ARF charges

[Marc]

So for a pension of €450k assuming 25% lump sum is taken you would have about 375,000 left in the ARF.

Charges are actually less important than asset allocation - getting the right investment approach. That's what you are really paying an adviser for - not to be a facilitator.

For example a bank account in an ARF essentially has "no charges" but won't cut the mustard when it comes to imputed distributions of 4% and paying fees to boot.

I've used a middle of the road balanced approach but ideally you would want more in equities than this. If you can't take the investment risk you should really give consideration to an annuity for at least part of it.

So, you need to test your investment approach using some stochastic modelling like this


Then you need to compare costs on a full disclosure basis like this



Marc Westlake CFP, TEP, APFS, QFA, EFP
Chartered, Certified and European Financial Planner
Registered Trust & Estate Practitioner
Everlake

 

[S class]

.

 

[Sarenco]

Charges are actually less important than asset allocation - getting the right investment approach.

Perhaps.

But the OP asked about charges - not asset allocation.

I note that you haven’t disclosed your own advisory fee for setting up an ARF.

 

[Marc]

Perhaps.

But the OP asked about charges - not asset allocation.

I note that you haven’t disclosed your own advisory fee for setting up an ARF.

It’s ok for posters to ask the wrong question.

Even though charges are generally misrepresented and opaque and empirically less important than asset allocation. But you work away.

Lol. I Genuinely couldn’t have more disclosed it if I tried.

Sometimes it is ok not to be belligerent

 

[Sarenco]

Lol. I Genuinely couldn’t have more disclosed it if I tried.

Sometimes it is ok not to be belligerent

Sorry, I didn’t realise the disclosure chart above reflected what you actually charge.

So, you charge a 1% establishment fee and an ongoing advisory fee of 0.75% per annum.

On top of the 0.40% per annum for the ARF itself.

Wow.

 

[Marc]

Sorry, I didn’t realise the disclosure chart above reflected what you actually charge.

So, you charge a 1% establishment fee and an ongoing advisory fee of 0.75% per annum.

On top of the 0.40% per annum for the ARF itself.

Wow.

You clearly don’t understand life company pricing. I’m not using retail products here.

On a total cost basis that’s cheaper than the majority of the market on a commission basis.

 

[Sarenco]

On a total cost basis that’s cheaper than the majority of the market on a commission basis.

Really?

Are you saying it’s not possible to get an ARF with 100% allocation with 0.40% AMC (or lower)?

 

[Marc]

Shush! Rugby

 

[Marc]

Really?

Are you saying it’s not possible to get an ARF with 100% allocation with 0.40% AMC (or lower)?

YES REALLY

This is like Groundhog Day.

Yes, a 0.40% AMC is ABSOLUTELY CATEGORICALLY NOT THE REAL CHARGE. As I’ve been saying for the last decade or more.

Once again I’ll prove it in the morning with data and a few days from now I’ll have to do the same thing over again

 

[Running Hatter]

Thanks Marc for you're detailed analysis, so you are saying that a 375,000 euro ARF would have a total of 171,064 euro in charges over 20 years, which would actually average out at 8,550 euro per year, l have to say that seems quite excessive and probably explains why financial advisors are constantly using smoke and mirrors when asked direct questions re the actual cost.

 

[Marc]

Thanks Marc for you're detailed analysis, so you are saying that a 375,000 euro ARF would have a total of 171,064 euro in charges over 20 years, which would actually average out at 8,550 euro per year, l have to say that seems quite excessive and probably explains why financial advisors are constantly using smoke and mirrors when asked direct questions re the actual cost.

I absolutely agree that brokers hide their costs.

However, costs still need some context. Running an ARF is like trying to gracefully drive an articulated lorry down a cliff!

I bought a car, second hand Audi A4 in 2016 for €36,000. It was serviced every year at the main dealer for a couple of hundred Euro. Let’s say I spend a total of €38,000 over the last 7 years.
Excluding insurance road tax and fuel.

That’s €5,400pa approximately. For a car. Which I spent 38k on. You are spending 10 times that. On your future income for the whole of the rest of your life and that of your spouse if you are married.

During which time. You will age. You may be Ill. You may lose mental capacity and you will die.

During that time, your fund will shrink in value so the ongoing income to an adviser is falling and in real terms significantly. As you get to your 80s you will be less inclined to want to deal with urgent requests from your adviser for a copy of your passport or driving licence (which you might not have renewed) because the one on file is out of date and they have to comply with AML obligations.

During that time markets will gyrate, interest rates will go up and down. Inflation will endlessly tip away at the remaining pot. You will have times when you are anxious about the value especially following a large fall which you can expect to happen several times during your retirement. A balanced portfolio will drop around 20% that’s 75 grand for you on average one year in 40 or 2.5% of the time if market returns were normal distributed.

We have had 2 such falls in the last 3 years and remember that a 25% decline which is what you suffer when you take your 4% distribution out at the bottom of a fall, need 33% returns to get back to par.

Every year you need to decide if you should purchase an annuity with some or all of the remaining ARF.

Properly and sensitively managing an ARF for a quarter of a century or more is really a very substantial commitment by an advisory firm and their Professional indemnity insurance policy. These are defined business risks for an adviser, even if many don’t appreciate what they are really doing here and are happy to discount their fees unaware of their own long term commercial risks.

Or perhaps, like many, they are just happy to flog you any old policy, take the highest upfront commission they can hide through misleading “increased allocation” and be long gone when you realise you actually need some help.

Happens all the time. Client contacted me recently Father in his 80s had been left in low risk funds for the last 10 years and the value of the ARF had collapsed with charges, inflation and income.

It’s no good then saying well you shouldn’t have done any of these things. It’s too late and we end up working for free because some broker flogged a poorly constructed and didn’t know how to maintain an ARF.

There’s always somebody who will do it cheaper

 

[Marc]

So to again remind viewers that the problem with any comparisons with a Life Company pension charge number is that it doesn't actually reflect the true cost on an apples for apples basis so we really don't give any weight to these numbers being bandied about by brokers.

To illustrate this point, I recently conducted a comparison of a range of life company "world equity funds" compared to the MSCI World Index that they all track. The fund we use in our portfolios is the Vanguard Institutional Plus.


Source FE


As you can see there is a huge variance in returns reflecting a host of hidden charges not included in their headline annual management charge.

So, for example, Irish Life discloses the fund charge for their index fund as 0.1% plus a 0.40% fee. However, the actual difference in performance compared to the index is 1.66%pa.

So, if I was a broker, I could offer you an Irish Life Indexed Equity fund for a 1.5% disclosed charge, pocket 1%pa myself and you would underperform the index by around 2%pa!

here is the same data presented as a line chart



So for example, over the last decade the Zurich Indexed Global Equity fund has underperformed the index it tracks by an annualised 0.98%pa according to data reported by Zurich to FE

 

[KOW]

I will be retiring early (59 yrs) in the next 18 month's and plan to go down the ARF route and of course I will be getting professional advice.
I plan to take 25% lump sum and go with a 75% passive global equity and 25% cash mix with the remainder.
My question is which company has the lowest overall charges and what percentage should I expect to pay.

You know fairly well what type of fund you want to invest in. Forget about all the crystal ball stuff and charts. Do some basic research and then get some quotes. Go with the broker that offers the best value and service to you. Such providers post on AAM. What you require is basic. At the end of the day you alone will be picking the fund you invest in.
Went through all this months back and once process was over was left scratching my baldy head. Listened to all sorts. Read all sorts.
But at the end of the day if all the so called experts knew what they proclaim to know they would long be retired.
Yes employ professionals you need to carry out specific tasks. Regarding using them for future projections etc buy a crystal ball in the pound shop it will serve you just as well.

 

[Marc]

You know fairly well what type of fund you want to invest in. Forget about all the crystal ball stuff and charts. Do some basic research and then get some quotes. Go with the broker that offers the best value and service to you. Such providers post on AAM. What you require is basic. At the end of the day you alone will be picking the fund you invest in.
Went through all this months back and once process was over was left scratching my baldy head. Listened to all sorts. Read all sorts.
But at the end of the day if all the so called experts knew what they proclaim to know they would long be retired.
Yes employ professionals you need to carry out specific tasks. Regarding using them for future projections etc buy a crystal ball in the pound shop it will serve you just as well.

Lol. I think its really annoying when pilots do those pesky pre-flight checks as well. I wish they would just take off already, its not that difficult....

Shades of Brexit and "we've had enough of experts" creeping in here.

I would counter this position by saying in my Professional opinion based on 30 years as a highly qualified adviser, that most people are not capable of competently self-managing their own ARF and that it is reckless for this site to encourage people to "have a go" without taking any care to assess someone's competence to do so.

If someone wants to suggest a starting "portfolio" as an example of what they think they want that's fine. But a competent adviser shouldn't just implement it.

The job of a competent advisor is to assess the circumstances and recommend the most suitable and appropriate course of action (which could be that an ARF is completely unsuitable, you should buy an annuity) not unquestionably implement whatever a prospective client suggests.

I don't go to my doctor and start writing out my own prescriptions.

 

[Sarenco]

So for example, over the last decade the Zurich Indexed Global Equity fund has underperformed the index it tracks by an annualised 0.98%pa according to data reported by Zurich to FE

This is not meaningful if you don’t tell us the disclosed costs.

Also, you are comparing fund performance with the gross return of the index (which ignores withholding taxes) as opposed to the net return (which is the industry standard).

The difference between the gross return and the net return of the index was an annualised 0.6% over the last decade.

 

[KOW]

Lol. I think its really annoying when pilots do those pesky pre-flight checks as well. I wish they would just take off already, its not that difficult....

Shades of Brexit and "we've had enough of experts" creeping in here.

I would counter this position by saying in my Professional opinion based on 30 years as a highly qualified adviser, that most people are not capable of competently self-managing their own ARF and that it is reckless for this site to encourage people to "have a go" without taking any care to assess someone's competence to do so.

If someone wants to suggest a starting "portfolio" as an example of what they think they want that's fine. But a competent adviser shouldn't just implement it.

The job of a competent advisor is to assess the circumstances and recommend the most suitable and appropriate course of action (which could be that an ARF is completely unsuitable, you should buy an annuity) not unquestionably implement whatever a prospective client suggests.

I don't go to my doctor and start writing out my own prescriptions.

John C bogle. Warren and Charlie. Mark unfortunately I do not think your in the same league but thats just me.

 

[KOW]

The plain and simple is that most if not all finance gurus cannot beat the market. This is a simple fact. Investing in a cheap index/s that just track markets wins But unfortunately cuts a lot of fees from brokers. Even an independant broker wants to make money.
Looking at graphs pass performance future predictions while helpful means little.
Best allocation cheapest fees/ set up and thats it for me.
Warren Buffet stated that when he dies 90% of his monies will go into a cheap simple index fund for wife/family.
Over analysis of information that in a large part suits vested interests only muddys the water and costs money.
Decide on where you want to invest and if a broker cannot give you full fee structure in a one liner walk away.

 

[Gordon Gekko]

My relative’s ARF has an AMC of 0.50%. Is that the full charge? Of course not. But it can’t be much more than an extra 0.15%.

 

[Kev1964]

The plain and simple is that most if not all finance gurus cannot beat the market. This is a simple fact. Investing in a cheap index/s that just track markets wins But unfortunately cuts a lot of fees from brokers. Even an independant broker wants to make money.
Looking at graphs pass performance future predictions while helpful means little.
Best allocation cheapest fees/ set up and thats it for me.
Warren Buffet stated that when he dies 90% of his monies will go into a cheap simple index fund for wife/family.
Over analysis of information that in a large part suits vested interests only muddys the water and costs money.
Decide on where you want to invest and if a broker cannot give you full fee structure in a one liner walk away.

Does the concept of an investment advisor/broker/intermediary who only gets paid based on positive gains in the customers’ portfolios exist? Win win or lose lose for both parties.

When I look at the various charts suppled by Marc above and others in the past, I wonder how many potential customers look at a presentation like this and think to themselves, I don’t understand this or can’t follow everything in it. But the presenter is a very nice and confident chap, the paperwork looks impressive…..so where do I sign?

 

[Gordon Gekko]

My relative’s ARF has an AMC of 0.50%. Is that the full charge? Of course not. But it can’t be much more than an extra 0.15%.

Some people disingenuously quote numbers from life company disclosure documents which set-out the highest fees possible (e.g. 5% upfront commission and 1.5% Annual Management Charge). In reality, it’s easy enough to get a fair deal from a decent broker.