When should I think about retirement

[Steven Barrett]

But and for me its getting to be a big but, so-far my investment has not delivered the yearly return of 4% that was indicated at the start, RTD after 3 & 3/4 years is around 3%

So to ask a third question, at what stage do you start to question the advice given when it is not providing the projected returns ??

Unless in some sort of guaranteed investment, there's little you do. Sometimes, you will achieve more than 4%, others less, it depends on market conditions. The longer you are invested, the more likely you are to achieve your goals.

You have to ask whether your advisor put you into assets that are underperforming while other similar assets are hitting that target or whether the way the market is, no one is achieving that return.


Steven
http://www.bluewaterfp.ie (www.bluewaterfp.ie)

 

[elacsaplau]

It's almost impossible to give independent financial advice if you are working on commission - and AUM fees are a form of commission. If CFPs really wanted to distinguish themselves, they would be fee only. Problem is working exclusively on this basis may not generate sufficient income.

 

[Steven Barrett]

It's almost impossible to give independent financial advice if you are working on commission - and AUM fees are a form of commission. If CFPs really wanted to distinguish themselves, they would be fee only. Problem is working exclusively on this basis may not generate sufficient income.

Are you saying that people aren't willing to pay for advice?

Steven
http://www.bluewaterfp.ie (www.bluewaterfp.ie)

 

[elacsaplau]

Hi Steven,

I think it's clear what I'm saying.

I have spoken to advisers who have said that they would love to be genuine fee only but that they would really struggle to survive well without AUM fees/commission.

People will pay for advice. If I have a million in an ARF, for example, at the outset there should be a cost for the advice of setting the ARF up and putting in a long-term asset allocation strategy, etc. However, the majority of the pricing models that I've seen suggest a 0.5% charge to cover on-going advice. Personally, I believe that if an adviser was to issue a fee each year for on-going advice, the bill to the client would not be €5,000 a year. Like once the thing is up and running, there's not that much to do, right?

My impression is that this model is simply not in the best interest of clients. The catch is that unless "genuine professionals" grasp this particular nettle, it will be hard for them to put clear blue water between themselves and the white-sockers!

You can put in all the you like but dems the facts!

 

[Steven Barrett]

The first thing that advisors need to realise when moving from commission to fee basis is that a client won't pay the same amount that an insurance company will for the business, so you will receive less.

To say there is not much to do is incorrect. There is always lots to do, especially for someone in retirement who needs reassurances that they are alright financially. If they have a decent size ARF, they will probably have lots of plans for things to do and as a planner, we look at whether they can afford to do all they want to do without fear of running out of money in the future. Then there is all the admin and updates that go on, a lot of it in the background. Compliance work is very onerous these days and the cost of this has to be factored into the fees that we charge. Then there's the situations where they want to make a really big decision in their finances and they want to go through everything with you. That is covered in the fees too. I'm not saying €5k a year is justified, but there is ongoing work involved.

On people paying fees, I have lost count of the amount of people who contact me looking for the "lowest cost" pension. If you want the lowest cost, don't be looking for someone to advise and implement it for you. We have to charge you to do it. If you want lowest cost, do it yourself.

I listen to a lot of US financial planning podcasts and Irish planners don't charge anywhere near their US counterparts. $5,000 a year financial planning fees is considered quite conservative.


Steven
http://www.bluewaterfp.ie (www.bluewaterfp.ie)

 

[Jimmy Dee]

Never only one Elephant in an Irish room, we have at least two:
- unattractive terms of the pension products available in Ireland coupled with the monopoly of the current providers backed by lazy government and civil service and peddled by advisers unwilling to be open and transparent about the products they sell as intermediaries
- the mad government policy of penalising individual investors willing to take the trouble to build up their own wealth via retail investment products such as ETF's through high taxes

 

[elacsaplau]

The first thing that advisors need to realise when moving from commission to fee basis is that a client won't pay the same amount that an insurance company will for the business, so you will receive less.

That's exactly my point. The commission/AUM stuff is not explicitly paid for so the adviser gets away with charging, indirectly, very high fees. This is so obviously not in the best interest of the client. Lets do the math. I'll keep it simple.

Individual, with an existing pension fund of €250,000 who wishes to contribute €15k a year. Let's look at the final fund in 25 years using a sensible growth rate of 5% under 2 scenarios - (a) where the client gets the full 5% return and (b) where the client gets 4.5% return because his adviser is taking 0.5%

Final fund values are: (a) €1,562,495 and (b) €1,419,837. In other words, the total cost of the advice is €142,658

The justification for this fee seems to be a combination of hand-holding and compliance. Seems to me a ridiculously high and unjustifiable cost. It's also noteworthy that when clients enquire about low-cost options, the answer is "do-it-yourself". WHERE IS THE MIDDLE GROUND??!!

 

[Steven Barrett]

That's exactly my point. The commission/AUM stuff is not explicitly paid for so the adviser gets away with charging, indirectly, very high fees. This is so obviously not in the best interest of the client. Lets do the math. I'll keep it simple.

Individual, with an existing pension fund of €250,000 who wishes to contribute €15k a year. Let's look at the final fund in 25 years using a sensible growth rate of 5% under 2 scenarios - (a) where the client gets the full 5% return and (b) where the client gets 4.5% return because his adviser is taking 0.5%

Final fund values are: (a) €1,562,495 and (b) €1,419,837. In other words, the total cost of the advice is €142,658

The justification for this fee seems to be a combination of hand-holding and compliance. Seems to me a ridiculously high and unjustifiable cost. It's also noteworthy that when clients enquire about low-cost options, the answer is "do-it-yourself". WHERE IS THE MIDDLE GROUND??!!

Lots of people want their hands held when it comes to their finances. That's why they talk to me!!

You have misquoted me. I said people look for the "lowest cost", which is to do it yourself. The middle ground is where a potential client is willing to pay a reasonable fee to ensure that their issue is looked after correctly, efficiently and with the minimum fuss to them.


Not all advisors charge extortionate fees and lots offer value to clients. Picking the most expensive fees as your example isn't a true reflection of how most advisors operate.


Steven
http://www.bluewaterfp.ie (www.bluewaterfp.ie)

 

[elacsaplau]

I didn't pick the most extortionate fees. When I have been asked for fee scales in the past, that's what I've been quoted. When I enquired about volume discounts, I have been told that they don't typically kick in until higher amounts. The figures quoted are simple maths and are outlandish in my opinion. I could have used higher growth rates which would have just increased further the crazy costs.

Anyway, you said yourself that clients won't explicitly pay the fees (as a fee) that they are being implicitly charged (as a commission/AUM charge).
This is the problem your profession has - like it or nay. This is the very reason that I said at the outset that:

….If CFPs really wanted to distinguish themselves, they would be fee only. Problem is working exclusively on this basis may not generate sufficient income.

 

[Cervelo]

Individual, with an existing pension fund of €250,000 who wishes to contribute €15k a year. Let's look at the final fund in 25 years using a sensible growth rate of 5% under 2 scenarios - (a) where the client gets the full 5% return and (b) where the client gets 4.5% return because his adviser is taking 0.5%

Final fund values are: (a) €1,562,495 and (b) €1,419,837. In other words, the total cost of the advice is €142,658

Not been smart here elacsaplau but if my advisor handed me €1,419,837 after 25 years, I would have no problem in paying them €142,658 in fees

 

[elacsaplau]

Not been smart Cervelo but you got to luv this site. You'll have guys on here delighted with themselves for saving €100 in the annual insurance switching farce or the annual utility switching farce and others in even greater delirium for getting one over on the banks by getting the mortgage switcher bonus. Meanwhile, paying a middle man an average of over €5,500 a year (as per the example) for holding hands and compliance activity is no bother at all - sure didn't he have a lovely leather folder?!

Mods: I am happy to publish the fee scales I was given (obviously suitably redacted) to show that the fees quoted were not out line with the market as Steven infers?

 

[Marc]

So, the theme of the thread is that everyone would be well advised to seek competent, professional planning advice well before they actually reach retirement.

The benefits of doing so are clearly being better prepared, having a better understanding of risks such as inflation, longevity, sequencing risks. Some of the clear benefits of engaging a professional adviser include paying less tax, having better investment composure and having access to the most competitive pricing available in the market today.

However, the provision of professional, competent and insured advice requires that a fee is paid.

The application of VAT at 23% to professional services means that many financial planners arrange to be paid for inter mediation services which are exempt from VAT and may be drawn directly from pre-tax funds (ie pension accounts)

The effect of this is that the overall fee is 23% smaller and can be paid from pre-tax earnings saving up to another 52%. Just on this point, wearing my www.sfpi.ie hat we submitted a proposal to the Dept Finance earlier this year that Financial Planning fees should be exempted from VAT to prevent the bias in the tax system that pushes planners into intermediation.

However, given the simple fact that any fee (hourly rate, fixed retainer etc) will always represent some percentage of a client's net worth then the real issue simply boils down to one of perceived value for money. Some people will always think that any advice fee is too high given what they perceive an adviser is actually doing.

Naturally, the real issue in any business is not to focus on gross turnover but net profit. I agree, if profit margins are exceptionally high then, yes, there is an argument that advice fees should come down. But I recently reviewed the published accounts of 100 financial advice firms in Ireland and I just don't see supernormal profit margins.

That said, if a broker sells a pension contract, never reviews and never revisits the client for 40 years then, yes, I accept that the client should not be paying a 0.5%pa trail commission.

However, this year a line was added to the Consumer Protection Code (CPC) which requires regulated financial advisers to demonstrate ONGOING suitability of a contract.

This requires an ongoing engagement that is considerably greater than the holding hands/compliance argument.

Since initial suitability is based on clearly defined "Know Your Client" principles as set out in the CPC then it is reasonable to assume that ongoing suitability can only really be demonstrated by those advisers who keep their records up to date and actively advise their clients (not necessarily to actively make changes) but to actively engage with clients and to make firm recommendations (which could of course include the recommendation to do nothing)

 

[elacsaplau]

I went pension shopping on behalf of my wife recently - this type of stuff bores her senseless - so she would probably just have accepted the fees proposed and got on with her life. I don't mind this stuff. Division of labour et al.

The figures I quoted are indeed representative of what I was offered. I checked on Steven's site and the fees are actually higher than those upon which I did my math - albeit with a rider that large volume discount applies at some, non-specified, level. So much for the accusation that I picked the "most expensive" fees!

Why should we have to pay €140K plus so that you can satisfy some ridiculous Know Your Client protocol? It's insane. What is there to know? An individual wants to save for her retirement in a tax effective way - she can make contributions within prescribed limits whilst she is in non-pensionable employment - what else is there to it? There must be an efficient way of satisfying this requirement without the drain on returns that these trail commissions siphon surreptitiously away? Put another way, if a guy was actually spending €140k of time getting to know my wife, I'd be somewhat, nay very, concerned!!

Trail commissions act as a very unwelcome drag on client returns. Brokers get away with them because of characters like my wife (high trust) and their unseen, stealthy nature.

They are, however, so clearly not in the best interests of clients like my wife. You can deny this 'til the cows come home but in your heart of hearts, you know.

Imagine a conversation where a client like my wife goes for an annual review meeting with an advisor. Imagine that there had been no other meetings during the year and that during this meeting, it was agreed that there should be no change in contribution levels or in the funds in which the pension account was invested. Is it even potentially conceivable that the adviser would point out to my wife, that he was paid €5,000 from her fund that year in part to pay for that particular meeting and in part to cover his getting to know her expenses?

 

[Marc]

ridiculous Know Your Client protocol?

The speed limit on the road outside my house is 50. Its some ridiculous safety protocol.

I should be allowed to drive as fast as I like, after all, I've never had a crash.

Society doesn't work like that. We have to move at the speed of the slowest member

Regulated advisers are not allowed to decide which regulations apply to you. They all apply or you do it yourself. There is no middle ground

 

[elacsaplau]

Marc

For some reason??, you seem to not understand that it is the cost that you have attributed to Knowing Your Customer protocols that I find ridiculous. Knowing the Customer is fine and dandy so long as it doesn't cost silly amounts. Interestingly, I note that you are not contradicting the level of fees.

I stand by what I've written. I accept that it is critical of the modus operandi that I have encountered from supposedly good practitioners in your industry.

Regulated advisers are not allowed to decide which regulations apply to you. They all apply or you do it yourself. There is no middle ground

This is really a pitiful response regarding the key point in recent posts that brokers get away with earning more from trail commissions that they would from explicitly charging fees. Not only does Steven accept this - it was he who actually volunteered this!

It is also pitiful that what you seem to be admitting is that someone who just wants a little guidance form an adviser can't have it - in the example used, you pay the €140K (and more if markets are favourably) or off with ya.

Anyway, I know from old that we are unlikely to agree - so I think I'll leave it to others to chime in. It will be interesting to see whether other posters share my views on the amount of time that they would be comfortable with an adviser spending in getting to know his/her spouse!

 

[Jimmy Dee]

I love it. But what about the second elephant, which I admit is quite a mouthful, and which IMO is actually the more damaging aspect of Irish pension structures:
"- unattractive terms of the pension products available in Ireland coupled with the monopoly of the current providers backed by lazy + (and complicit or or not very clever?) government and civil service and peddled by advisers unwilling to be open and transparent about the products they sell as intermediaries"
Remember you can fire an adviser, but the consequences of trying to change your pension may not be so simple.

 

[Leper]

I find the debate on this thread intriguing. A few years ago I looked at getting financial advice for my retirement and to be honest the sales pitches in Ireland were as boring as sunbathing on Tramore Beach during heavy winter snowing. Nothing was clear other than what I would be charged commissions/fees and nothing solid on what I might gain or lose. But, the one constant was that high fees payable would be taken win or lose and at all stages forward. I felt I was augmenting the existence of others.

At the same time my sister (living in the UK) was doing the same thing and she received hard data of what her "investments" would surely earn and risk where there was risk. Fees payable depended on profits/losses too, but nothing like the high fees in Ireland. Like Ecapsaplau's wife above, my sister and I found our processes extremely boring but the Irish process was like dealing with the Secret Service.

If there are any Financial Retirement Planners out there, it is time your products are made fully readable, understandable and customer orientated rather than Seller focused. You can make a living by telling the full truth, you know!

I don't have any financial qualifications (in fact I have no qualifications whatsoever). But, at present my humble retirement plan is working which augments my PS pension. I know my plan can founder (I'm not stupid and have a Plan B), but nearly a year into retirement the augmenting continues and I don't have fees/commissions to pay.

 

[Steven Barrett]

Anyway, you said yourself that clients won't explicitly pay the fees (as a fee) that they are being implicitly charged (as a commission/AUM charge).

This is really a pitiful response regarding the key point in recent posts that brokers get away with earning more from trail commissions that they would from explicitly charging fees. Not only does Steven accept this - it was he who actually volunteered this!

I was referring to implementation fees. For a €1m ARF, some insurance companies will pay up to €50,000 in commission. Simply madness to ever take that amount but it has been done and still is being done.


You can dismiss the compliance work that we have to do and you may think it adds no value. But we work in a heavily regulated industry and compliance takes up a large part of the work that we have to do for clients. It is seen as more of a hassle for clients and because the time spent on it is not in front of the client, it is not valued by them. But we cannot ignore it or we will be shut down.

The Know Your Client is also very important. The better you understand a client and what makes them tick, the better you can advise them. Pension advice is seen as a commodity by a lot of people, but it is not. Not all advisors are the same and different advisors offer different levels of service. One client of mine was reaching retirement. The advisor who managed his work pension scheme literally sent him an ARF proposal form in the post to fill out. No investment advice, no assessment of his personal situation or plans for retirement. He was going to be paid €20,000 for this ARF. When questioned about the massive commission, the reply was "That's just the way it is".

It's up to you to decide what represents value to you. You obviously think my services are too expensive for what you want and that's fine. I have no problem with that. But I disclose all my fees to clients. You were able to see them easy enough on my website as they are on the banner on the front page.

We do not disagree as much as this thread sometimes suggests.

Have to get back to work. Lots of people want stuff done before Christmas!!


Steven
http://www.bluewaterfp.ie (www.bluewaterfp.ie)

 

[elacsaplau]

Thanks Steven,

Firstly, I wish to acknowledge and applaud your customary reasoned tone in what must be a difficult debate.

I, too, need to focus on he day job. Over the next while, I would like to continue this debate because I genuinely believe the drag on returns is too high. As mentioned, in the meantime, it would be great to get others to chime in now.

One point in passing is that what I've encountered can be characterised as a "one size fits all" approach. In my/our case, I do need help in identifying the best low-cost vehicle to invest the this pension and I would like to discuss how best to invest a fully invested return seeking portfolio - as in whether simply to invest 100% in a particular world equity index or whether there is merit in a certain amount of hedging and tilting. I would be more than happy to pay a reasonable explicit fee for such a discussion - whether such fees are deducted from the fund or not. There should not be excessive work involved in preparing for such a discussion as it's the sort of stuff that I'd expect a talented adviser to be prepared for.

Following on from this discussion, obviously there's a pile of paperwork to be completed to set the pension up and all of this certainly has a cost.

My problem is what happens next. We believe (well really I as the better half lets me pull rank on this one!) that once the plan is up and running - let it roll. We believe in trying to get the strategy right up front and then not trying to chop and change it regularly. We are not trying to time the market in our pension plans, treating them as core investments. Of course, a strategic review may be required periodically - for which we would again be more than happy to pay for.

It is clear that there must be very onerous regulatory requirements. To be frank, I have had professional dealings with the Central Bank and I have found them particularly rudderless. I suspect that there is a significant chance that these requirements are a pain for the adviser and offer very little added value to many clients and clearly come with huge cost.

I hope what I'm saying is clear. My questions change as we work through this thread. I am happy to pay you well for information and advice I value but only wish to pay the absolute minimum for, what I perceive, as non-value added activity. So my question now is whether there is any way to minimise the compliance cost and burden so that the existing drag on returns is lowered?

 

[Steven Barrett]

Elacsaplau, I think if we worked at Ted Baker, there'd be a hug being offered!

I give prices on my website but I can't factor for an individual's specific situation or knowledge level. The charges page would be unreadable and be impossible to manage. When I sit down and speak to people, I am able to assess what their requirements are and can give more specific results.

I do charge some level of ongoing fee though. Some pay by standing order, others through their fund. It's their choice. I have had too many cases of people who told me they won't need any ongoing advice. They tend to be the ones who are always asking questions! Never enough to send them an individual invoice but I have to spend time on them and they're not paying me for the work I am doing. I am also listed as the agent of the policy with the provider so they come to me with any queries (and there are always queries). I answer these most of the time without having to bother the policyholder. And then there's the mistakes people can make by trying to do everything themselves. Pensions rules are incredibly complex. I don't know everything but I know a lot and I know who to ask for more complex situations. All saves a lot of time and potentially money.

Anyway, if you want to give me a shout, my mobile is 086 020 6087 and my email is steven@bluewaterfp.ie