% allocation immediately because it is still technically 100% applied at the pension level.

Taxes within a pension are probably stamp duty or VAT but not explained.

The central bank is taking a hard line on foreign exchange disclosure even though it is not technically regulated. So that additional transaction cost of up to 0.65% should really have been disclosed initially without having to ask further.

And remember  that if you buy in a foreign currency you also need to pay the charge to get back to euro so double that fee on the round trip.

That of course also applies to the dealing charges which typically apply to both buys and sells so you should double those too.

Anyone with a grasp of theoretical mathematics want to hazard a guess at what that comes to??

“Money is like a bar of soap, the more you handle it, the smaller it gets”


In terms of my comparison.

The wholesale cost of the executive pension is excluding commissions so that you can clearly separate the cost of the “plumbing” from the cost of advice. So, yes, that is the market leading price to you for an executive pension with advice charged separately.

My estimate included a fully discretionary managed portfolio with daily monitoring and trigger-based rebalancing so hardly rip-van-winkle. To be clear, 20% of the portfolio could be turned over each year and it wouldn’t result in additional explicit transaction costs.

You could pay more for the investment funds which MIGHT increase the returns but it WOULD increase the costs.

The target growth rates are just that. What if a more realistic growth rate is achieved? You could be giving up a third of your returns....

So, the main difference between costs can be explained by the difference between the old world of stockbrokers getting paid for transactions in the hope that it would add value.

As Woody Allen said:” a stockbroker is someone who invests your money, until it’s all gone”

BTW I’m currently trialling a service for exec pensions in excess of €250,000 that could get that fee down to 1.40%pa

That would look something like this


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## thumbelina (26 Aug 2018)

Marc,

What is the PortfolioMetrix fee for and how does it not reduce returns? 

Would I be right in saying that you would benefit from both the 0.25% advice fee and then also a percentage (100%?) of the PortfolioMetrix fee?

If the client was just being charged the 0.8% then it would be very competitive and interesting but the 1.4% fee above seems high compared to other structures I've seen discussed here on AAM.


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## Marc (26 Aug 2018)

Not sure which alternative structures you are referring to but I’d be happy to take a look.

Some background to what we are trying to achieve.

Like many posters on AAM I’ve been frustrated over the last 10 years at the pace of competition in Ireland. My pension in Ireland now costs me six times what I used to pay in the UK 20 years ago and I know I have one of the best deals currently on the market. It’s one to the defining characteristics of being an independent adviser.

Those “other structures” almost certainly aren’t as cheap as they seem especially once we properly account for dealing charges and often lack the necessary functionality - or by definition I’d already be using them myself.

However, rather than just moan about it, I’ve been constructively going about introducing change to the benefit of the good people of AAM.

Following some negotiations we can now offer investment management at the same price as Vanguard’s Lifestrategy funds in the UK. Big tick.

However, through an independent whole of market approach, we have achieved better returns than lifestrategy on an ex-post basis.

Better returns can come from cost effective implementation. Our clients pay 0.15%pa for Global Equities compared to the Vanguard Global Stock Index Fund Euro Investor which costs 0.30%pa for example.

Another source of return is Asset allocation, but dealing and rebalancing accross multiple managers requires a fair amount of technology.

That’s where Portfoliometix provides a discretionary portfolio for each client with rebalancing based on triggers. So if you add some cash to your pension but next door doesn’t, then your portfolio is rebalanced but theirs isn’t.

Rebalancing captures mean reversion in asset classes and since we can deal with no trading costs, the sum of the fund charge savings and rebalancing effectively negate the portfolio management fee which is already less than half the price of an equivalent service in Ireland.

In terms of distribution PortfolioMetrix only distribute through partner advice firms, some of whom post on AAM.

The final piece of the puzzle is the regulatory cost of engaging with new clients.

We are currently developing an on line fact find which could allow advisers to engage with a new client more efficiently with the hope that advisers would be able to offer an ongoing advice fee of 0.25%pa rather than the more common 0.50%pa.

Significantly there are NO set up costs or implementation fees so over 20 years assuming an initial value of €250,000 plus €40,000pa contributions and an assumed 5%pa return that adds €19,859 to the pension fund! 

Again, Vanguard’s personal advice service costs 0.30%pa so this would be extremely competitive.


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## North Star (29 Aug 2018)

I think it is advisable not to bundle the advice element into the overall cost. I may believe strongly that to opt out of professional advice for an important matter like pension and financial planning is a false economy, however this is the clients decision. Therefore we would offer an option for advice or without advice, where both parties have clarity on the service offered the costs and responsibilities etc. 

So a cost model would look something like this;

once off implementation charge 1%
No exit charges
Pension wrapper/fund platform fee 0.4% of the assets annually
Advice fee - optional but if chosen 0.5% of the assets annually
Investment charges - totally dependent on the on going cost factor (OCF) of the portfolio chosen. For Vanguard this could be as low as 0.15% - other popular Dimensional funds range from 0.2% to 0.63% annually
No charges for buying or selling out of funds. For equities commission of 0.2%
So annual ongoing charges of 1.05% including advice is achievable, and 0.55% without advice. This would apply on amounts of €200k or above. For smaller amounts the implementation fee may be higher but would be confirmed in advance.

Re the investment strategy, whilst costs are important, I don't think that this should be the only factor when building an appropriate investment strategy.
Regards Vincent


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## Steven Barrett (30 Aug 2018)

With the introduction of MiFID II, a lot of platform providers introduced a minimum fee. The company I use, Conexim, charges 0.4% with a €300 minimum, which means you need €75,000 in your pension to get the 0.4% charging rate. 

What consumers have to be aware of, is that it is expensive to give financial advice and to manage money. We are a highly regulated industry and there are a lot of costs that come with that. Also, with the increasing advances in technology, clients are being provided with more technological tools for their money, all of which have to be paid for, a lot of which is paid for on a subscription basis. 

A lot of my charging structure would be similar to Vincent's above but I charge an ongoing fee. The reason being, I've had plenty of cases where the client told me they wouldn't need any ongoing advice and didn't want to pay for it. They are the ones who come back to me most with questions about their pension. But they aren't paying me for the advice. But even if the client doesn't have any questions, the provider will always come back to me with questions. And with MiFID II, there are obligations on the suitability of investment strategies to be satisfied, again work that has to be paid for. 

There is certainly a lot more choice than there was in the past and cheaper options. We are nowhere near the UK or US on charges and I don't think we ever will be due to the small size of our market. 


Steven 
www.bluewaterfp.ie


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## Marc (30 Aug 2018)

Stephen makes a very good point


The adviser declaration reads 

“Advisor Declaration
I declare that I have met the above named applicant and have explained the relevant investments provided within the services and am satisfied that the investments chosen on this application form and any subsequent instructions are suitable and appropriate in relation to the clients knowledge and experience, risk tolerance, capacity for loss and the client’s investment needs and objectives. I can also confirm that I/we have fully complied with all Anti-Money Laundering and Terrorist Financing Legislation and other relevant legislative requirements in relation to this client.”

It would be impossible for any adviser to sign this declaration on an execution only basis.


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## Sarenco (30 Aug 2018)

Marc said:


> It would be impossible for any adviser to sign this declaration on an execution only basis.


Why would an adviser have to sign a declaration re the suitability of the chosen investments if the client is availing of an execution only service?

40bps pa seems reasonable (at least by Irish standards) for a pension wrapper.

80bps pa for ongoing advice and a rebalancing widget?  Well, it wouldn't be for me but I'm sure others can see value in that offering.


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## Marc (30 Aug 2018)

That’s my point. In the Conexim service referred to above, Conexim are acting as an execution venue and is passing on the suitability and appropriateness obligations to the adviser.  An adviser who charges no fee for providing the service still contractually has these obligations whether they like it or not.

Of course consumer can still seek an execution only service if that's what they want. But an adviser using the Conexim service would be carrying a load of business risk with little or no payment.

Important
As a consumer, you should always protect your rights and avoid dealing with *unregulated* anonymous sources which provide no protection in the form of regulation, professional indemnity insurance or verifiable experience and professional qualifications.


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## Sarenco (30 Aug 2018)

I'm confused.

I thought Conexim provided a platform/custody service for independently advised clients.  Are you saying Conexim itself provides an advisory service?

Correct me if I'm wrong but it seems to be the case that consumers can buy an execution-only pension wrapper if that's what they want (although perhaps not with Conexim).  

In those circumstances, there's no advisory service provided - so why would an advisor have to give a suitability declaration?  That makes no sense to me.


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## North Star (30 Aug 2018)

I believe that there is a distinction between pure 'execution only'  transactions and advice only  at point of implementation  and an ongoing advice service (if chosen) and that is the universe of 'advice' offerings of all/most regulated entities. I believe that it's our job to explain each of the options in clear language and let the prospective client decide what is their best interests in terns of service needed/provided. As always transparency is the key.
 regards Vincent


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## Marc (30 Aug 2018)

Mifid II 

Regularity of suitability checking will be required from January (2018) onwards: assessing suitability is not a one-off exercise to be conducted at the point of recommendation only.

The issues of due diligence and suitable advice are addressed through requirements of periodic suitability assessments and reports, which should also include advice on switching investments


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## Steven Barrett (31 Aug 2018)

Sarenco said:


> I'm confused.
> 
> I thought Conexim provided a platform/custody service for independently advised clients.  Are you saying Conexim itself provides an advisory service?



You are correct, Conexim does only deal with the advisor market and does not take on clients directly. 

For a piece of business to be execution only, they have to specifically ask for a certain provider and take no investment advice (there can be execution risk business too). This is a rare occurance as people tend not to know what is available out there. What they are usually doing is trying to reduce on how much they will pay you. These have a habit of being problem clients as they don't really know what they are doing but they won't pay for me to do the job properly. So I've just stopped taking these on. 

If you want the lowest cost version, don't be hiring a professional to do it for you. You have to do it yourself. 

Steven
www.bluewaterfp.ie


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