# Why do insurers allow advisers to choose ARF commission rate?



## Wollie (10 Aug 2021)

Some insurers allow advisers to choose their own trail commission on ARF's.  The insurer recoups the cost through an identical adjustment to the management fee charged to the client.   Do the insurers demand higher service levels in return for higher commission.  If not, how do they justify the resulting lower value for their customers?


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## Dave Vanian (12 Aug 2021)

As far as I know, all ARF providers allow advisers this flexibility.  The regulations stipulate that if an adviser chooses to take trail commission, the adviser must demonstrate what services they are providing in return for that trail commission.  It's not the ARF providers' role to police these regulations, nor to fix prices.  They just provide the vehicle for collecting the trail commission and paying it to the broker.  

If Brown Thomas sells a product for €100 and another shop sells the same product for €75, that's a matter for the sellers, not the manufacturers.    

Consumers should be aware that if their adviser is proposing to charge trail commission, they should know what service they're getting in return and if they're not happy, challenge it or shop around.


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## kinnjohn (12 Aug 2021)

easier said than done when it comes to shopping around,


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## Brendan Burgess (12 Aug 2021)

Dave Vanian said:


> Consumers should be aware that if their adviser is proposing to charge trail commission



Dave

What percentage of customers of investment intermediaries have ever heard of trail commission? 

Brendan


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## Wollie (13 Aug 2021)

Brendan Burgess said:


> What percentage of customers of investment intermediaries have ever heard of trail commission?


Good question.  Furthermore, a simple calculation indicates that trail commission alone could mean that the intermediary makes twice as much from the ARF as the customer could expect to earn. 
The calculation is as follows:  Assume a gross annual return on the ARF of (say) 1.5% a year, which is generous, given current interest rates of zero or less, and the conservative investment strategies for ARF's.  Assume also an insurance company management fee of 0.75% a year.  Intermediary commission can be as high as 0.5% a year.  This means just 0.25% a year on average for the customer, or half what the intermediary makes - without having to do a tap of work after the initial sale. 
How can that be justified?


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## Dave Vanian (13 Aug 2021)

@Brendan Burgess As I'm sure you'd guess, only a well-informed customer or Askaboutmoney regular would know what trail commission is.  So I'd say the percentage is very low.  There is a legal requirement for an intermediary to provide written details of all remuneration at or before point of sale.  The problem is that there are so many other legal requirements around information to be disclosed that an intermediary can choose to bury the commission disclosure among about 30 pages of other disclosure documents.  

I'd like to see there being a one-page, easy to read document which includes disclosure of all charges in a simple format - "If you invest €100,000, the ARF provider gets €X, the broker gets €Y and the fund manager gets €Z."  It should also include a Reduction in Yield (RIY) figure.  "The combined effect of these charges results in an overall cost of YY% per year, which will reduce your investment return by this amount."

While the percentage of customers who would know about trail commission would be small, I think there's a bigger percentage would be willing and able to ask an intermediary "what are you getting paid out of all this?"  Faced with a straight question like that, I would hope that a broker would be honest in the answer.  So I'd recommend asking the straight question.  



Wollie said:


> - without having to do a tap of work after the initial sale.



@Wollie - I'm quite critical about many aspects of the pension industry, but what you're talking about here is simply illegal.  The regulations are clear that if an intermediary chooses to take trail commission, they must be able to show what work they're doing in return for it.  So if you come across an intermediary who is proposing to take trail commission and not do a tap, they should be reported.  So in answer to question - how can this be justified - it can't.


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## Wollie (14 Aug 2021)

Dave Vanian said:


> The regulations are clear that if an intermediary chooses to take trail commission, they must be able to show what work they're doing in return for it.


What does this mean? How can they show "_what work they're doing"_?  
First of all, are we talking about CBI regulations?   Could you quote chapter and verse for me, please?  
Is it sufficient for them to say something on the lines of "_I will check regularly that the funds in which my client's money is invested are performing as expected_"?  My fear, from what I've heard in the market, is that some intermediaries (hopefully very few) wait five years (or whatever is the time required to 'earn' the commission received at time of sale) and then advise the client to move to another company, giving the intermediary an opportunity to earn initial commission again - and more trail commission, of course, but only on condition that they keep to the law and demonstrate that they will keep an eye on things and be prepared to move the client after another few years, in order to earn even more commission.  
Sorry, cynicism got the better of me. 
Hopefully, you'll set me right and demonstrate that intermediaries really have onerous legal responsibilities and that they discharge those responsibilities in a professional manner.


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## kinnjohn (14 Aug 2021)

Wollie said:


> What does this mean? How can they show "_what work they're doing"_?
> First of all, are we talking about CBI regulations?   Could you quote chapter and verse for me, please?
> Is it sufficient for them to say something on the lines of "_I will check regularly that the funds in which my client's money is invested are performing as expected_"?  My fear, from what I've heard in the market, is that some intermediaries (hopefully very few) wait five years (or whatever is the time required to 'earn' the commission received at time of sale) and then advise the client to move to another company, giving the intermediary an opportunity to earn initial commission again - and more trail commission, of course, but only on condition that they keep to the law and demonstrate that they will keep an eye on things and be prepared to move the client after another few years, in order to earn even more commission.
> Sorry, cynicism got the better of me.
> Hopefully, you'll set me right and demonstrate that intermediaries really have onerous legal responsibilities and that they discharge those responsibilities in a professional manner.


I may be wrong I am sure I will be corrected if so  they are covered once they contact you with updates several times a year by post,
I think a paper trail is all they need,


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## Wollie (15 Aug 2021)

kinnjohn said:


> I may be wrong I am sure I will be corrected if so they are covered once they contact you with updates several times a year by post,
> I think a paper trail is all they need,


Thanks @kinnjohn    Given that no-one has corrected you, you seem to have got it right.  Not a particularly demanding standard of care , is it?  

I wonder if an adviser/broker taking commission of 0.5% a year has to show that they have done more work for their client than one taking one-fifth that amount, i.e., 0.1% a year?  



Dave Vanian said:


> It's not the ARF providers' role to police these regulations, nor to fix prices. They just provide the vehicle for collecting the trail commission and paying it to the broker.



Is it anyone's role to police the regulations?  If so, what does policing entail?  If not, do the regulations mean anything?

The ARF provider cannot wash their hands of responsibility as easily as you claim.  They have a contractual relationship with the client, a more enduring one than that of the broker/ adviser, since they will have to fork out on the contract eventually.  How can they stand over one client getting far worse value than another, for the sole reason that they caved into a demand from the broker/ adviser for higher commission, without checking that the adviser is doing anything to justify it?    

While admitting that I may have misunderstood key aspects, the entire system seems to stink to high heaven.    How can anyone - insurance companies, compliance officers in advisory firms, or the CBI - stand over it?


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## SGWidow (15 Aug 2021)

My 2 cents

The CB is pretty useless and the business model for brokers is highly dependent on this trail commission nonsense.

At the ARF set up, the asset allocation and re-balancing protocols should be established. If someone has €1m in an ARF and is being charged 0.5% trail, it's almost impossible to see what add value a broker would give me on an on-going basis. It is possible that I may need specific advice on occasion - but I'd much prefer for this to paid for as and when and if needed.


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## Gordon Gekko (15 Aug 2021)

Does the broker not have ongoing obligations such as reassessing suitability regularly?


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## Wollie (15 Aug 2021)

Gordon Gekko said:


> Does the broker not have ongoing obligations such as reassessing suitability regularly?


So I'm told.  I'm asking what that implies in practice.  Is @kinnjohn right in saying that a paper trail is all that's needed?  


Dave Vanian said:


> what you're talking about here is simply illegal.


I hear you, but who decides that an intermediary is acting illegally?  And how how do they make the decision?  Do they have different criteria on what constitutes illegality for an intermediary taking 0.1% than for one taking 0.5% a year?  Does the 0.5% intermediary have to send five times as many letters to the client, telling them how diligently they're looking after their interests?


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## Gordon Gekko (15 Aug 2021)

There is a serious anti-broker sentiment here (and I’ve no axe to grind either way because I’m not a broker).

A paper-trail is all that’s needed for most things, but if the underlying work isn’t being done, that’s fraud and a regulatory breach.

There are dodgy brokers out there, absolutely, but there are dodgy accountants and solicitors as well.

People who use an advisor have far better outcomes on average than people who go it alone. We should all remember that when every second poster is trying to seek out the lowest cost self-chosen investment via the lowest cost pension structure.

There is reliable data from the US which indicates that people who manage their own investments make about 2-2.5% per year on average versus 5-6% for your typical 60-40 Equities/Bonds managed portfolio and 7%+ for a managed all-equity approach. Going it alone is a bad idea.


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## SGWidow (16 Aug 2021)

Firstly, for the avoidance of doubt - I am not talking about going it alone. I am talking about getting advice as and when needed. There is a big difference.

Also, Gordon - can you provide the link to the reports you are referring to please? In particular, I am interested to see how brokers would add value to the non-clueless investor. Specifically, if an investment strategy has been agreed with a broker at the outset - including re-balancing protocols - I find it hard to see where a broker could make up the 0.5% charge - let alone surpass it by the levels you've quoted. 

In this - I am talking about the non-clueless investor. I am not anti-broker. I am anti not paying charges for a service that I don't understand. Can you tell me where I even might possibly get the extra 3% to 4% return that you are referring to please?!


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## Steven Barrett (16 Aug 2021)

Wollie said:


> What does this mean? How can they show "_what work they're doing"_?
> First of all, are we talking about CBI regulations?   Could you quote chapter and verse for me, please?
> Is it sufficient for them to say something on the lines of "_I will check regularly that the funds in which my client's money is invested are performing as expected_"?  My fear, *from what I've heard in the market, is that some intermediaries (hopefully very few) wait five years (or whatever is the time required to 'earn' the commission received at time of sale) and then advise the client to move to another company*, giving the intermediary an opportunity to earn initial commission again - and more trail commission, of course, but only on condition that they keep to the law and demonstrate that they will keep an eye on things and be prepared to move the client after another few years, in order to earn even more commission.
> Sorry, cynicism got the better of me.
> Hopefully, you'll set me right and demonstrate that intermediaries really have onerous legal responsibilities and that they discharge those responsibilities in a professional manner.


The old "5&5". Get 5% commission, wait 5 years for the early exit penalties to be finished with and then move to another provider to get another 5%.

At the end of the day, it is your money and if you are not happy with the charges, go somewhere else. You don't have to move to another provider if you don't want to or if you want to pay a fixed fee, you can do that too. It is up to you. 

But remember, you are are getting a service, not a product. You can get your tax return done by PwC or by a small firm. The prices may be vastly different but you are getting the same tax return down. You need to know what service you want from the outset and have it priced accordingly. 

Steven
www.bluewaterfp.ie


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## Duke of Marmalade (16 Aug 2021)

Dave Vanian said:


> If Brown Thomas sells a product for €100 and another shop sells the same product for €75, that's a matter for the sellers, not the manufacturers.


Let's develop that analogy.  The customer is buying €100 of Chanel 5 perfume.  The €100 is sent to Chanel.  Chanel provide the customer of Browne Thomas with a bottle of 65ml and pay BT €35 commission.  They provide the Dunnes Stores customer 90ml and pay DS €10 commission.
Chanel is clearly being very unfair to its customers, differentiating according as who sold the product.
The point of describing it this way is to highlight that the producer is facilitating the rip off.


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## Duke of Marmalade (16 Aug 2021)

Gordon Gekko said:


> There is a serious anti-broker sentiment here (and I’ve no axe to grind either way because I’m not a broker).


I don't sense an anti broker sentiment.  Brokers are like many, they will try and get as much as they can from a sucker.  I see OP as being very anti provider for facilitating this natural greed.
If a punter wants to be ripped off it should not be by a tick box on a proposal form but a separate agreement with separate bank arrangements with her broker.


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## Dave Vanian (17 Aug 2021)

Duke of Marmalade said:


> Let's develop that analogy.  The customer is buying €100 of Chanel 5 perfume.  The €100 is sent to Chanel.  Chanel provide the customer of Browne Thomas with a bottle of 65ml and pay BT €35 commission.  They provide the Dunnes Stores customer 90ml and pay DS €10 commission.
> Chanel is clearly being very unfair to its customers, differentiating according as who sold the product.
> The point of describing it this way is to highlight that the producer is facilitating the rip off.



I think your analogy is wrong.  Chanel calculate that they can make a profit on a single bottle as long as they sell it for €65.  So they sell it at €65 wholesale price to all their stockists.  BT sell it retail for €100.  Fred's Discount Perfume Shop sells it online for €80.  Is it Chanel's job to tell BT what price they should be charging for it?

Please don't get me wrong.  I'm not an apologist for any unethical brokers out there, nor do I speak for brokers in general.  I can only speak for myself.  Are there brokers out there who are gouging their customers for maximum commission and providing a lousy service in return?  Undoubtedly.  There are good and bad brokers just like any other profession.


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## Duke of Marmalade (17 Aug 2021)

Dave Vanian said:


> I think your analogy is wrong.  Chanel calculate that they can make a profit on a single bottle as long as they sell it for €65.  So they sell it at €65 wholesale price to all their stockists.  BT sell it retail for €100.  Fred's Discount Perfume Shop sells it online for €80.  Is it Chanel's job to tell BT what price they should be charging for it?
> 
> Please don't get me wrong.  I'm not an apologist for any unethical brokers out there, nor do I speak for brokers in general.  I can only speak for myself.  Are there brokers out there who are gouging their customers for maximum commission and providing a lousy service in return?  Undoubtedly.  There are good and bad brokers just like any other profession.


Well we can play word games I suppose.  The main difference is that commission actually detracts from the product.  With Chanel perfume the customer gets the same product but to be sure some pay more than others for it.
The "product" that a life assurance company is selling is the potential to accumulate savings.  A 0.5% p.a. extra charge seriously detracts from the "product" as others have pointed out  (awaiting GG's source that this is not the case).  The real issue is that life companies make this contamination of their product easy for unscrupulous brokers to implement.
AAM should campaign for people who have signed up to these OTT trail commissions to immediately cancel their commitment and instead seek advice maybe every 5 years, possibly on AAM.


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## SGWidow (17 Aug 2021)

Duke of Marmalade said:


> awaiting GG's source that this is not the case



We are indeed - in addition to the other questions I posed



Duke of Marmalade said:


> AAM should campaign for people who have signed up to these OTT tail commissions to immediately cancel their commitment and instead seek advice maybe every 5 years, possibly on AAM.



Now - there's an idea + 50%


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## Wollie (17 Aug 2021)

Gordon Gekko said:


> People who use an advisor have far better outcomes on average than people who go it alone. We should all remember that when every second poster is trying to seek out the lowest cost self-chosen investment via the lowest cost pension structure.
> 
> There is reliable data from the US which indicates that people who manage their own investments make about 2-2.5% per year on average versus 5-6% for your typical 60-40 Equities/Bonds managed portfolio and 7%+ for a managed all-equity approach. Going it alone is a bad idea.


@Gordon Gekko, could you point us to where we can verify that assertion?  A friend who knows the pensions business says that the opposite is the case, that brokers have made far more out of ARF's than their clients. 
He says that, over the last ten years, total commission (initial and trail) paid by insurance companies to intermediaries exceeded gains by clients.  That is despite strong stock market growth in the period.  He may have qualified it by saying that it applied for ARF's under €1 million, because people with ARF's over €1 million were more prepared to invest in the stock market and were also better at avoiding trail commission. 
Either way, my friend's claim seems preposterous.  If it is false, the insurance companies (collectively or individually) should put the lie to it and publish the true figures.  If it's true, then the Central Bank should force them to publish the figures.
My friend made the sarcastic comment that the introduction of ARF's spelt the end for annuities for individuals, but delivered a nice annuity income for intermediaries - in the form of trail commission!


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## Dave Vanian (17 Aug 2021)

Duke of Marmalade said:


> Well we can play word games I suppose.  The main difference is that commission actually detracts from the product.  With Chanel perfume the customer gets the same product but to be sure some pay more than others for it.
> The "product" that a life assurance company is selling is the potential to accumulate savings.  A 0.5% p.a. extra charge seriously detracts from the "product" as others have pointed out  (awaiting GG's source that this is not the case).  The real issue is that life companies make this contamination of their product easy for unscrupulous brokers to implement.
> AAM should campaign for people who have signed up to these OTT trail commissions to immediately cancel their commitment and instead seek advice maybe every 5 years, possibly on AAM.



Hardly word games.  Let's say I tell you that you have two choices: (a) pay me 0.25% of your fund value per year as both a retainer for any queries you may have during the year and for regular reviews or (b) don't.  Let's say you choose (a).  Whether you pay me out of your bank account or the pension company pays me out of your pension fund makes no difference to me.  Paying me from the pension fund means that I don't have to charge you VAT, so it's cheaper for you.    

Do I believe that charges disclosure regulations should be a lot more consumer-friendly, so that all charges (broker, pension company, trustee, fund manager) would be displayed clearly in a much more obvious and easy-to-understand way than the regulations currently require?  Yes I do.  See my post #6 above.

Do I believe that it's the job of pension companies to police or dictate what brokers or agents charge their clients?  No - we have a Central Bank and a Pensions Authority to do that job.


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## Dave Vanian (17 Aug 2021)

Wollie said:


> A friend who knows the pensions business says that the opposite is the case, that brokers have made far more out of ARF's than their clients.
> He says that, over the last ten years, total commission (initial and trail) paid by insurance companies to intermediaries exceeded gains by clients. That is despite strong stock market growth in the period.



Sorry but that sounds like utter nonsense to me.  

I've no idea what the majority of brokers are charging for ARFs.  But let's assume that the average is 3% up-front and 0.25% trail.  I know brokers who charge a lot less than that, but let's go with the higher figure.  Over 10 years the 3% up-front adds 0.3% per year to the annual charge.  So we're up to 0.55% per year commission.  Now before an actuary scolds me because the 3% commission is paid up-front, let's really be generous and round up the effect of commission to 1% per year.  Actual commission is 3% + (10 years x 0.25%) = 5.5%.  I'm showing that as an average of 1% per year x 10 years. 

Let's take the Irish Life Consensus Fund as a proxy for the average Irish managed pension fund, as that's what the fund is designed to do - replicate the average.  Annual growth over the past 10 years on the Consensus Fund has been 8.44% per year AFTER deduction of the standard 0.75% annual fund charge.  

So fund growth 8.44% per year.  Sales commission 1% per year or less.  Does your friend have any data whatsoever to back up his claim? 



Wollie said:


> Either way, my friend's claim seems preposterous. If it is false, the insurance companies (collectively or individually) should put the lie to it and publish the true figures.



It certainly does seem preposterous.  Why should any insurance company go to the expense and work of collating and publishing data to rebut a preposterous claim unless your friend published it with data to back it up?  I can claim that the average broker only makes €1.24 for selling an ARF and that the average client makes 1,000% fund growth every three weeks.  I wouldn't expect any insurance company to bother to rebut that preposterous claim either.  



Wollie said:


> My friend made the sarcastic comment that the introduction of ARF's spelt the end for annuities for individuals, but delivered a nice annuity income for intermediaries - in the form of trail commission!



Your friend does know that annuities are still available to anyone that wants one, right?


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## Gordon Gekko (17 Aug 2021)

Wollie said:


> @Gordon Gekko, could you point us to where we can verify that assertion?  A friend who knows the pensions business says that the opposite is the case, that brokers have made far more out of ARF's than their clients.
> He says that, over the last ten years, total commission (initial and trail) paid by insurance companies to intermediaries exceeded gains by clients.  That is despite strong stock market growth in the period.  He may have qualified it by saying that it applied for ARF's under €1 million, because people with ARF's over €1 million were more prepared to invest in the stock market and were also better at avoiding trail commission.
> Either way, my friend's claim seems preposterous.  If it is false, the insurance companies (collectively or individually) should put the lie to it and publish the true figures.  If it's true, then the Central Bank should force them to publish the figures.
> My friend made the sarcastic comment that the introduction of ARF's spelt the end for annuities for individuals, but delivered a nice annuity income for intermediaries - in the form of trail commission!


So it’s Page 76 of the JP Morgan presentation below, which is based on work undertaken by Dalbar:






						Guide to the Markets
					

The J.P. Morgan Guide to the Markets illustrates a comprehensive array of market and economic histories, trends and statistics through clear charts and graphs.




					am.jpmorgan.com
				




Dalbar is an independent investment research firm based in the US. They produce an annual ‘Quantitative Analysis of Investor Behavior’ report, or ‘QAIB’. Their research studies overall investor performance in mutual funds.

This summarises it all quite neatly:






						Dalbar QAIB 2022: Investors are Still Their Own Worst Enemies
					

The latest update of this research series analyzes fund performances by investment behavior versus actual returns.




					www.ifa.com


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## Sarenco (17 Aug 2021)

Gordon Gekko said:


> Dalbar is an independent investment research firm based in the US. They produce an annual ‘Quantitative Analysis of Investor Behavior’ report, or ‘QAIB’. Their research studies overall investor performance in mutual funds.


The Dalbar report has been widely discredited at this stage -


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## Duke of Marmalade (17 Aug 2021)

Dave Vanian said:


> Paying me from the pension fund means that I don't have to charge you VAT, so it's cheaper for you.


This is the payment by the life company to you (the broker) on behalf of the customer for *services rendered to the customer.*  It is a VATable expense no matter how the customer pays for it.  But of course life companies would not avoid VAT so it is not after all a payment for services provided to the customer but a crude commission from the life company* for services provided to it, the life company, by the broker*.  The latter is of course the correct interpretation hence no VAT but its presentation to the customer as a service to her is a deception facilitated by the life company.


Dave Vanian said:


> Let's say I tell you that you have two choices: (a) pay me 0.25% of your fund value per year as both a retainer for any queries you may have during the year and for regular reviews


For sake of argument let's stay consistent with the parameters of the debate.  You are being asked to pay €5,000 a year for a retainer to answer any queries and provide regular reviews.  I have my GP as retainer to answer questions on my health but I ain't going to pay him €5,000 a year for it.
This is open and shut.  0.5% of €1m as a retainer to answer questions and provide 6 monthly sexy updates on your Sharpe Ratios is a rip off and it is being made easy and respectable by the providers.

The CBI spew out their honeyed words about the consumers' best interest and turn a blind eye to this massive consumer con trick. Gimme a break.


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## Gordon Gekko (17 Aug 2021)

Sarenco said:


> The Dalbar report has been widely discredited at this stage -


Did you even read the link you posted?!

It’s one guy, who actually states that he could only find two other people criticising the Dalbar methodology!

Hardly “widely discredited” 

Dalbar and JP Morgan versus some keyboard warrior 

And Dalbar actually refute his assertions in writing!


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## Duke of Marmalade (17 Aug 2021)

I think the Dalbar point is that folk are their own worst enemy.  They should stick with the program and ignore their irrational whims.  All very wise and indeed your typical GP will have the same whine - I keep telling them to go easy on the fags and the booze.  And of course she is right as many surveys have shown.  But she doesn't charge a retainer of €5,000 per annum to regurgitate the mantra.  What I meant was she doesn't insist that her patient signs a contract with the GP's preferred hospital to charge the patient €5,000 per annum and pass it on to the GP - think of the VAT saving!


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## Sarenco (17 Aug 2021)

Gordon Gekko said:


> Dalbar and JP Morgan versus some keyboard warrior


Professor Wade Pfau is hardly a key board warrior!  He's a highly respected academic.

His analysis on the DALBAR report has been cited with approval by Jonathan Clements in the Wall Street Journal, amongst other commentators.

But hey, read the analysis - and DALBAR's response (included at the end of the link) - and make up your own mind.

I think it's clear that the DALBAR report uses junk maths and definitely does not constitute "reliable data".


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## Gordon Gekko (17 Aug 2021)

Duke of Marmalade said:


> I think the Dalbar point is that folk are their own worst enemy.  They should stick with the program and ignore their irrational whims.  All very wise and indeed your typical GP will have the same whine - I keep telling them to go easy on the fags and the booze.  And of course she is right as many surveys have shown.  But she doesn't charge a retainer of €5,000 per annum to regurgitate the mantra.  What I meant was she doesn't insist that her patient signs a contract with the GP's preferred hospital to charge the patient €5,000 per annum and pass it on to the GP - think of the VAT saving!


The March before last, people who manage their own money were running for the hills turning temporary declines into permanent losses.

People with advisors in situ were being told not to panic, and to stay the course.

It’s stating the obvious to argue that people who manage their own money typically underperform.


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## Gordon Gekko (17 Aug 2021)

Sarenco said:


> Professor Wade Pfau is hardly a key board warrior!  He's a highly respected academic.
> 
> His analysis on the DALBAR report has been cited with approval by Jonathan Clements in the Wall Street Journal, amongst other commentators.
> 
> ...


We’ll have to agree to disagree.

JP Morgan vs a lone wolf…I’ll take the JP Morgan and Dalbar side of that, thanks.

They’ve analysed mutual fund flows and concluded that investors who do their own thing do pretty badly; I note that the opposing view isn’t that the investors do well, it’s to do with IRRs and dollar cost-averaging.


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## Duke of Marmalade (17 Aug 2021)

Gordon Gekko said:


> The March before last, people who manage their own money were running for the hills turning temporary declines into permanent losses.
> 
> People with advisors in situ were being told not to panic, and to stay the course.
> 
> It’s stating the obvious to argue that people who manage their own money typically underperform.


Doesn't cost €5,000 p.a.   You can get that advice for free on AAM.

It is quite common for comparison between medical advice and financial advice - brokers are particularly fond of it.
Both make a big point of behavioural advice, and so they should.  But the comparison in charges is staggering and facilitated by the hospitals, I mean life insurers.


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## Dave Vanian (17 Aug 2021)

Oh come now @Duke of Marmalade - I'm sure you know very well that the average DC pension fund in Ireland is far less than €1 million.  Sounds to me like you're inflating the realistic figures to make a point.  

To use more a realistic example, if I offer you ongoing service at a cost of 0.25% of €300,000 or €750 per year, you can choose to turn it down.  Or you can choose to accept it.  

And yet you continue to use emotive language like "massive consumer con trick" and "rip off".


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## Sarenco (17 Aug 2021)

Gordon Gekko said:


> JP Morgan vs a lone wolf



JP Morgan, like all financial advisers, have an obvious vested interest in citing the DALBAR Report.

Academics have no vested interest in critiquing the DALBAR methodology.

Neither does the Wall Street Journal.

Neither does the Irish Times -








						‘Dumb money’ acting smart while institutions jump ship
					

Ordinary investors not panicking in coronavirus crash, data strongly suggests




					www.irishtimes.com


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## Duke of Marmalade (17 Aug 2021)

Dave Vanian said:


> Oh come now @Duke of Marmalade - I'm sure you know very well that the average DC pension fund in Ireland is far less than €1 million.  Sounds to me like you're inflating the realistic figures to make a point.
> 
> To use more a realistic example, if I offer you ongoing service at a cost of 0.25% of €300,000 or €750 per year, you can choose to turn it down.  Or you can choose to accept it.
> 
> And yet you continue to use emotive language like "massive consumer con trick" and "rip off".


We're discussing ARFs here.  €1m has been cited.  That is good for an index linked annuity of about €24,000 p.a., not Jeff Bezos country.  Fees of €5,000 p.a. are about 20% of the pension earning power of the ARF.


----------



## Wollie (17 Aug 2021)

@Duke of Marmalade   You have just (maybe inadvertently) provided support for my earlier comment:  


Wollie said:


> over the last ten years, total commission (initial and trail) paid by insurance companies to intermediaries exceeded gains by clients


@Dave Vanian disagrees:


Dave Vanian said:


> Sorry but that sounds like utter nonsense to me.


To prove my point, suppose we look at a level rather than an index-linked annuity.  The website pensionchoice.ie tells us that a €1,000,000 lump sum will buy a level pension of €36,400 a year for a 66-year old male.  
Now suppose our 66-year old male decides that the alternative to buying the annuity is to stick the money under the mattress, and take out €33,333 a year, on the assumption that he'll live another 30 years (until he's 96).  
Therefore, the extra return he's getting for doing business with the insurance company and the broker is the princely sum of €3,067 a year, which is far less than the €5,000 a year that the broker is getting from the sale.
Now, before you tell me that he's taking an ARF, not buying an annuity, note that @Marc and others assure us, after treating us to some sophisticated stochastic calculus, that the 'safe' return from the ARF is around the same as the €36,400 he would get from the annuity.  We end up at the same place.  
@Dave Vanian The error in your logic is the assumption that a broker would advise a retiree to put their money in an Irish Life Consensus Fund.  Experience shows that they don't, that they have a strong bias toward directing older clients towards so-called "safe" options like cash and bonds.  That's how they demonstrate the added value.


----------



## TheGoodTheBad (18 Aug 2021)

Insurance companies allow brokers apply trail on other products too not just ARF. They also allow brokers to select their own commission structure which is also a major issue. How can someone justify the massive Commissions they can make for really just getting a client to sign a piece of paper. 
Take your example of 1,000,000, a broker can get up to 5% commission (3% without affecting allocation). Can you justify a broker of FA getting minimum 30,000 to just sign a new client with a million euro pension. Regardless of how that pension peforms that broker has being paid. The markets could crash the following month and does not impact the broker. 
At least with a trail the brokers payment is dependent of the performance of the pension. If the pension isn't doing well the brokers income isn't doing well. For that reason it may make the broker actually give a real interest in what is happening especially when things aren't going so well. 
How many Financial Advisors or Brokers would you say got in touch with their clients in Feb/March of 2020 and were proactively trying to help their clients. I would say there was a lot of brokers who had their commission suddenly became harder to get in touch with or didn't get in touch with their clients when the equity markets fell.


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## Steven Barrett (18 Aug 2021)

TheGoodTheBad said:


> Insurance companies allow brokers apply trail on other products too not just ARF. They also allow brokers to select their own commission structure which is also a major issue. How can someone justify the massive Commissions they can make for really just getting a client to sign a piece of paper.


There is a lot more work involved than just getting a client to sign a piece of paper. But I have seen plenty of instances where that is literally what happens, usually from the bigger firms who manage group schemes. When it comes to a member retiring, they send them a proposal form to complete in the post and earn 3% commission, no advice. This is wrong. 



TheGoodTheBad said:


> Take your example of 1,000,000, a broker can get up to 5% commission (3% without affecting allocation). Can you justify a broker of FA getting minimum 30,000 to just sign a new client with a million euro pension. Regardless of how that pension peforms that broker has being paid. The markets could crash the following month and does not impact the broker.


I am told there are some brokers that do take that size commission but there are not that many. There is no circumstance where a broker can justify earning €30,000 for setting up an ARF. And that isn't free money, the client is paying for it through higher management fees but probably being told that the insurance company is paying for it so it is free to the client. The world of personal finance products is very opaque and most people won't be aware of all the different charging structures, so it is very easy for a broker to hide fees. I am aware of one who targets directors as you don't have to disclose fees for executive pensions. So he doesn't and he charges very high fees. 



TheGoodTheBad said:


> How many Financial Advisors or Brokers would you say got in touch with their clients in Feb/March of 2020 and were proactively trying to help their clients. I would say there was a lot of brokers who had their commission suddenly became harder to get in touch with or didn't get in touch with their clients when the equity markets fell.


This is the time where an advisor earns their corn. We don't have to have a weekly involvement in someone's life but when things start going wrong, you need to hold people's hands. Being in constant contact with clients, letting them know what is going on, we have been through this before, you have cash on hand if needed so there is no need to panic. If you had €1m in equities, you would have seen it fall to €670,000 in March 2020. That is going to scare anyone and if you aren't talking to them and reminding them of the quality of their investment assets, they are going to pull the plug and crystalise those losses. 


Steven
www.bluewaterfp.ie


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## Steven Barrett (18 Aug 2021)

Wollie said:


> A friend who knows the pensions business says that the opposite is the case, that brokers have made far more out of ARF's than their clients.
> He says that, over the last ten years, total commission (initial and trail) paid by insurance companies to intermediaries exceeded gains by clients.  That is despite strong stock market growth in the period.  He may have qualified it by saying that it applied for ARF's under €1 million, because people with ARF's over €1 million were more prepared to invest in the stock market and were also better at avoiding trail commission.
> Either way, my friend's claim seems preposterous.
> [/QUOTE]
> ...


----------



## GSheehy (18 Aug 2021)

The average private pension maturity pot in Ireland is less than €150,000, so €112,500 ARFable.
Folk can buy ARFs without initial commission.
Folk can buy ARFs without trail commission. 
The vast majority of ARF money is in Multi-Asset / Mixed Asset Funds and I would say that if they are invested in those funds for the last 10 years they probably have an annualised return (net of all charges) of circa 7% and 12% (roughly). 
There is no evidence whatsoever to support a claim that intermediaries are biased towards cash/bonds.  

Gerard.

www.prsa.ie


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## Duke of Marmalade (18 Aug 2021)

Gordon Gekko said:


> Did you even read the link you posted?!
> 
> It’s one guy, who actually states that he could only find two other people criticising the Dalbar methodology!
> 
> ...


This Dalbar stuff came up before and I vaguely remembered it.  I have now got round to refreshing my memory,
*The Dalbar methodology is totally in error.  Guilty as charged.*
There are many flaws.  Perhaps the simplest to explain is as follows.  Say we are looking at a 20 year period.  Dalbar calculates the annualised return based on what 240k at the start would grow to after 20 years and expresses is it as an annual interest rate.  Correct so far.  It then calculates what investors actually got.  For ease of explanation lets say investors actually invested 10k per month instead of 240k at the start.  Dalbar still calculates the annualised return as if the 240k was invested at the start.  (Please read the critique, it explains it much better than I).
 Several questions spring to mind:
Why is the Dalbar message so popular with brokers?
Why when it is so damningly exposed do you shoot the messenger?
Why indeed did Dalbar and JPM duck the bullet in their response?

In any case, as the critique also pointed out, if indeed the majority of mutual fund investors  do actually underperform the same mutual fund (itself a mathematical contradiction) the great bulk of these will themselves be professionals or advised by such.


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## Steven Barrett (18 Aug 2021)

It is so popular because a well know advisor, Carl Richards, launched a career on what he coined The Behavior Gap.


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## Duke of Marmalade (18 Aug 2021)

Steven Barrett said:


> It is so popular because a well know advisor, Carl Richards, launched a career on what he coined The Behavior Gap.


The GG "like" indicates that indeed that is why brokers drool on Dalbar.  It  was Dalbar's evidence which GG cited and which @Sarenco 's link so clearly exposed only to get the GG response - how can JPM be wrong against those nobodys?  I wonder did he read the critique or if he did, did he understand it.
As for Carl Richards I would like to see some technical back-up (any links?).  Investments are owned by investors.  If investments are up X then so too are investors up X.    Also one presumes investors include those who are professionally advised.  Who reaps the gap?


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## Dave Vanian (18 Aug 2021)

Wollie said:


> The error in your logic is the assumption that a broker would advise a retiree to put their money in an Irish Life Consensus Fund. Experience shows that they don't, that they have a strong bias toward directing older clients towards so-called "safe" options like cash and bonds. That's how they demonstrate the added value.



Okay so first you were quoting nonsensical claims from "a friend who knows the pensions business".  Now you're making other claims about what "experience shows", again without a shred of evidence to back up such claims.  Is this experience coming from the same friend?  I'm happy to debate but I've no interest in debating points that seem to be works of fiction.


----------



## Dave Vanian (18 Aug 2021)

Duke of Marmalade said:


> This is open and shut. 0.5% of €1m as a retainer to answer questions and provide 6 monthly sexy updates on your Sharpe Ratios is a rip off and it is being made easy and respectable by the providers.



If you're not happy to pay a particular price for something (and personally I wouldn't be willing pay the figures you're quoting for the service you're using in your example), it's a free country - don't pay it and go elsewhere.


----------



## Duke of Marmalade (18 Aug 2021)

Dave Vanian said:


> If you're not happy to pay a particular price for something (and personally I wouldn't be willing pay the figures you're quoting for the service you're using in your example), it's a free country - don't pay it and go elsewhere.


The problem is that consumers are led to believe that in this space we are not a "free country".  The consumer is plamassed with lots of fine words from the regulator about what should and should not be done. This to give confidence that unscrupulous operators do not have a "free country".  I think we both agree that this is a false confidence for which the regulator and its industry are partly responsible.


----------



## Sarenco (18 Aug 2021)

Gordon Gekko said:


> The March before last, people who manage their own money were running for the hills turning temporary declines into permanent losses.


Less than 0.5% of self-directed Vanguard investors went to cash between February and May 2020.




__





						Vanguard - Cash panickers: Coronavirus market volatility
					





					institutional.vanguard.com
				




Would an advisor have succeeded in talking those panicked investors off the ledge?  I have my doubts.


----------



## Gordon Gekko (18 Aug 2021)

Sarenco said:


> Less than 0.5% of self-directed Vanguard investors went to cash between February and May 2020.
> 
> 
> 
> ...


Straightaway, I’ve an issue with that…it’s too narrow…they need to have gone 100% to cash in the period.


----------



## kinnjohn (18 Aug 2021)

Gordon Gekko said:


> Straightaway, I’ve an issue with that…it’s too narrow…they need to have gone 100% to cash in the period.


by the time an advisor would get to contact customers and get permission the shares would have reached the bottom by the time pot get moved to cash, I would say advisers would start with the well connected first not who was paying the most in fees,
I would say there is a good chance the people paying the highest fees get the least service,


----------



## Dave Vanian (18 Aug 2021)

Duke of Marmalade said:


> The problem is that consumers are led to believe that in this space we are not a "free country".  The consumer is plamassed with lots of fine words from the regulator about what should and should not be done. This to give confidence that unscrupulous operators do not have a "free country".  I think we both agree that this is a false confidence for which the regulator and its industry are partly responsible.



I'd agree that the regulator could do a lot more to improve both consumer protection and education in this area.  My earlier idea of an obligatory simple one-page document detailing all the fees paid to all stakeholders in simple euros and cents format is just one example.  It could include a line to the effect that charges can vary from one company to the next, from one fund to the next and from one broker to the next and that you're not obliged to go down a particular road.  I'd like to see more explanation of the real meaning of risk being included.  Many more examples if I sat down and thought them out.  I'd like to see any agents, bank staff, brokers being compelled to follow the rules or be run out of the business.  

But to go back to the very first post on this thread, we have both the Central Bank and the Pensions Authority to regulate this business.  I don't see it as the responsibility of the product companies to police the regulations.  By all means change and improve the regulations and then issue the new rules to the product providers to follow.


----------



## Steven Barrett (18 Aug 2021)

Duke of Marmalade said:


> The GG "like" indicates that indeed that is why brokers drool on Dalbar.  It  was Dalbar's evidence which GG cited and which @Sarenco 's link so clearly exposed only to get the GG response - how can JPM be wrong against those nobodys?  I wonder did he read the critique or if he did, did he understand it.
> As for Carl Richards I would like to see some technical back-up (any links?).  Investments are owned by investors.  If investments are up X then so too are investors up X.    Also one presumes investors include those who are professionally advised.  Who reaps the gap?


He's more a behavorial finance kind of guy, well known for the sketches that he did on napkins in a NYT article that he had for years. 

The thing is some people need a financial advisor to advise them on their money and others don't. I have spoken to people who have had the same policy for decades and haven't changed funds through all the ups and downs over the last 20 years. But if an advisor didn't show them where to put the money in the first place, they wouldn't have done it. 

Then on the other side of the coin, is the advisor who thinks he's Warren Buffett and feels that he needs to change around clients portfolios every year to justify his ongoing fee. How much are they costing their clients by switching funds all the time and going for the new best fund? GARS was great for a while and then fell off the cliff and at 1.35% amc, you were certainly paying for underperformance. Then something else comes along. MSCI do a perfectly good job of building a basket of stocks to represent the world stock market and until I have convinced myself that I can do it better, I'll let them carry on building client portfolios for me for free.


Steven
www.bluewaterfp.ie


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## Sarenco (18 Aug 2021)

Gordon Gekko said:


> Straightaway, I’ve an issue with that…it’s too narrow…they need to have gone 100% to cash in the period.


97.5% of self-directed Vanguard pension investors didn’t make a single trade during the Corona crash.

And of that small minority that did trade, the majority bought equities!


			Vanguard - Majority of Vanguard investors holding steady during market volatility
		


The idea that self-directed investors are a panicky lot that are more prone to selling during a correction is a myth.


----------



## Wollie (18 Aug 2021)

@Steven Barrett.   I too enjoyed the story of Lyndon Johnson trying to make his opponent deny he had sex with a pig.  It's a sad lookout, though, if you consider that a request for insurance companies to ascertain customer outcomes is in the same category as Johnson's opponent having sex with a pig.  Do you not agree that both providers and advisers should be doing studies of this type on an ongoing basis?  There is a constant barrage of figures showing comparative returns for this, that and the other fund, but nothing - zilch - about actual customer outcomes.   We need to change the focus, to measuring actual outcomes for customers, then seeing how we can improve them.  


Dave Vanian said:


> Why should any insurance company go to the expense and work of collating and publishing data to rebut a preposterous claim unless your friend published it with data to back it up?


Let me put it differently.  Why shouldn't insurance companies complete studies to ascertain how their customers have done, and compare the results with the amounts paid to brokers.  For example, it would be good to know if high rewards to intermediaries translate into high rewards for customers, or the opposite.  After all, we are all told to cherish our customers.



Dave Vanian said:


> Oh come now @Duke of Marmalade - I'm sure you know very well that the average DC pension fund in Ireland is far less than €1 million. Sounds to me like you're inflating the realistic figures to make a point.


We are now in the era of DC pensions.  DB pensions are dying or dead.  In future, anyone on a half decent salary will have a DC pension fund of over €1 million.  That's what the industry should be preparing for.  Instead, it tries to justify ridiculously high charges and commissions.


GSheehy said:


> The vast majority of ARF money is in Multi-Asset / Mixed Asset Funds and I would say that if they are invested in those funds for the last 10 years they probably have an annualised return (net of all charges) of circa 7% and 12% (roughly).
> There is no evidence whatsoever to support a claim that intermediaries are biased towards cash/bonds.


@GSheehy, Where do you get those figures?  They are absolute rubbish. 
The only figures I can get my hands on are from a 2015 paper by  a Working Group of the Society of Actuaries.  I quote the following paragraph from the paper:
*"Data supplied to us by some life assurance QFMs indicate that in respect of some €2.6bn of AMRF and ARF funds, the two most popular asset allocations were:*
*• Cash or cash like funds (capital protected) : 44% 
• Managed type , where the asset allocation is determined by the fund manager : 44% 
• Single asset type fund : 12% *
_*This analysis varied little by ARF size."*_
 The figures are dated, but I have no reason to believe that the proportions in various asset types since then have changed that much.  For that reason, I would be very interested in learning the source of your claim that "the vast majority" is in Multi-Asset/ Mixed Asset Funds.


GSheehy said:


> There is no evidence whatsoever to support a claim that intermediaries are biased towards cash/bonds.


In the light of the above, are you still saying that, or have you changed your tune?


Dave Vanian said:


> Okay so first you were quoting nonsensical claims from "a friend who knows the pensions business".  Now you're making other claims about what "experience shows", again without a shred of evidence to back up such claims.  Is this experience coming from the same friend?  I'm happy to debate but I've no interest in debating points that seem to be works of fiction.


Is the above (in bold) sufficient evidence that "experience shows" where ARF customers are advised to put their money?  Show me why my claims are works of fiction.  I wish others could produce some hard facts to support their self-serving arguments.  


Dave Vanian said:


> But to go back to the very first post on this thread, we have both the Central Bank and the Pensions Authority to regulate this business. I don't see it as the responsibility of the product companies to police the regulations. By all means change and improve the regulations and then issue the new rules to the product providers to follow.


Do you not agree that companies should try to look after their customers?  Why should they wait until the CBI or the Pensions Regulator pushes them into doing it?  Sadly, too many insurance companies see the broker, not the final consumer, as their "customer".  They keep trying to find new ways of paying more to brokers, not caring that the 'real' customer is the one who suffers as a result. 


Steven Barrett said:


> Then on the other side of the coin, is the advisor who thinks he's Warren Buffett and feels that he needs to change around clients portfolios every year to justify his ongoing fee. How much are they costing their clients by switching funds all the time and going for the new best fund?


It's great to see an adviser talking sense.  Well done!


----------



## Dave Vanian (18 Aug 2021)

Sarenco said:


> 97.5% of self-directed Vanguard pension investors didn’t make a single trade during the Corona crash.
> 
> And of that small minority that did trade, the majority bought equities!
> 
> ...



That's in the US and I would argue that the average US small investor is streets ahead of the average Irish small investor in terms of the basics of investing dos and don'ts.  I'm not talking about the regulars here on Askaboutmoney who are, by and large, pretty clued in, which is why they come to a website like this in the first place.  I'm talking about the butcher, the baker, the candlestick-maker who knows her own business very well but very little about investing.

Anyway, while these US Vanguard customers may be self-directed, it's not clear how many of them are acting on professional advice.


----------



## Dave Vanian (18 Aug 2021)

Wollie said:


> Show me why my claims are works of fiction.



You claimed that your "friend who knows the pensions business" says that brokers have made far more out of ARF's than their clients.

Also...

"He says that, over the last ten years, total commission (initial and trail) paid by insurance companies to intermediaries exceeded gains by clients. That is despite strong stock market growth in the period."

Then you claimed...


Wollie said:


> Experience shows that they don't, that they have a strong bias toward directing older clients towards so-called "safe" options like cash and bonds. That's how they demonstrate the added value.



but when asked to show where this claim came from you admitted that the only figures you could get your hands on to back it was from 2015, showed that 44% of the surveyed ARFs were in cash in 2015, which doesn't in any way prove that brokers in 2021 have a "strong bias" toward directing older clients towards so-called "safe" options like cash and bonds.  

Have you any evidence to back up your claim that brokers in 2021 have a strong bias toward directing older clients towards so-called "safe" options like cash and bonds.


----------



## Wollie (18 Aug 2021)

Dave Vanian said:


> Have you any evidence to back up your claim that brokers in 2021 have a strong bias toward directing older clients towards so-called "safe" options like cash and bonds.


Put it the other way round, have you any evidence that brokers changed their approach between 2015 and 2021?  If anything, the fact that we have had six years of growth since then would have made them more likely, not less likely, to be pushing people towards "safe" options now than they were six years ago. 
Show me even a single shred of evidence to indicate I'm wrong. 
You also query my claim that brokers made more in commission over the last ten years than their clients made on their ARF investments.  I refer you to my earlier post on this thread:


Wollie said:


> To prove my point, suppose we look at a level rather than an index-linked annuity. The website pensionchoice.ie tells us that a €1,000,000 lump sum will buy a level pension of €36,400 a year for a 66-year old male.
> Now suppose our 66-year old male decides that the alternative to buying the annuity is to stick the money under the mattress, and take out €33,333 a year, on the assumption that he'll live another 30 years (until he's 96).
> Therefore, the extra return he's getting for doing business with the insurance company and the broker is the princely sum of €3,067 a year, which is far less than the €5,000 a year that the broker is getting from the sale.
> Now, before you tell me that he's taking an ARF, not buying an annuity, note that @Marc and others assure us, after treating us to some sophisticated stochastic calculus, that the 'safe' return from the ARF is around the same as the €36,400 he would get from the annuity. We end up at the same place.


The return in this example is €5,000 a year for the broker and €3,067 a year for the client - and that's before allowing for a cent of initial commission to the broker.  It's open and shut as far as I'm concerned.  The insurers and brokers should be equally ashamed of how poorly they have served and are serving their clients.


----------



## Dave Vanian (18 Aug 2021)

Wollie said:


> Show me even a single shred of evidence to indicate I'm wrong.



You did that yourself.  The only actual figure you were able to offer was from the 2015 paper.  Do you have a link to that paper, by the way? 

It showed that, instead of the "strong bias" you claimed, only 44% of ARF assets that they looked at were in cash.  How many of these ARFs were in cash only?  That will be interesting to see if we read the actual paper.  And how much of that 44% cash figure was in ARFs that had a portion in cash and more in other risk assets.  Do you see your claim of "strong bias" slipping away when faced with actual facts?



Wollie said:


> To prove my point, suppose we look at a level rather than an index-linked annuity. The website pensionchoice.ie tells us that a €1,000,000 lump sum will buy a level pension of €36,400 a year for a 66-year old male.
> Now suppose our 66-year old male decides that the alternative to buying the annuity is to stick the money under the mattress, and take out €33,333 a year, on the assumption that he'll live another 30 years (until he's 96).
> Therefore, the extra return he's getting for doing business with the insurance company and the broker is the princely sum of €3,067 a year, which is far less than the €5,000 a year that the broker is getting from the sale.



Large problem with this example.  A broker cannot get €5,000 per year commission from selling an annuity.  That's not how annuities work with Irish Life or any other pension company.    



Wollie said:


> It's open and shut as far as I'm concerned. The insurers and brokers should be equally ashamed of how poorly they have served and are serving their clients.



You came to this conclusion based on a fundamental lack of understanding of how annuities even work, so perhaps you need to acknowledge that your conclusion is therefore wrong.


----------



## Wollie (18 Aug 2021)

Dave Vanian said:


> The only actual figure you were able to offer was from the 2015 paper. Do you have a link to that paper, by the way?


I'm blue in the face trying to tell you it's the only figure I can find.  Can you give me a more up-to-date figure?  As I said, the likelihood is that brokers have gone even more cautious since 2015, given how the market has powered ahead in the last few years.  Therefore, if they thought it was overvalued in 2015 and advised clients to go into cash, it's even more overvalued now.

I tried to post a link to the paper, which is on the "Past events" section of the Society of Actuaries website, but for some reason I wasn't allowed to paste it.  The paper was presented in November 2015.


Dave Vanian said:


> It showed that, instead of the "strong bias" you claimed, only 44% of ARF assets that they looked at were in cash.


Are you serious when you write "only 44% in cash"???  Remember too that there's another 44% in "managed type".  I presume at least 20% to 25% of that will be in cash/ bonds.  That brings us up from 44% to 55%.  Then there is another 12% in single asset funds.  Some of those single asset funds will be bonds only, the performance of which I compare with cash at the present time.  Bottom line:  there was well over 50% in cash, as I stated.  Repeating what I wrote above, the proportion could be higher now.



Dave Vanian said:


> Large problem with this example. A broker cannot get €5,000 per year commission from selling an annuity. That's not how annuities work with Irish Life or any other pension company.


I suspected that my argument was a bit too subtle for some people.  I was right.  Read the post again, in particular the following.


Wollie said:


> Now, before you tell me that he's taking an ARF, not buying an annuity, note that @Marc and others assure us, after treating us to some sophisticated stochastic calculus, that the 'safe' return from the ARF is around the same as the €36,400 he would get from the annuity. We end up at the same place.


Now has the penny dropped?  If not, ask @Marc where he would advise a client to invest an ARF to assure themselves of an income of €36,400 a year for life.  He sure as hell would not be advising them to put their all in the Irish Life Consensus Fund.   He would be advising them to put a high proportion of it in bonds and other "low risk" assets - after showing them lots of fancy graphs, of course.


----------



## Dave Vanian (18 Aug 2021)

Wollie said:


> I presume at least 20% to 25% of that will be in cash/ bonds. That brings us up from 44% to 55%.



You presume.  Or in other words, you made up that figure.  

If you believe that a paper published in 2015 showing that 44% of ARFs surveyed then were in Cash (which presumably includes many ARFs that are in Cash AND risk assets) backs up your claim that brokers in 2021 have a "strong bias" towards cash and bonds, good luck to you.  



Wollie said:


> If not, ask @Marc where he would advise a client to invest an ARF to assure themselves of an income of €36,400 a year for life. He sure as hell would not be advising them to put their all in the Irish Life Consensus Fund. He would be advising them to put a high proportion of it in bonds and other "low risk" assets - after showing them lots of fancy graphs, of course.



Sorry - I did indeed misunderstand that particular example.  You quoted an annuity rate, but seem to making a point about what @Marc would advise.  I think I'd have to leave @Marc to answer that one.  I'm not going to comment on what he might or might not do.


----------



## Marc (18 Aug 2021)

Wow what a lot of knots you have all got yourselves into but I see my name being quoted so feel the need to make some points here

some themes

why do insurers allow brokers to select commission rates? - legally the broker is the agent of the insurer not the client.
If you want your advisers to represent you, you will need to pay them a fee.

this is a really good example of this point









						Physician heal thyself - Everlake
					

The GMS Pension is administered by Mercer and most Doctors and GPs will contact Mercer for advice on their retirement options. We believe that such an important decision warrants objective Independent Financial Advice.




					globalwealth.ie
				






dalbar - this is the difference between time weighted and money weighted returns. We actually report both so our clients can actually measure the value of our advice given over time.

we also report actual client returns net of fees over time









						In Search of the Perfect Investment Portfolio - Everlake
					

Many investors find it difficult to achieve returns offered by the markets due to a misunderstanding of investment risk, costs and taxes.




					globalwealth.ie
				




And the positive impact of our intervention during market volatility in March last year









						Coronavirus one year on - Everlake
					

We don't subscribe to any market timing strategy because we don't possess a crystal ball but from time to time it is clearly appropriate for a nudge on the tiller and to trim the sails.....




					globalwealth.ie
				





a fund manager reports time weighted returns - the return of a fund over a time period. It’s perfectly possible that they had next to no money in the fund when they had their best returns - a good example is standard life Gars

money weighted returns are the actual returns earned by an investor and reflect their actual purchases and sales.

in aggregate investors must be making poor timing decisions or markets wouldn’t lurch around.





think tech funds in 1999 a lot of money was invested at the top which made negative returns for investors yet the fund can still report an average annual return over time. It’s just that most investors never received the good years - they were too late.

This is the behaviour gap. People buying things once they become aware of them are typically too late to the party.

now to what extent an adviser is able to influence poor decision making in aggregate is of course another matter but there is certainly evidence to support the fact that it (poor decision making) must be happening at the macro level.

there is also plenty of evidence during my quarter century actually advising clients that clients working with an adviser typically do better than those without and this is especially true as we get older and in particular if we lose mental capacity (I made this point before in the context of an ARF and was shouted down so I won’t labour that particular point) but to my mind this is the real risk faced by ARF investors - as you age your pot is declining and so is your cognitive ability. The last person on the pitch is likely to be the adviser.

but the hurdle you face day after day is the annuity you didn’t purchase at outset





__





						Key Post - People should consider buying an annuity on retirement
					

Why an Annuity matters to an ARF investor   How should one approach investing an ARF?  As we set out in our [broken link removed] for retirement planning in Ireland, an investor’s risk tolerance is only one of several factors that go into the decision to go into an ARF.  A far more appropriate...



					www.askaboutmoney.com
				




and it is for this reason that most people should actually reconsider their ARF strategy









						Do You Need to Review Your ARF Strategy? - Everlake
					

More people invest in an Approved Retirement Fund (ARF), over the certainty of an annuity. But do you need to review your ARF strategy?




					globalwealth.ie


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## Duke of Marmalade (18 Aug 2021)

Marc said:


> dalbar - this is the difference between time weighted and money weighted returns.


Dalbar's errors were much more serious than that.  Yes they used a money weighted versus time weighted calculation.  Both calculations are valid but they are not comparing apples with apples.  The history was that the best returns (annualised) were by the early punters and in money terms there were less early punters than later punters.  The math then showed that money weighted annualised returns were worse than time weighted.  All that says is that later punters did worse than earlier ones and there were more of them.  The conclusion was wrong of course that this meant that in aggregate punters do worse than the market.  That is a mathematical contradiction.  One woman's purchase of a share is another's sale.  In aggregate they do as well as the market in money weighted terms *by definition*.  But of course it is a bit of a coincidence that the erroneous conclusion is exactly what the troops want to hear.  So much so that when the fallacy is pointed out they shoot the messenger.

But the really unforgivable error of Dalbar which simply shows them up as hopeless amateurs goes as follows - in a simplified illustration.
Lets say returns are 10% p.a. and let's ignore compounding to simplify the point.  Then 100 invested for 10 years will earn 100.  But 10 invested every year is, let's say approximately, 100 invested for 5 years and earns only 50.  The Dalbar school of math looks at this latter picture and says it is no different from the first.  100 was invested over 10 years but only earned 50, which is 5% p.a.  I know the faithful don't want to believe it but that's exactly what they did.


----------



## GSheehy (19 Aug 2021)

It has been alleged here that intermediaries have made far more from their ARFs that their clients in the last 10 years. It's very similar to something that was said in another recent thread but the time scale was 5/7 years. When asked to provide evidence or an example of that, both posters have declined to do so. If anyone wants to fact-check that they can go to any ARF providers website and use the fund growt/performance calculators that are provided.

The basis of both allegations appears to be a 2015 Society of Actuaries report that stated that 44% of reported AUM were in Cash/Protected Funds and therefore those ARF holders can't be making money because the AMCs are greater than 'Cash' returns.

The Society of Actuaries, whose members run the ARF business, couldn't get more than 50% of their members to provide a breakdown of the AUM in ARFs. If those lads and lassies can't get their members to play ball and furnish figures then I doubt anyone else will. So, that's a bit skewed for a start. If an large insurer, that provided information, had a bias towards a capital protected ARF product at that time it would throw the figures out. But, there's also the fact that Fixed Rate Term Deposits were popular back in 2011/2012. Some of my clients demanded those. Those clients are now in multi-asset funds that have between 0% & 10% in cash.

It's likely that ARF providers don't want to share, what they would probably consider commercially sensitive information, with collators of reports. In the absence of that information an intermediary can look at ther own book of business (AUM) and see what funds their execution only and advisory clients are invested in. Again, you find the same thing - Top 5 Funds have 0% - 10% in Cash.

If you are going to ask your friend how their ARF has done over the last 10 years, and they say it's dropping in value, it may be because the date on their statement valuation coincides with, say, a 10% drop in the markets but by the time they got the statement the market had risen by 20% (this happened last year with the bi-annual PRSA statements). Folk don't check values, all the time.  Also, folk 'forget' that they're taking 4%/5%+ from their ARFs every year and maybe (just maybe) after 10 years their original €112,500 is currently valued at €112,000.

Gerard

www.prsa.ie


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## Wollie (19 Aug 2021)

GSheehy said:


> The basis of both allegations appears to be a 2015 Society of Actuaries report that stated that 44% of reported AUM were in Cash/Protected Funds and therefore those ARF holders can't be making money because the AMCs are greater than 'Cash' returns.


I agree that it's ridiculous that the industry hasn't produced more recent figures on the asset distribution of ARF's.  Hopefully Insurance Ireland will have someone watching this thread and nail the lie, if that's what it is.  Do you think they will?

The conclusions from the Society of Actuaries survey are in line with the advice of experienced brokers like @Marc who contributes regularly on this forum.  He is constantly denouncing contributors who invest heavily in equities, saying that they are being reckless and risk running out of money prematurely.  I am sure that his advice is fairly typical of the broker community.  All you need to do is go back through various threads on this forum, where people ask for, or offer, advice on where they should invest their ARF money.

In my experience, intermediaries are happy to recommend an equity-heavy ARF for people who already have a DB pension and for whom the ARF is pin money, but they advise a far more cautious approach for people with large DC pots, for whom the ARF will be their main source of income.  That is what the future will look like for everyone.  

I take it that you agree that, for a client with a reasonably conservative asset profile, the intermediary's remuneration could exceed what the client makes from the ARF.  Therefore, the only disagreement is over the actual distribution of ARF assets.  There we are both in the dark, unfortunately.


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## Marc (19 Aug 2021)

So, just to be very clear on this point.   Our advice is certainly not typical of the broker community.

Personally I think the issue here stems from brokers (and tied agents in banks) having an over reliance on risk profile questionnaires to test a client's risk tolerance when what they should be testing is a more objective measure of capacity to bear losses. (the point about having AVCs and a DB pension - then yes, you objectively have more risk capacity)









						Considerations for Investor Risk Profiling - Everlake
					

When constructing investment portfolios, it is essential that we understand risk tolerance, AS WELL as capacity and risk required.




					globalwealth.ie
				





I took great exception to the thread where a *100% Equity strategy* was being touted as "something to consider". Its not a suitable investment strategy for an ARF for most people. That was my point. Just that

However, I consistently argue that, equally, a very conservative investment strategy (ESMA 2, 3 or even 4) is also wholly unsuitable for an ARF investment.







We estimate that the amount of investors cash held across these strategies is almost €10 Billion. Now we don't know the split between pre and post retirement but it really doesn't matter. Its not really suitable for pre-retirement savings to be in such conservative strategies and it clearly doesn't work for an ARF. So, broadly speaking nobody should have any money in any of these.

HM Treasury commissioned a review a while back now by Ron Sandler (https://en.wikipedia.org/wiki/Sandler_Review) in which the phrase _"reckless conservatism"_ was coined to describe the investing decisions of a very large proportion of the UK investing public.

This is the original "bootstrap" analysis I did 10 years ago now and referenced in our guide on this subject








Clearly, the all cash portfolio resulted in a lower inheritance for the investor’s heirs.

However, equally revealing is the fact that when we add in the stream of income payments, we see that the cash strategy also provided the lowest cumulative income payments for an investor themselves.









1 Strategic Portfolio Cautious (DMY)2 Strategic Portfolio 20% Risk (DMY)3 Strategic Portfolio 30% Risk (DMY)4 Strategic Portfolio 40% Risk (DMY)5 Strategic Portfolio Balanced (DMY)6 German 3 Month Money Market Rate (Cash) (DMY)7 MSCI World Index (gross div.) (Equity) (USD)8 German REX Performance Index (Fixed Interest)


And here is the ex post performance of those strategies since our first Irish client invested back in Sept 2008  assuming a 4%pa withdrawal paid monthly on the 1st month







Investing in an ARF carries higher risk than annuity purchase as the fund remains invested and may fall as well as rise in value. This in turn may lead to the client receiving less income than they expect.

For some clients this is unacceptable. However, as we have seen, pursuing a deposit-based investment strategy within an ARF to avoid investment risk does not guarantee a better outcome and depending on how long the client lives, an Annuity may work out to be better value overall.

Some clients, in the face of a decline in the value of their ARF may subsequently elect to switch to an annuity part way through their retirement; some of these may discover that they would have been better off buying an annuity at outset.

Clearly, investing in an ARF is not without its risks. Furthermore, if part of the portfolio is held in cash to meet the needs of imputed distributions, the return from the non-cash part needs to be that much higher to meet the overall return objective. (cash drag)

If you need withdrawals from your ARF to maintain your required lifestyle and the withdrawal rate is close to the annuity rate that could currently be secured, you are only going to be able to maintain this income level if a higher level of investment risk is taken.

The decision to invest in an ARF is not a simple process and we believe that it is very important for clients to fully understand all the risks that they face.

Equally, it is essential to appreciate that if you pursue a cautious investment strategy (such as investing in a deposit account) with an ARF you will almost certainly fail to meet the critical yield requirement and might actually find out that you would have been better off with the purchase of an annuity (depending on how long you live).

This problem is much too complex to have a single solution for everyone. Relevant factors to consider include; the expected time horizon, the tolerance for risk, the desire for smooth consumption from year to year, and the desire to leave a bequest will each have an impact on the outcome.


While there is no single answer, there are several principles which apply uniformly:


• Investors are more likely to maintain living standards in retirement if they have low spending rates and reasonably large stock allocations within their portfolios. A long retirement coupled with a low stock allocation translates into a high probability of declining consumption.

• Insisting on a very high degree of “smoothing” of income from one year to the next (i.e. maintaining a relatively constant income) is a recipe for disaster. Imputed distributions are based on 4% or 5% of the remaining fund value and therefore does not subject the fund to this risk.

• For shorter time periods, higher spending rates may be justified. However, even over these shorter periods, higher spending rates increase the probability of declining consumption in the future.

• Expected bequests are higher for portfolios with high stock allocations, but so is the likelihood of leaving a small bequest. This is a classic risk/return trade-off.


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## Wollie (19 Aug 2021)

Wollie said:


> ask @Marc where he would advise a client to invest an ARF.  He sure as hell would not be advising them to put their all in the Irish Life Consensus Fund. He would be advising them to put a high proportion of it in bonds and other "low risk" assets - after showing them lots of fancy graphs, of course.


Good old @Marc   I knew you wouldn't let me down, that you'd be sure to produce a graph or two - or three or more.  Not sure what they mean, but that's irrelevant.  They always look good.


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## Duke of Marmalade (19 Aug 2021)

Steven Barrett said:


> It is so popular because a well know advisor, Carl Richards, launched a career on what he coined The Behavior Gap.


I Googled the guy.  All I can get is adverts for his books.  No discussion on his thoughts.  I suspect that my initial reaction that the contradiction in this graphic will not withstand any serious scrutiny is reinforced.  I would worry that someone who "likes" this may already be using it as a sales tool.  Can you point to any serious discussion on this message?


----------



## Steven Barrett (19 Aug 2021)

Duke of Marmalade said:


> I Googled the guy.  All I can get is adverts for his books.  No discussion on his thoughts.  I suspect that my initial reaction that the contradiction in this graphic will not withstand any serious scrutiny is reinforced.  I would worry that someone who "likes" this may already be using it as a sales tool.  Can you point to any serious discussion on this message?


That image was based on the Dalbar survey. His work is in the area of behavourial finance and people's attitudes and treatment of money. You can read his articles in the New York Times at https://www.nytimes.com/by/carl-richards


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## Gordon Gekko (19 Aug 2021)

I don’t accept the criticism of Dalbar’s work (and they also reject the criticism).

Of course it’s going to be a comparison between ‘time weighted’ and ‘money weighted’.

The whole point is that they’re looking at the outflows and inflows for ‘self-managed’ money vs just being in the market.

Examples where all of the returns arose in one year of the 20 are just noise and a red herring.

The person who just invested and stayed the course was there for that, some other might not have been.

Dalbar are just doing their best to create something.


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## Sarenco (19 Aug 2021)

Marc said:


> there is also plenty of evidence during my quarter century actually advising clients that clients working with an adviser typically do better than those without


I would be genuinely interested to see _any_ quantifiable data that demonstrates that advised investors typically earn higher returns than DIY investors, net of all costs.

The Dalbar survey is misleading nonsense (sorry Gordon), so let's leave that to one side.

I am sceptical that simply exhorting clients to "stay the course" during market corrections has any real impact on clients.  But if I am wrong in that regard, can you point me to any quantifiable data that demonstrates the impact?

Don't get me wrong - I do think that advisers can provide a valuable service to clients in terms of financial planning and portfolio construction.  However, I have yet to see any evidence of "adviser alpha" in terms of observed portfolio returns.


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## Steven Barrett (19 Aug 2021)

Sarenco said:


> I would be genuinely interested to see _any_ quantifiable data that demonstrates that advised *investors typically earn higher returns than DIY investors, net of all costs*.
> 
> The Dalbar survey is misleading nonsense (sorry Gordon), so let's leave that to one side.
> 
> ...


I'm not sure if you will find it because it may not exist. As in all industries, there are people who can do it themselves and those that can't. People who are confident and knowledgable of investing make have bigger returns net of costs because they don't have to pay someone (although they do have to spend time). But those who don't know what they are doing will certainly benefit from working with a good advisor. They are the kind of people who don't understand risk and will move to cash at the first instance of bad news and having a good advisor may help talk them off the ledge. 

I know I will certainly benefit from a builder who will do DIY in my home and am happy to pay for it. Lots of people are capable of doing it themselves and are happy to spend the time on a DIY project. Same with personal finance. 


Steven
www.bluewaterfp.ie


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## Duke of Marmalade (19 Aug 2021)

Gordon Gekko said:


> I don’t accept the criticism of Dalbar’s work (and they also reject the criticism).


For some reason beknownst only to yourself you refuse to accept that their math was totally in error.  We will have to park that one.  But the following extract from Dalbar's "defence" is worth repeating.


			
				Dalbar's defence said:
			
		

> The initial Dalbar critique:
> “_…to convince clients and prospects that they will earn significantly higher investment returns through professional management of their portfolios._”
> 
> The Dalbar defence:
> There is no basis for assigning this purpose. At no point has this study stated or implied that the difference in returns had anything to do with professional management.


This is a discussion as to whether the charges for professional advice on ARFs are justifiable.  Of what relevance is a faulty report which even its authors say has nothing to do with the efforts of professional managers?


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## SPC100 (19 Aug 2021)

Page 4 of vanguard pdf 'The buck stops here: Vanguard money market funds Vanguard research February 2019 Putting a value on your value: Quantifying Vanguard Advisor’s Alpha®''

[broken link removed]

has a table showing how advisors can increase return.


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## SPC100 (19 Aug 2021)

Behavioural coaching is listed at 150 basis points


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## time to plan (19 Aug 2021)

SPC100 said:


> Page 4 of vanguard pdf 'The buck stops here: Vanguard money market funds Vanguard research February 2019 Putting a value on your value: Quantifying Vanguard Advisor’s Alpha®''
> 
> [broken link removed]
> 
> has a table showing how advisors can increase return.


I have a sneaking suspicion about where this sits on the marketing material vs peer reviewed independent research spectrum.


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## Gordon Gekko (19 Aug 2021)

time to plan said:


> I have a sneaking suspicion about where this sits on the marketing material vs peer reviewed independent research spectrum.


Why?

What % do you think being an active member of Askaboutmoney adds to the person’s annual returns?

It is significant I’d contend.

Similarly, if I didn’t have a reasonable grasp of what to do myself and I went to, say, Steven Barrett for ongoing advice, I would estimate that he’d ‘make’ my family and I a very significant amount of money over time.

It’s almost as if people have been blinded by the various high profile chancers and pillar bank horse manure that’s been shipped into people’s portfolios over the years. In reality, having a good financial adviser or wealth manager is like having a good doctor, lawyer, or accountant in your life. They’ll save you a fortune and justify their fees many times over.

I am not a financial adviser, but I really don’t like the way they’re sneered at and in some ways looked down upon on this site, almost as if the work they do isn’t hugely valuable.

If I hadn’t a notion, and my adviser had me in high risk Zurich Prisma funds with a 0.75% fee plus 0.25% for him, and extra allocation every five years split between the two of us, I’d do very well. Yet there’d be people here whinging about Vanguard ETFs and the potential to pay 0.2% per annum.

1) US ETFs can’t be bought directly anymore; people need to stop obsessing about them
2) The Venn diagram of AAM members and Joe Public is two separate circles
3) Joe Public hasn’t a notion about any of this stuff


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## time to plan (19 Aug 2021)

Gordon Gekko said:


> Why?
> 
> What % do you think being an active member of Askaboutmoney adds to the person’s annual returns?
> 
> ...


I'm not arguing that. I'm saying that Vanguard 'research' is not a reliable evidence source.


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## SGWidow (19 Aug 2021)

Steven Barrett said:


> I know I will certainly benefit from a builder who will do DIY in my home and am happy to pay for it.



Of all the claims and counter-claims on this thread, this one has me rightly flummoxed?!


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## Gordon Gekko (19 Aug 2021)

time to plan said:


> I'm not arguing that. I'm saying that Vanguard 'research' is not a reliable evidence source.


Why not?

Forget that though.

Do you think that if Marc, Steven Barrett, Brendan, Sarenco, or myself “caddied” for a member of the public from a financial perspective for a period of 10 years, that the person would do better or worse than if they were left to their own devices?

These studies are stating the bloody obvious!

A punter does better when they get advice! Wow…stop the presses!

Next you’ll be telling me that people who go to the dentist regularly have healthier teeth!

But, oh no, the study that says as much is from the Irish Association of Dentists…sure they would say that!


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## time to plan (19 Aug 2021)

Gordon Gekko said:


> Why not?
> 
> Forget that though.
> 
> ...


You’ll probably find independent peer reviewed evidence that going to a dentist regularly leads to better teeth. 

I am interested in whether there is reliable evidence as to whether engaging a Financial professional leads to better financial outcomes. You have a hunch that it does. So do I. But that is not the same as evidence.


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## Gordon Gekko (19 Aug 2021)

time to plan said:


> You’ll probably find independent peer reviewed evidence that going to a dentist regularly leads to better teeth.
> 
> I am interested in whether there is reliable evidence as to whether engaging a Financial professional leads to better financial outcomes. You have a hunch that it does. So do I. But that is not the same as evidence.


How does one prove it though when people debunk anything that’s out there?

I have more than a hunch…it’s obvious that it does.

Find me proof that using a proper builder to renovate your house leads to better outcomes than doing it yourself…


----------



## time to plan (19 Aug 2021)

Gordon Gekko said:


> How does one prove it though when people debunk anything that’s out there?
> 
> I have more than a hunch…it’s obvious that it does.
> 
> Find me proof that using a proper builder to renovate your house leads to better outcomes than doing it yourself…


Very difficult to prove I agree. You would need to prove correlation and then causation (maybe people who choose to get financial advice would fare better in any case - a reverse correlation). A well designed longitudinal study would be a tough gig.

But agreeing that it is very difficult to evidence leads us towards an agreement that there isn’t good evidence.

So we should stop believing in marketing materials that confirm our hunches. I am sure you could get all sorts of that kind of thing from a homeopath.

As for a builder, sounds like you’ve got another hunch. We all have them and use them to navigate life and shortcut decisions but it’s worth examining them occasionally.


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## Duke of Marmalade (19 Aug 2021)

SPC100 said:


> Behavioural coaching is listed at 150 basis points


To be absolutely precise Vanguard say that *their course* on behavioural coaching adds 150bp. Sure Guinness used to say their product was good for you.
 Interesting quote on page 2 of the Vanguard link states that "the overwhelming majority of mutual fund assets are advised".  @Gordon Gekko has cited sources that claim that the vast majority of mutual fund investors are screwed.  I'll leave it to others to join the dots.
I think the comparison between a dentist and a financial advisor is a fair one.  They certainly know how to extract.
(just my little joke)


----------



## Marc (20 Aug 2021)

Reproduced without comment

Financial advisers coaching clients through the pandemic with a disciplined approach to investing have added approximately 5.2 per cent in value to client portfolios according to a new report from Russell Investments.

The 2021 Russell Investments Value of an Adviser Report says advisers helped Australians avoid a “litany of poor investment calls” since the start of the pandemic in 2020, including pulling out their investments at the volatility trough in March last year.

“Throughout the COVID-induced market dislocation and recovery, the most critical mistake non-advised investors made was to not hold the line on their investment strategies and sell out of equities after dramatic market falls – and then find it hard to time a re-entry as the market roared back to life,” Russell states.

While advisers largely prevented their clients from being among those that pulled an estimated $40.5 billion out of the superannuation system when valuations were at their lowest, Russell says the 5.2 per cent savings figure comes from a number of sources.

“The value of an adviser calculation is drawn from five key elements: preventing behavioural mistakes (2 per cent); advising on appropriate asset allocation (1.1 per cent); optimising cash holdings (0.6 per cent); tax-effective investing and planning (1.5 per cent); and the priceless value of expert wealth management knowledge derived from years of market experience,” Russell states.

Russell’s head of business solutions Bronwyn Yates said the events that unfolded during the heat of the pandemic have only underscored the important role advisers play.

“Investors that have been educated by a financial adviser understand there will be ups and downs along their financial journey, so they feel comfortable in staying the course,” Yates said.

“However, non-advised investors struggle to make the correct decision when markets are volatile, and often attempt to time the market. This is an issue which plagues both those with loss aversion, and those convinced they can beat the market. It’s also a timely consideration for the growing ranks of millennials and Gen Z turning to fin-fluencers as their source for financial advice.”


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## Steven Barrett (20 Aug 2021)

A big caveat is whether you are talking to an advisor who is providing you with honest advice for a fee or a salesman who is maximising the amount of commission payable to him from your money. The financial outcomes under both situations will be vary different. 


Steven
www.bluewaterfp.ie


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## time to plan (20 Aug 2021)

Marc said:


> Reproduced without comment
> 
> Financial advisers coaching clients through the pandemic with a disciplined approach to investing have added approximately 5.2 per cent in value to client portfolios according to a new report from Russell Investments.
> 
> ...


All very interesting Marc, but Russell Investments is hardly an independent peer reviewed learned journal. So it’s all a bit 82% of women who used Pantene said their hair was shinier and stronger. 

I’m not saying it’s not true but we can’t trust that it is.


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## Duke of Marmalade (20 Aug 2021)

Behavioural advice?
I wonder how advisors sell this service.  The honest approach is as follows:
"Folk make the mistake of panicking when markets have a severe setback.  We will be available like The Samaritans to tell you not to panic.  In fact we will set up a recorded message on a helpline in those circumstances"
Honest but is it always correct?  Is it worth €5,000 (€2,000) p.a.?
The fraudulent approach goes as follows though in more veiled terms:
"Surveys show consistently that folk sell at the wrong time and are inclined to panic in the face of market setbacks.  We will be able to advise you if any market setback is just temporary or if it is time for you to get out.  Surveys show that by giving this advice we add 2% p.a. (€20,000) to clients' fund performance.  Come on, doesn't €5k seem cheap for that service?".


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## Marc (20 Aug 2021)

I suppose the problem here is that any evidence an adviser actually provides of real clients accounts showing the impact of advice given at the bottom of the market is never going to be a statistically significant sample even though this applied to a very large number of clients









						Coronavirus one year on - Everlake
					

We don't subscribe to any market timing strategy because we don't possess a crystal ball but from time to time it is clearly appropriate for a nudge on the tiller and to trim the sails.....




					globalwealth.ie
				










Its patently obvious that something dramatically changed in this client's portfolio in the Spring of 2020 AND that it was to their benefit.

There is another factor at play here which is also relevant which is that the client was extremely ill and the death benefit on their old pension contract was a return of fund with interest. A sum of just €17,000 vs a transfer value of nearly €600,000.

So there we are measuring the value of advice relative to the impact of potential future events. Very intangible and difficult to ascribe an accurate value since very often, it depends.

I could easily claim that the added "value" for this client is on the order of the improved death benefits (around €500,000) plus the value added from asset allocation say another €100 grand. So about  €600,000 added to a €600 grand pension. But those numbers are very easy to challenge even with the facts before us.  Whereas we do know exactly what the client is paying us which for the record is about €300pm. Its  much easier to focus on cost because its more tangible.

Of course, if the market had continued to fall an adviser wouldn't be able to use this as evidence of "good advice" so on balance it will always look to an extent  like good luck. Equally, since the client hasn't actually died yet, I can't really claim the value of the death benefit.

That's the real challenge here. How do you accurately measure the impact of an adviser relative to a client working on their own. Obviously it depends on the client it depends on the adviser, it depends if the client actually implements the adviser's recommendations and it depends to an extent on how events in the future actually play out so that the client actually sees a real tangible benefit.

The best analogy I can make is that a client working without an adviser is like someone playing blackjack in a Casino who knows you are supposed to get to 21 in order to win. Whereas working with an adviser is like playing with someone who has the American Mensa Guide to Casino Gambling (I do in fact own a copy) and is having a stab at counting cards in a five deck shoe.

You just about reduce the house edge to a positive 0.5% advantage to yourself. It's not a huge difference but its better than playing the slots!!

Just to prove this isn't an isolated and cherry picked example


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## time to plan (20 Aug 2021)

Marc said:


> I suppose the problem here is that any evidence an adviser actually provides of real clients accounts showing the impact of advice given at the bottom of the market is never going to be a statistically significant sample.
> 
> 
> 
> ...


One of the problems is how do you design a longitudinal study, either in the model of a clinical trial (with a control group) or as an observational study. There are a lot of confounding factors to deal with. Here is a statement which I reckon is true:

People who consult a financial professional are on average richer in retirement than people who don't.

But the main causal link is likely to be that richer people consult financial professionals.

You could then look at people who consult financial professionals vs a cohort of people who don't but who are of equivalent wealth at the start of the process. If those that consult financial professionals fare better, then what does that tell you? Maybe people who are more engaged with their finances are more likely to consult a professional so would have fared better anyway. Maybe reading a defined short book once a year would lead to better outcomes.

It's an interesting problem.



> That's the world we live in: when it comes to economics, people have emotions; it's not like chemistry or physics.
> 
> Robert J. Shiller


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## time to plan (20 Aug 2021)

Marc said:


> Its patently obvious that something dramatically changed in this client's portfolio in the Spring of 2020 AND that it was to their benefit.


People often get better after visiting homeopaths, just as they do after visiting medical doctors. So the graph doesn't tell us which category financial professionals fit into.


----------



## time to plan (20 Aug 2021)

Another thought on this is whether Financial Advisers are following evidence based practice for investment and investment advice, is such a thing exists.


----------



## Marc (20 Aug 2021)

https://youtu.be/tkHpahHjR8o









						Investment Philosophy
					

At Global Wealth, we don’t manage investments, we manage investors




					viewer.joomag.com
				




*Final observation *

We don't actually use Life Assurance Companies for ARFs and we don't take any commissions. Probably should have mentioned that


----------



## Sarenco (20 Aug 2021)

I have absolutely no doubt that a financial adviser can potentially add value to their clients.  Let's take that as a given.

However, I am interested in teasing out the claim that there is plenty of evidence that clients working with an adviser typically do better than those without.  

This academic paper seems to offer some evidence that the opposite is actually the case:









						Financial Advisors: A Case of Babysitters?
					

We use two data sets, one from a large brokerage and another from a major bank, to ask: (i) whether financial advisors are more likely to be matched with poorer



					papers.ssrn.com
				




The paper examines two data sets, one from a large German brokerage and another from a major German bank, to ask: (i) whether financial advisors are more likely to be matched with poorer, uninformed investors or with richer and experienced investors; (ii) how advised accounts actually perform relative to self-managed accounts; and (iii) whether the contribution of independent and bank advisors is similar. 

The authors find that advised accounts offer on average lower net returns and inferior risk-return tradeoffs (Sharpe ratios) regardless of the advisory model.

Now, that is obviously just one study and I certainly don't think we can conclude that it is universally the case that DIY investors do better than investors working with an adviser.  

However, I think it is telling that none of the big fund houses with advisory arms (Vanguard, Fidelity, etc), to my knowledge, have produced data showing that investors working with an adviser typically do better than those without.


----------



## Steven Barrett (20 Aug 2021)

Duke of Marmalade said:


> Behavioural advice?
> I wonder how advisors sell this service.  The honest approach is as follows:
> "Folk make the mistake of panicking when markets have a severe setback.  We will be available like The Samaritans to tell you not to panic.  In fact we will set up a recorded message on a helpline in those circumstances"
> Honest but is it always correct?  Is it worth €5,000 (€2,000) p.a.?
> ...


 Duke, it's a lot more than that. It is not just looking at a policy on its own and advising on that all of their wealth. 

I work with clients who are absolutely awful with money. Usually they are high earners as they never really had to save for anything. But they are not wealthy. Ironically, these people are the least likely to panic when there is a crash because they never look at their investments, it's not something they care about.


----------



## Duke of Marmalade (20 Aug 2021)

Steven Barrett said:


> Duke, it's a lot more than that. It is not just looking at a policy on its own and advising on that all of their wealth.
> 
> I work with clients who are absolutely awful with money. Usually they are high earners as they never really had to save for anything. But they are not wealthy. Ironically, these people are the least likely to panic when there is a crash because they never look at their investments, it's not something they care about.


Steven
I know that many financial advisors provide a valuable service in terms of organising people's finances in the context of the tax and other regulations, on estate planning, on knowledge of the range of investment options etc.
But I remain very skeptical of this "behavioural advice" in the context of investment decisions.  What I am hearing seems mainly to revolve around preventing people panicking when markets dive and of course recent experience is cited to underline the efficacy of this advice.
Maybe a few words at the initial consultation to warn that there may be choppy times ahead and if you feel worried your advisor is at the end of the phone.  But nothing that would justify the types of retainer/trailer fees that OP is criticising.


----------



## SGWidow (20 Aug 2021)

Duke of Marmalade said:


> But nothing that would justify the types of retainer/trailer fees that OP is criticising.



This is the key point - certainly for the non-clueless investor. My sense is that this thread has run its course because the financial advisers will never accept this and we will just go round in circles. This is not a particular surprise. I think it was on this site that I once read that it's hard for someone to understand something when his income is dependent on him on understanding it. How true. In particular, I would just point out how specific questions in this thread have not been answered...….I won't now or later waste my time looking for them. I have read enough nonsense.


----------



## Steven Barrett (20 Aug 2021)

Duke of Marmalade said:


> Steven
> I know that many financial advisors provide a valuable service in terms of organising people's finances in the context of the tax and other regulations, on estate planning, on knowledge of the range of investment options etc.
> But I remain very skeptical of this *"behavioural advice" in the context of investment decisions*.  What I am hearing seems mainly to revolve around preventing people panicking when markets dive and of course recent experience is cited to underline the efficacy of this advice.
> Maybe a few words at the initial consultation to warn that there may be choppy times ahead and if you feel worried your advisor is at the end of the phone.  But nothing that would justify the types of retainer/trailer fees that OP is criticising.


 That's because you wouldn't charge fees at that level for just giving advice on investment decisions, it would cover over services, which as you pointed out earlier, should be VATable but because it comes in the form of commission from a life company, it isn't.


----------



## Marc (20 Aug 2021)

it’s not like this question hasn’t been extensively studied


Bae, S.C., and J. P. Sandager (1997). What Consumers Look For In Financial Planners. Journal of Financial Counseling and Planning, 8(2), pp. 9-16.

Blanchett, D. and P. Kaplan (2013). Alpha, Beta, and Now...Gamma. The Journal of Retirement, Fall, (2) 29-45.

Brenner, L. and T. Meyll (2020). Robo-advisors: A substitute for human financial advice? Journal of Behavioral and Experimental Finance, 25, pp. 1-8.

Cheng, Y. and C.M. Kalenkosi (2011). Lost in Fees; An Analysis of Financial Planning Compensation. Journal of Wealth Management, Spring, pp. 46-54.

Egan, M. (2019). Brokers versus Retail Investors: Conflicting Interests and Dominated Products. Journal of Finance, 74(3), pp. 1217-1260.

Fama, E.F. and K.R. French (2010). Luck versus Skill in the Cross-Section of Mutual Fund Returns. Journal of Finance, 65(5) pp.1915-1947.

Finke, M.S., S.J. Huston, and D.D. Winchester (2011). Financial Advice: Who Pays. Journal of Financial Counseling and Planning, 22(1), pp. 18-26.

Haslem, J. A. (2010). The New Reality of Financial Advisors and Investors. Journal of Investing, 19(4), pp. 23-30.

Hoechle, D., S. Ruenzi, N. Schaub, and M. Schmid (2018). Financial Advice and Bank Profits. The Review of Financial Studies, 31(11) pp. 4447-4492.

Kitces, M. E. (2013). A ‘New Normal’ Look at Practice Growth. Journal of Financial Planning, 26(1), pp. 16.

Kitces, M. E. (2017). Financial Advisor Fees Comparison – All-In Costs For The Typical Financial Advisor?
www.kitces.com 


Lahtinen, K.D. and S. Shipe (2018). Compensation of Investment Advisors. Journal of Investing, Spring, pp. 80-86.

MacKillop, S. (2017). It’s Time to Reexamine Your Fee Schedule. Journal of Financial Planning, 30(5), pp.34.

Mazzoli, C. and G. Nicolini (2010). To fee or not to fee: Pricing policies in financial counseling. Financial Services Review, 19, pp. 307-322.

Opiela, N. (2006). The Future of Fees. Journal of Financial Planning, 19(8), pp. 24-31. Seay, M. C., S. G. Anderson, D. R. Lawson, and K. Tae Kim (2017).

Identifying Variation in
Client Characteristics between Financial Planning Compensation Models. Journal ofFinancial Planning, 30(10), pp. 40-51.

SEC (2014). How Fees and Expenses Affect Your Investment Portfolio. Investor Bulletin –
Security and Exchange Commission’s Office of Investor Education, Pub. No. 164. Statman, M. (2000). The 93.6% Question of Financial Advisors. Journal of Investing, 9(1), pp.
16-20.

Uhl, M. W. and P. Rohner (2018). Robo-Advisors versus Traditional Investment Advisors: An Unequal Game, The Journal of Wealth management, Summer, pp. 44-50.


----------



## Marc (21 Aug 2021)

This is a nice short video made by my good friends at Regis Media for a firm I know well based in Dubai AES

Michael Kitces is a respected financial planner in the USA and prolific researcher and author 









						Video | How to choose a financial adviser
					

A highly qualified financial expert can add significant value to your life. However, how do you choose the a suitable financial adviser whose interests are aligned with your own?




					hubs.ly


----------



## time to plan (21 Aug 2021)

Marc said:


> Michael Kitces is a respected financial planner in the USA and prolific researcher and author
> 
> 
> 
> ...


Funnily enough Marc, I was reading a blog post of his yesterday.









						Can We Trust Research On The Use Of Financial Advisors?
					

Whether we can trust different types of research on the use and benefits of financial advisors, and why it\'s best to have a healthy degree of skepticism.




					www.kitces.com


----------



## Wollie (21 Aug 2021)

@time to plan   Thanks for posting.  I really liked this sentence:
_In some cases, the “best” advice may require sacrificing financial gains for other ends (e.g., psychological comfort), which means the “best” advice could be wealth-reducing! _
Never a truer word was spoken.  If someone is as nervous as a kitten, it's bad advice to put them into a risky investment.

However, I would like to get back to my original post, which was aimed at insurers, not intermediaries.
Suppose the insurer has two identical clients, with exactly the same risk profiles, making exactly the same fund choices.   The difference is that, in one case, the intermediary has demanded 0.5% trail commission;  the other is happy with 0.1%.  The client pays for the excess commission to the first intermediary.  How can the insurer's directors and senior managers stand over this?  Do they demand that the first intermediary provide five times the level of ongoing service as the second?  Should they?


----------



## Duke of Marmalade (21 Aug 2021)

Marc said:


> This is a nice short video made by my good friends at Regis Media for a firm I know well based in Dubai AES
> 
> Michael Kitces is a respected financial planner in the USA and prolific researcher and author
> 
> ...


Mixed messages there from Kitces.  On the one hand commission is a bad word.  On the other hand fees related to how the investments perform create the right incentive for advisors.  Sounds like a justification for trailer fees/commissions to me.  And not a credible one - the advisor has no influence in how the investments will perform.
We have been reminded by OP that this is about providers facilitating wide variations in trailer fees at the advisors' discretion.  They are called commission to avoid VAT, fair enough, but they are presented and justified as paying for a service from the advisor to the customer.  If you ever book a flight these days you will be bombarded with a range of optional extras - seat choice, priority boarding, baggage allowance etc.  All ways to make extra money for the carrier for sure.  I personally tick the box for many of them.  But it is clearly optional and it is clear what I am paying for.
When a client signs up for a 0.5% trailer fee I have a number of questions.
1.  Was it optional?  Could they opt not to have the future service or have a more yellow pack service?
2.  Do they know what the service is that they are paying such high fees for?
3.  It is suggested that the service consists of the advisor being on a retainer to be at the end of a phone in times of market stress.  Is there a clear option to pay for these counselling services as and when they are needed rather than by way of retainer?
4.  And of course @Wollie's question.  Do the providers have a responsibility to ensure that this is a fair and transparent commercial arrangement between its customers and its distributors?  Or are they basically facilitating and turning a blind eye to a rip-off?


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## Marc (21 Aug 2021)

So the salient issue and something I have already addressed in my first answer then is simply this:

why do insurers allow brokers to select commission rates? - legally the broker is the agent of the insurer not the client.

If you want your advisers to represent you, you will need to pay them a fee. It really is as simple as that.


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## Conan (21 Aug 2021)

Wollie said:


> @time to plan   Thanks for posting.  I really liked this sentence:
> _In some cases, the “best” advice may require sacrificing financial gains for other ends (e.g., psychological comfort), which means the “best” advice could be wealth-reducing! _
> Never a truer word was spoken.  If someone is as nervous as a kitten, it's bad advice to put them into a risky investment.
> 
> ...


Because the Insurer is only providing the product. They might never meet the client. The intermediary is the one meeting the client and providing the advice.


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## Wollie (21 Aug 2021)

Conan said:


> Because the Insurer is only providing the product.


The legal contract is between the insurer and the client.  The intermediary has no role, no responsibility in the legal contract between them.  They can disappear off the face of the earth the day after the product is sold.  The insurer must be there to pay the income as it falls due, to deliver the promised return after 20, 30 years or whatever.  By then, the intermediary may well be gone to their final reward.  The likelihood is that no-one will know or care.  Before they died, though, they probably will have sold their business to someone else, who will continue to claim the trail commission - paid at the client's expense.  Shows how ludicrous the whole situation is.


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## AJAM (23 Aug 2021)

The question I always come back to is, Why to insurers FORCE you to use a broker?
As far as I know, you can't go direct to any of them.


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## Conan (23 Aug 2021)

AJAM said:


> The question I always come back to is, Why to insurers FORCE you to use a broker?
> As far as I know, you can't go direct to any of them.


Not true. You are not FORCED to use a broker. Insurers will deal with you directly, but they won’t necessarily offer to a better deal by cutting out a Broker.


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## time to plan (23 Aug 2021)

Conan said:


> Not true. You are not FORCED to use a broker. Insurers will deal with you directly, but they won’t necessarily offer to a better deal by cutting out a Broker.


Don't they just make you use a tied agent?


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## Steven Barrett (23 Aug 2021)

Conan said:


> Not true. You are not FORCED to use a broker. Insurers will deal with you directly, but they won’t necessarily offer to a better deal by cutting out a Broker.





time to plan said:


> Don't they just make you use a tied agent?


Yes, that is correct, you get someone from the direct sales team and can only charge a commission and not a fee.


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## Dave Vanian (23 Aug 2021)

AJAM said:


> The question I always come back to is, Why to insurers FORCE you to use a broker?
> As far as I know, you can't go direct to any of them.



As has been said, you can go directly but you won't necessarily get a better deal by doing so.  

Off the top of my head, I can't think of any manufacturer that will sell you their product at reduced / wholesale prices if you buy directly from them.  I'm thinking phones, cars ... maybe there are but I can't think of any right now.


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## time to plan (23 Aug 2021)

Dave Vanian said:


> As has been said, you can go directly but you won't necessarily get a better deal by doing so.
> 
> Off the top of my head, I can't think of any manufacturer that will sell you their product at reduced / wholesale prices if you buy directly from them.  I'm thinking phones, cars ... maybe there are but I can't think of any right now.


Hotels are usually cheaper (I find) to book direct. Not manufacturers but neither are insurers. Takeaways seem to be offering a better deal if you bypass the justeats of the world.


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## Duke of Marmalade (23 Aug 2021)

Dave Vanian said:


> As has been said, you can go directly but you won't necessarily get a better deal by doing so.


The point of this thread is that if you go to a producer directly, or for that matter through another broker, you definitely will get a better deal than the maximum allowable commission.


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## Gordon Gekko (23 Aug 2021)

Duke of Marmalade said:


> The point of this thread is that if you go to a producer directly, or for that matter through another broker, you definitely will get a better deal than the maximum allowable commission.


In reality though who pays the maximum allowable commission?


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## Duke of Marmalade (23 Aug 2021)

Gordon Gekko said:


> In reality though who pays the maximum allowable commission?


More to the point, who charges it?  And why do insurance companies facilitate it?


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## Gordon Gekko (23 Aug 2021)

Duke of Marmalade said:


> More to the point, who charges it?  And why do insurance companies facilitate it?


As I understand it, the insurance companies just say “we’ve 5% to play around with, how do you want to divvy it up?”, but it doesn’t have to go in the broker’s pocket.


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## Wollie (23 Aug 2021)

Gordon Gekko said:


> As I understand it, the insurance companies just say “we’ve 5% to play around with, how do you want to divvy it up?”, but it doesn’t have to go in the broker’s pocket.


The trail commission either goes into the client's pocket, or it goes into the broker's pocket.  There is a straight trade-off.  
I'm looking at the product details for the ARF product for a leading life company.  The client pays a management charge of 0.75% a year if there is no trail commission; they pay 0.85% a year if there's a 0.1% trail commission, etc., up to a management charge of 1.25% a year if the broker opts for trail commission of 0.5% a year.  There is no question of checking if the client gets a better service if the broker opts for a trail commission of 0.5% rather than 0 or 0.1%.  How can anyone - either life company or broker - defend such practices?   
We've heard lots from brokers about this.  How about hearing from the life companies?  Or from the CBI?  What about the consumer protection lot who were jumping up and down about the sins of the non-life companies with 'price signalling'?  Is this not far worse collusion against the public, on a grand scale?


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## TheGoodTheBad (24 Aug 2021)

Wollie said:


> The trail commission either goes into the client's pocket, or it goes into the broker's pocket.  There is a straight trade-off.
> I'm looking at the product details for the ARF product for a leading life company.  The client pays a management charge of 0.75% a year if there is no trail commission; they pay 0.85% a year if there's a 0.1% trail commission, etc., up to a management charge of 1.25% a year if the broker opts for trail commission of 0.5% a year.  There is no question of checking if the client gets a better service if the broker opts for a trail commission of 0.5% rather than 0 or 0.1%.  How can anyone - either life company or broker - defend such practices?
> We've heard lots from brokers about this.  How about hearing from the life companies?  Or from the CBI?  What about the consumer protection lot who were jumping up and down about the sins of the non-life companies with 'price signalling'?  Is this not far worse collusion against the public, on a grand scale?


You give example of an amc of 0.75%. Firstly that is dependant on commission, allocation, fund value etc. So rates can vary quite a bit. 
Depending on how advisor works will depend on what rate. 

What if an advisor provided a standard AMC of 0.5% (through negotiations on commissions and allocations, fund value) but then added a trail of 0.25% so your overall AMC was 0.75%. 
You seemed happy with an AMC of 0.75% in your post, so what difference is it to you if option 1 the insurance company gets 0.75%, or option 2 the insurance company gets 0.5% and then a broker/advisor gets 0.25% with his trail. You are paying 0.75% either way.  
Is there any issue that the advisor took their income over a longer period and not Immediately in that case. 

There are many ways a broker can choose their charging structure such as taking commission or taking zero commission, what allocation the clients get such as less than 100%, 100% or even above 100% and a broker can add his trail to the AMC as well. 

If your grievance is on trails, what is your ideas on Brokers/advisors taking commission. (the standard way advisors took payment historically) 
As said on other comment a broker can take say anything up to 5% commission, leaving a client with the possibility of say 98% allocation, but more realistically a broker will take say 3% maybe so client gets 100%. Depending on the size of the fund, 3% commission can be a sizeable amount just to sign them over. (yes I know a lot more that just signing a paper) But Once the policy is in place the broker really doesn't have to do a whole lot, they have done their hard work "selling" the service or product and received their commission. Their work was done getting the policy in place. 

Again by a broker taking a trail income instead like above example, their income is dependent on the performance of the ARF or any other pension etc so they want it to perform so their income does well also. 

Like most professions, there are some great and some not so great.
Some advisors can justify having a trail for ongoing service provided and I don't think that can be argued. Others maybe not so much. 

I think you could make the argument about any profession regarding pricing structure and service they offer.


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## Steven Barrett (24 Aug 2021)

Gordon Gekko said:


> In reality though who pays the maximum allowable commission?





Duke of Marmalade said:


> More to the point, who charges it?  And why do insurance companies facilitate it?



There are so many people out there that have no idea of how the personal finance markets work and they are easy pickings for brokers who are out to make as much money as possible off them. They don't question the charges and in some cases are so overwhelmed with all the paperwork, that they don't notice. Or they don't want to feel stupid by asking questions about the charges so they don't ask, even though they are perfectly entitled to ask. 

I spoke to someone yesterday who is reaching the Normal Retirement Age for a pension he has that he left years ago. Someone from the large corporate brokerage told him that he had to get the paperwork in now to get the pension matured for October. This guy says he is still working away and doesn't need the money at the moment. He had waived his tax free lump sum entitlement from a redundancy, so if he transferred to an ARF, any withdrawal would have been taxed. Him and his wife were being put under pressure to get the forms back and you could see it was a commission play. I told him that he had all the time in the world and as long as he made the decision by the time he was 75, he was fine. What can be done about these people giving incorrect advice in order to get sales? 

Duke, the higher commission options are still there but they are used less and less. The life companies still want to facilitate all spectrums of broker, probably afraid of losing business because they know that one of their competitors will still offer the high commission structure. Over my 20+ years in the industry, charges have only come down. The Bid/Offer spread is gone. The 50% initial commission is gone along with their initial units. The standard commission for a regular premium pension used to be 25% initial, 4% renewal. That is gone with most advisors. 


Steven
www.bluewaterfp.ie


----------



## Wollie (24 Aug 2021)

TheGoodTheBad said:


> You seemed happy with an AMC of 0.75% in your post,


Of course I'm not 'happy' with any level of charge.  You seem to be arguing that I picked an extreme example.  I did not.    I chose a bog-standard document from a leading life company.   It says in bold at the top:  "*This is not a customer document and is intended for Financial Brokers and Advisers only."  *You can bet your bottom dollar that it is not a customer document.  
The document then goes on to list the trail commission options, ranging from zero to 0.5% a year, with the associated increase in the yearly charge to the client, from 0.75% to 1.25%.  
I should add that the same document lists all the options for initial commission, ranging from zero to 5%, with allocations to the client falling by the same percentage at each step.
Therefore, the broker can choose - THEIR CHOICE - between limits of zero initial commission and zero trail commission (presumably with a fee to the client) at one extreme and 5% initial commission and trail commission of 0.5% a year - FOR WHAT IS ESSENTIALLY EXACTLY THE SAME PRODUCT.  
Think about it.  The broker can even choose between these two extremes for an ARF that is invested entirely in cash.  Even if there were 100% investment and zero trail commission, the client would be lucky to make a cent from the contract over its lifetime, yet the broker can take 5% up front plus a recurring 0.5% a year on it.  It is truly scandalous.  


Steven Barrett said:


> There are so many people out there that have no idea of how the personal finance markets work and they are easy pickings for brokers who are out to make as much money as possible off them.


You're absolutely right.  What is more, the life insurance companies are doing all they can to make it easier for those brokers to con their clients.  And you wonder why the general public has so little trust in the industry?     
Who is ever going to put a stop to this daylight robbery?


----------



## Duke of Marmalade (24 Aug 2021)

Steven Barrett said:


> There are so many people out there that have no idea of how the personal finance markets work and they are easy pickings for brokers who are out to make as much money as possible off them. They don't question the charges and in some cases are so overwhelmed with all the paperwork, that they don't notice. Or they don't want to feel stupid by asking questions about the charges so they don't ask, even though they are perfectly entitled to ask.
> 
> I spoke to someone yesterday who is reaching the Normal Retirement Age for a pension he has that he left years ago. Someone from the large corporate brokerage told him that he had to get the paperwork in now to get the pension matured for October. This guy says he is still working away and doesn't need the money at the moment. He had waived his tax free lump sum entitlement from a redundancy, so if he transferred to an ARF, any withdrawal would have been taxed. Him and his wife were being put under pressure to get the forms back and you could see it was a commission play. I told him that he had all the time in the world and as long as he made the decision by the time he was 75, he was fine. What can be done about these people giving incorrect advice in order to get sales?
> 
> ...



Initial Units, that’s a real blast from the Stoneage.
It is good to hear of the fall in commissions in general.
OP is referring to ARFs.
Your description of the typical relationship between punter and advisor is so apt.  Very few people would seek to discuss fees with their medical consultant, certainly not me.  And the same with your financial advisor.
Perhaps naively I believe that my medical consultant’s fees have been decided by some process of governance that ensures it is not at his discretion.  The analogy that OP is referring to is that the system has given my consultant a tick box to charge between €150 and €750.  Of course that wouldn’t work as I would have to write a cheque.  Or the VHI would have to pay.  But in the case of the ARF it all looks pretty seamless, the life company will appear to pay but unlike the VHI the life company simply deducts that €5,000 p.a. from my policy, nothing for me to be bothered about.


----------



## Itchy (24 Aug 2021)

TheGoodTheBad said:


> What if an advisor provided a standard AMC of 0.5% (through negotiations on commissions and allocations, fund value) but then added a trail of 0.25% so your overall AMC was 0.75%.
> You seemed happy with an AMC of 0.75% in your post, so what difference is it to you if option 1 the insurance company gets 0.75%, or option 2 the insurance company gets 0.5% and then a broker/advisor gets 0.25% with his trail. You are paying 0.75% either way.
> Is there any issue that the advisor took their income over a longer period and not Immediately in that case.



The issue is the defacto protectionism, facilitated by the insurance companies. Its no coincidence that going direct costs the same as the broker charge. If your argument is truly about legitimately earning your commission then I'm sure you would have no problem if there was direct access available to the products at the 0.5% AMC or even at say 0.65% retail rate. 



TheGoodTheBad said:


> *But Once the policy is in place the broker really doesn't have to do a whole lot, they have done their hard work "selling" the service or product and received their commission. Their work was done getting the policy in place.*



This is the crux of the issue for me. 



TheGoodTheBad said:


> Again by a broker taking a trail income instead like above example, *their income is dependent on the performance* of the ARF or any other pension etc so they want it to perform so their income does well also.



From a broker perspective! That's just not the case from the client perspective. Earing slightly less as an underperforming fund bobbles along is not linked to performance in my eyes. No hurdles, no benchmarking, no sunset on the commission, how is it linked to performance? Income is dependent on the resilience of the client to keep committing their capital.


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## AJAM (24 Aug 2021)

Dave Vanian said:


> Off the top of my head, I can't think of any manufacturer that will sell you their product at reduced / wholesale prices if you buy directly from them. I'm thinking phones, cars ... maybe there are but I can't think of any right now.


Tesla
Nike
Adidas
Dell
Apple
Ryanair/Aerlingus/etc. 
Dyson

The internet has changed things, you can buy whatever product you want directly from a manufacturer.
For the financial services industry, it should be even easier than for physical manufacturers.

I agree that a good financial advisor or broker is the best option for a lot (maybe the majority) of people. But not everyone needs advice.

Specifically, for PRSA's, to my knowledge, you can't go direct to any provider. If you want to invest in passive index funds in your PRSA (as opposed to the lifestyle strategy), then the only differentiator between providers is fees.


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## Steven Barrett (24 Aug 2021)

Duke of Marmalade said:


> Initial Units, that’s a real blast from the Stoneage.


Talking of which, a mate asked me to look at his pension as it's not performing. Some of his pension is in With Profits earning a return of 0%. A portion has initial units and he is being charged 4.75%. Did the calcs on whether he should take the penalties now and transfer out to a cheaper contract and he would make a gain of 34% on projected returns.


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## Duke of Marmalade (24 Aug 2021)

Steven Barrett said:


> Talking of which, a mate asked me to look at his pension as it's not performing. Some of his pension is in With Profits earning a return of 0%. A portion has initial units and he is being charged 4.75%. Did the calcs on whether he should take the penalties now and transfer out to a cheaper contract and he would make a gain of 34% on projected returns.


I can believe it.


----------



## Steven Barrett (24 Aug 2021)

AJAM said:


> Tesla
> Nike
> Adidas
> Dell
> ...


That's not correct. A Nike store is the direct sales team of the manufacturer. You do not get manufacturer prices from a Nike or Adidas store. Same with the computers. 

In fact, I can get an iphone 12 for €50 cheaper at Harvey Norman than I can from Apple.


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## time to plan (24 Aug 2021)

Itchy said:


> The issue is the defacto protectionism, facilitated by the insurance companies. Its no coincidence that going direct costs the same as the broker charge. If your argument is truly about legitimately earning your commission then I'm sure you would have no problem if there was direct access available to the products at the 0.5% AMC or even at say 0.65% retail rate.
> 
> 
> 
> ...


When I was looking at Zurich Exec Pension, I found better deals available going via a broker than by going via Zurich tied agent.


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## Wollie (24 Aug 2021)

@Duke of Marmalade showed why it's completely inappropriate to compare what's happening with ARF's to other service businesses. 


Duke of Marmalade said:


> Very few people would seek to discuss fees with their medical consultant, certainly not me.  And the same with your financial advisor.
> Perhaps naively I believe that my medical consultant’s fees have been decided by some process of governance that ensures it is not at his discretion.  The analogy that OP is referring to is that the system has given my consultant a tick box to charge between €150 and €750.  Of course that wouldn’t work as I would have to write a cheque.  Or the VHI would have to pay.  But in the case of the ARF it all looks pretty seamless, the life company will appear to pay but unlike the VHI the life company simply deducts that €5,000 p.a. from my policy, nothing for me to be bothered about.


This is what we should be discussing, not trying to distract from the core issue by comparing to the cost of a car, a piece of sports equipment, or whatever, from different distributors.


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## Gordon Gekko (24 Aug 2021)

People are not comparing like with like.

A company such as Zurich Life are wholesaling investment products.

It’s the broker who not only sells the product but he or she also assesses suitability etc at the outset and monitors it on an ongoing basis.

It’s up to the client to put a value on that and agree the fee.

Let’s not kid ourselves, the midpoint of 0.25% on a €250,000 fund is €625 a year.

Not exactly the Great Train Robbery.


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## kinnjohn (24 Aug 2021)

Gordon Gekko said:


> People are not comparing like with like.
> 
> A company such as Zurich Life are wholesaling investment products.
> 
> ...


It could run to over 100K in fees for each  client for a small  pension pot over a lifetime,
A bit higher fees and pension pot and you are into 200K,


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## Dave Vanian (24 Aug 2021)

Gordon Gekko said:


> Let’s not kid ourselves, the midpoint of 0.25% on a €250,000 fund is €625 a year.



...and in reply...



kinnjohn said:


> It could run to over 100K in fees for each client for a small pension pot over a lifetime,



At €625 per year (and assuming that the fund size is not being reduced at all by withdrawals) it would take 160 years before the fees would run up to €100,000.  I suspect the client might have died before then.


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## Duke of Marmalade (24 Aug 2021)

Poor @Wollie he finds it so hard to keep this on topic - the broker lobby protesteth so much.
But I think I can summarise some relevant consensus.  €5,000 per annum trail fees for a €1m ARF is scandalous and equally scandalous is that the providers make it so easy for unscrupulous operators avail of this.

Yes I accept:
It's a free country
Most brokers are good guys and wouldn't be tempted by this gravy dangled in front of them by the providers
Financial advisers who do not engage in rip offs like this can add value

But is there anybody out there who objects to the consensus as I have stated it?


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## Gordon Gekko (24 Aug 2021)

Duke of Marmalade said:


> Poor @Wollie he finds it so hard to keep this on topic - the broker lobby protesteth so much.
> But I think I can summarise some relevant consensus.  €5,000 per annum trail fees for a €1m ARF is scandalous and equally scandalous is that the providers make it so easy for unscrupulous operators avail of this.
> 
> Yes I accept:
> ...


So firstly, I’m not a broker, so I consider myself objective on the basis that I’ve no skin in the game.

How is it “scandalous”?

Say I was a broker and I find and cultivate a client. I’m his trusted advisor. I help him on a number of fronts. His pension needs to be looked-after. Like most people, he hasn’t a clue about risk or asset allocation. I make sure that he’s set-up in the right way and that he avoids financial pitfalls. And I have the compliance burden of monitoring suitability and capacity for loss etc on an ongoing basis.

Now let’s say I allocate the money to a provider who’s charging 0.5% and I also charge 0.5%, with no VAT ‘cause it’s an insurance company.

I see nothing wrong with that.

The client is paying 1% (no VAT) and getting decent ongoing advice.


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## Duke of Marmalade (24 Aug 2021)

Gordon Gekko said:


> So firstly, I’m not a broker, so I consider myself objective on the basis that I’ve no skin in the game.
> 
> How is it “scandalous”?
> 
> ...


1 down for consensus.  I cited what I thought was an absolutely extreme example, hopefully never actually seen in practice but the point being that providers do make it easy for this outrageous example to happen. But it was only cited in the firm belief that no-one could honestly believe that €5,000 per annum retainer to give advice available at €1,000 per annum was reasonable.  That is more than 10% of the pension which on optimistic assumptions the ARF will provide.  God help the poor sucker who so trusted his adviser to throw €4,000 per annum at her for nothing.   Lo and behold there is a contrarian view.  That's blogsphere for you.


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## Gordon Gekko (24 Aug 2021)

Duke of Marmalade said:


> 1 down for consensus.  I cited what I thought was an absolutely extreme example, hopefully never actually seen in practice but the point being that providers do make it easy for this outrageous example to happen. But it was only cited in the firm belief that no-one could honestly believe that €5,000 per annum retainer to give advice available at €1,000 per annum was reasonable.  That is more than 10% of the pension which on optimistic assumptions the ARF will provide.  God help the poor sucker who so trusted his adviser to throw €4,000 per annum at her for nothing.   Lo and behold there is a contrarian view.  That's blogsphere for you.


Where is the advice available for €1,000 / 0.1%?


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## Duke of Marmalade (24 Aug 2021)

Gordon Gekko said:


> Where is the advice available for €1,000 / 0.1%?


According to OP the options made available from providers is from 0.1% to 0.5%.  I am not a practitioner no more than you are a broker.  I accept your assertion that you have no skin in the game and that you study Dalbar reports (aimed at brokers) as a matter of academic interest.  It wouldn't be my choice of bedtime reading. Hey, it’s a free country.


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## Wollie (25 Aug 2021)

Gordon Gekko said:


> Not exactly the Great Train Robbery.


Some people just don't get it.
First of all, you are conveniently ignoring the initial commission, which could be as high as €12,500 on a €250,000 investment, in addition to the trail commission.   That is unconscionable.
Most important, however, referring back to The Duke's analogy with a medical consultant (though the comparison is laughable, given the educational standards required and the exams a consultant must pass, the experience they've had to accumulate, not to mention the professional standards they must adhere to), would you agree a retainer of €625 a year to a consultant, who is not even required to take your temperature, and where the money is taken straight out of your pocket, without them invoicing you for it?   And don't try to pretend that it doesn't come out of your pocket, that it's out of the insurer's.  It comes out of your - the client's - pocket.  Make no mistake about that.


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## _OkGo_ (25 Aug 2021)

Gordon Gekko said:


> How is it “scandalous”?


Haven't you answered your own question?


Gordon Gekko said:


> Say I was a broker and I find and cultivate a client. I’m his trusted advisor. I help him on a number of fronts


In your scenario, the 'client' is the product and the FA is selling them the insurance company for as much as they can get out of them. Why should previous work which the FA has already been paid for factor into how much they should get from an ARF?


Gordon Gekko said:


> I have the compliance burden of monitoring suitability and capacity for loss etc on an ongoing basis


Again, I think this is what is at the core of Wollie and Duke's comments. In real practical terms, what is this burden? Is it 10/20/40 hours of work dedicated to that client each year?

The only logical reason I can see for a range in commission is for a broker to act fairly with different clients and pot sizes. If I have a €100k pot, the broker can be very clear and tell me that it will take 5 hours of his time every year and so he needs a 0.5% commission. If the next client arrives in with a €500k pot, the same advisor can charge 0.1% because it is the same 5 hours or work. Sadly there are too may FA's who are glorified sales reps and don't protect the clients best interest


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## Duke of Marmalade (25 Aug 2021)

_OkGo_ said:


> The only logical reason I can see for a range in commission is for a broker to act fairly with different clients and pot sizes. If I have a €100k pot, the broker can be very clear and tell me that it will take 5 hours of his time every year and so he needs a 0.5% commission. If the next client arrives in with a €500k pot, the same advisor can charge 0.1% because it is the same 5 hours or work. Sadly there are too may FA's who are glorified sales reps and don't protect the clients best interest


Great point.  Let us start at the very beginning.  Why do providers get involved at all in the fees *paid for advice by a client to her advisor*, nothing to do with the provider, and why the variable percentage?
1.  The VAT angle makes commission more tax efficient than direct fees.  I'm all for tax efficiency so that is a good reason.
2.  There will be a large fixed element to the advisory service and so I can see the need for a variable ad valorem percentage.
So there is a valid justification for the facility but it leaves wide open a gap for the unscrupulous, a gap which I have illustrated by the €5,000 p.a. retainer for the €1m ARF.
Amazingly @Gordon Gekko sees no difficulty with that size of gap.  Goes to show that the scope to rationalise the most egregious of rip-offs is unfortunately part of the human condition.  If someone with "no skin in the game" like GG can do it, someone with €4,000* p.a. for ziddly twat dangling in front of her will have little difficulty wrestling with her conscience.

So OP's most relevant question is - what do providers do to monitor that some brokers are not driving a coach and horses through this gap?

* assuming that €1,000 is a reasonable fee for the service


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## gkp (15 Sep 2021)

I have had a quote from an ARF provider (direct team) for 100.5% allocation and 0.5% AMC.  ARF value approx €1m.
Am I likely to get a better allocation and AMC with a broker/advisor or is this as good as it gets?


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## Gordon Gekko (15 Sep 2021)

That’s pretty competitive.


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## GSheehy (16 Sep 2021)

gkp said:


> I have had a quote from an ARF provider (direct team) for 100.5% allocation and 0.5% AMC.  ARF value approx €1m.
> Am I likely to get a better allocation and AMC with a broker/advisor or is this as good as it gets?



If you were comfortable with an execution only service you'd probably better it, at that level of fund. But, that type of service isn't suitable for everyone. 

Gerard

www.prsa.ie


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## Dave Vanian (16 Sep 2021)

gkp said:


> I have had a quote from an ARF provider (direct team) for 100.5% allocation and 0.5% AMC.  ARF value approx €1m.
> Am I likely to get a better allocation and AMC with a broker/advisor or is this as good as it gets?



The 0.5% AMC is pretty good.  You could get 0.35% AMC for passive funds with Aviva but the allocation rate would be lower.  Or 0.4% for Vanguard funds with Standard Life but again the allocation rate would be lower.  

At 0.5% AMC you could get 101% allocation from Zurich.  

Talk to a broker.


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## Barney Magoo (23 Sep 2021)

gkp said:


> I have had a quote from an ARF provider (direct team) for 100.5% allocation and 0.5% AMC.  ARF value approx €1m.
> Am I likely to get a better allocation and AMC with a broker/advisor or is this as good as it gets?





GSheehy said:


> If you were comfortable with an execution only service you'd probably better it, at that level of fund. But, that type of service isn't suitable for everyone.
> 
> Gerard
> 
> www.prsa.ie



Is there any way of locating the best offers of allocation, AMC, TER, etc., apart from using a broker? Similarly there seems to be a lack of published actual returns and experiences of ARF customers.

Some fund providers obviously do not offer retail so a broker is a must for access to their particular suite of products (e.g. MCSI), even access to Vanguard must be through an intermediary (e.g Davy).

With all due respect to the frequent posters here who make their livings giving advice, I suspect there is a significant number of readers of this forum who do not wish to use a broker/financial advisor/planner. It seems that even the financially aware are restricted by the system in this country.


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## Dave Vanian (23 Sep 2021)

Barney Magoo said:


> Is there any way of locating the best offers of allocation, AMC, TER, etc., apart from using a broker?



Good question.  Quick answer - no.  

There are a small number of brokers offering execution-only services - some of them post here on AAM.  They'll generally be lower-cost than dealing directly with the product providers.  But you need to have chosen your product and funds before you go to them as they won't / can't provide advice or tell you which product is most suitable for you.  That said, an execution-only provider can tell you the charges of the products they provide.

Most of the product providers that deal with brokers offer brokers a wide range of charging structures to facilitate different brokers' different charging models.  Like any profession, some brokers charge more than others.  Some brokers charge trail commission to pay for ongoing service and reviews.  Others don't.  The choices a broker makes will affect allocation rates, TER, AMC etc.  Providers won't publish all the available options because then you'd have customers looking for Rolls Royce advice and service but also wanting to pay the execution-only lowest end of the charging options.  

I've had customers who have who have told me that they want execution-only discounted charges.  But then asked me which product and funds I thought were best.  Those two requirements contradict each other.


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## kinnjohn (23 Sep 2021)

I have seen advisors charging different rates for the same service the only difference is how well informed the person taking out the ARF was,

The line people who dealt with people down through the years know who to milk a bit extra from,

I would not be surprised if they were getting an extra bonus for doing so,
If you knew enough to go above the line people there was better rates to be got,


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## Steven Barrett (24 Sep 2021)

kinnjohn said:


> *I have seen advisors charging different rates for the same service* the only difference is how well informed the person taking out the ARF was,


Do solicitors, accountants, builders, plumbers, mechanics etc all charge the same rates? No, they don't, so I don't know why people expect financial advisors to all charge the same too. You are paying for advice, not just implementing the product. 


Steven
www.bluewaterfp.ie


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## Dave Vanian (24 Sep 2021)

kinnjohn said:


> I would not be surprised if they were getting an extra bonus for doing so,



All regulated firms have a legal obligation to disclose any payment received down to the last cent, with the exception of a relevant seminar hosted by a provider or anything more than a cup of coffee bought by a sales rep from a provider company.  That's how tightly regulated things are at the broker end these days.  So this attempt to spread a rumour which has absolutely no foundation in fact is frankly a bit sad.  If you don't know the actual facts, please don't share fictional opinions that are simply wrong - other people reading this might actually believe them.

Of course if you have any actual evidence of people being paid bonuses for milking a bit extra from unsuspecting consumers, please do the right thing and report it to the Central Bank of Ireland.  Or bring your evidence to the press.


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