Gordon Gekko
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I wasn’t actually. There is an excellent planner who I’ve met in the largest firm. The others have some really good people, top pensions for experts, people who work in academia also.
When should I think about retirement
- Thread starter Marc
- Start date
I wasn’t actually. There is an excellent planner who I’ve met in the largest firm. The others have some really good people, top pensions for experts, people who work in academia also.
Nobody seems to want to talk about the institutional costs of pensions here. I don't mind paying an adviser if they can save me costs and give decent advice. There are generally a few types of charges for pensions:
There can be a big difference in the charges for different pension plans. Remember that pensions with higher charges may or may not perform better than similar pensions with lower charges.
That's all a bit ironic when you consider an adviser fee.
Deloitte in a study compared a typical Irish pension plan to a deposit account and the result was practically the same for a 4% growth rate assumption for the pension. How can you grow a pension with these sort of costs? Why would you even compare a deposit account to any type of investment? Perhaps some of the interested parties on the site can advise?
- Initial charges to set up your plan, such as the allocation rate (this could be say 3-5%), I have heard of worse and also an entry charge (lump sum). .
- Ongoing charges to manage your pension plan.
- These can include a monthly policy fee, could be a small monthly fee.
- Bid-offer spread
- Yearly fund management charge
There can be a big difference in the charges for different pension plans. Remember that pensions with higher charges may or may not perform better than similar pensions with lower charges.
That's all a bit ironic when you consider an adviser fee.
Deloitte in a study compared a typical Irish pension plan to a deposit account and the result was practically the same for a 4% growth rate assumption for the pension. How can you grow a pension with these sort of costs? Why would you even compare a deposit account to any type of investment? Perhaps some of the interested parties on the site can advise?
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Some really important points to address
"Also, what about firms who provide all of the advice and manage the money? e.g. they charge 1% for everything. Can’t get much more transparent than that."
Firstly to acknowledge that good planners can work in all organisations. I used to work in a bank. The bank was fined for systematic mis-selling - this doesnt make me a bad person.
However, to put it bluntly until this year, these were amongst the least transparent fees in the market.
They absolutely and categorically DONT charge 1% for everything.
Mifid II now requires an ex post (backwards looking) fee statement which will set out the actual fees incurred during the year.
It will now be harder for this myth to perpetuate.
The actual fees incurred include but not limited to
1% PLUS VAT
Plus dealing charges to buy and sell
Plus foreign exchange charges
Plus stamp duty where relevant
Plus bid offer spreads
Plus fund management charges on investment funds
While they might not charge on their own funds they will of course earn a management fee on their own funds
They may also earn a dealing fee on the securities within their own funds
Commissions on funds
Etc etc etc
In short, it's not anywhere near 1% expect to see 2% or 3%pa
As Woody Allen says;"a stockbroker is someone who invests your money, until it's all gone"
Allocation rates
In a similar manner allocation rates are frequently mentioned on askaboutmoney.
Life assurance companies have agents. The agents sell their policies. The agents are paid a commission.
The rate of commission is determined by a table of commission options.
Each option states an allocation rate and an annual management charge.
Now I've been looking at these things for 25 years. My first degree is in economics. I've studied mathematics and statistics. I work with actuaries and people who have trained as aerospace engineers.
I have to say I find commission tables bewildering. They read like mobile phone tarrifs.
The phrase often used by regulators around the world is "confusion marketing"
To be absolutely clear.
AN ALLOCATION RATE SIMPLY RELATES TO THE AMOUNT OF COMMISSION YOU ARE PAYING
It's not free money from the life company
You are not receiving an enhancement
Your adviser is not improving your terms
You are not getting a special deal
You are simply being drawn into the contract and the terms of that contract are being set by the agent of the life assurance company.
Once the contract is signed you will pay the charges and if you subsequently discover that these are not what you were led to believe, unlucky. The insurance company will recover its costs by either a higher annual fee or an early surrender penalty.
It makes no difference what you do, you will pay the charges. If you remain with the contact you will pay the annual charges, if you try to get out of it you will pay the early surrender charge.
This is how the life company protects itself and its agent.
Until recently most consumers in Ireland believed that they were only paying an annual management charge and typically they would have been told that this was 1%pa or less.
The packaged retail insurance and investment regulations (PRIIPS) required that, from this year, advisers provide you with a Key Investment Document (KID) which sets out the impact of the charges.
Bizarrely, these regulations do not apply to pension contracts. Equally, they require that the agent provides the document at the point of sale.
However, what these documents confirm is that the actual cost you pay including then commission is more than 1%. In some instances it's more than 2%.
If you want the adviser to act as YOUR agent. Then you must pay by a fee.
Here's where the symantics allows for an argument with less informed posters who will maintain I'm wrong even when I'm trying to explain how to obtain the service they so desperately crave. Here goes anyway...
Unbundling
In order to receive the most sophisticated solution you need to unbundle the various components of a pension.
The test I always suggest is simply the number of forms you are being asked to complete.
If it's just one form from an insurance company then you have a packaged retail product and most of your costs are hidden from view.
Despite the lack of transparency, this is almost always the most appropriate and suitable solution for "smaller" pensions and small regular contributions.
This is not to say that these contracts are value for money. Only that that the alternative is simply to be disenfranchised from having a pension at all. This is just a fact of the economics of distribution of private pensions.
Ireland is too small to be able to economically provide pension contracts for the workforce.
At the recent consultation on auto enrollment the government publicly chided the pensions industry for its failure to achieve more universal pensions coverage.
If you are fortunate enough to have at least €80,000 in your pension fund (per type of pension not in aggregate) then you should consider an unbundled solution.
This involves employing an adviser as your agent to arrange a pension trustee, a custodian and a fund management solution.
Each of these parts are interchangeable and allow for the lowest cost solution overall.
Your adviser will agree their fee with you (known as customer agreed remuneration) rather than be paid a commission by a life company for selling a contract.
The most common fee structure globally is for the adviser to be paid an annual fee from the pension account for providing an ongoing service.
The key distinction being that this fee is disclosed annually and can be turned off by the client - something that can't happen on a traditional life assurance contract.
Interestingly I am currently working with an adviser who has just been sacked by his client after many years of in my view excellent advice and service.
The funny thing is that the client also believes he has received excellent advice and service.
He just doesn't want to pay for ongoing advice anymore. He can't see the point.
Whilst free to sack his adviser because he can't see the value he has requested a meeting to discuss how his pension works.
The various parties to his pension are all explaining that they don't deal directly with clients (or they would have to charge more for their service) and that if he wants advice he needs to pay an adviser for it.
This speaks to the crux of this thread and the tension created by the financial service providers and those seeking a DIY pension solution.
Deep down we all want something for nothing.
We perceive that surely it can't be that hard to do, I'll do it myself.
Here, these pension thingys are complex as hell, can someone tell me how I can do it myself....
"Also, what about firms who provide all of the advice and manage the money? e.g. they charge 1% for everything. Can’t get much more transparent than that."
Firstly to acknowledge that good planners can work in all organisations. I used to work in a bank. The bank was fined for systematic mis-selling - this doesnt make me a bad person.
However, to put it bluntly until this year, these were amongst the least transparent fees in the market.
They absolutely and categorically DONT charge 1% for everything.
Mifid II now requires an ex post (backwards looking) fee statement which will set out the actual fees incurred during the year.
It will now be harder for this myth to perpetuate.
The actual fees incurred include but not limited to
1% PLUS VAT
Plus dealing charges to buy and sell
Plus foreign exchange charges
Plus stamp duty where relevant
Plus bid offer spreads
Plus fund management charges on investment funds
While they might not charge on their own funds they will of course earn a management fee on their own funds
They may also earn a dealing fee on the securities within their own funds
Commissions on funds
Etc etc etc
In short, it's not anywhere near 1% expect to see 2% or 3%pa
As Woody Allen says;"a stockbroker is someone who invests your money, until it's all gone"
Allocation rates
In a similar manner allocation rates are frequently mentioned on askaboutmoney.
Life assurance companies have agents. The agents sell their policies. The agents are paid a commission.
The rate of commission is determined by a table of commission options.
Each option states an allocation rate and an annual management charge.
Now I've been looking at these things for 25 years. My first degree is in economics. I've studied mathematics and statistics. I work with actuaries and people who have trained as aerospace engineers.
I have to say I find commission tables bewildering. They read like mobile phone tarrifs.
The phrase often used by regulators around the world is "confusion marketing"
To be absolutely clear.
AN ALLOCATION RATE SIMPLY RELATES TO THE AMOUNT OF COMMISSION YOU ARE PAYING
It's not free money from the life company
You are not receiving an enhancement
Your adviser is not improving your terms
You are not getting a special deal
You are simply being drawn into the contract and the terms of that contract are being set by the agent of the life assurance company.
Once the contract is signed you will pay the charges and if you subsequently discover that these are not what you were led to believe, unlucky. The insurance company will recover its costs by either a higher annual fee or an early surrender penalty.
It makes no difference what you do, you will pay the charges. If you remain with the contact you will pay the annual charges, if you try to get out of it you will pay the early surrender charge.
This is how the life company protects itself and its agent.
Until recently most consumers in Ireland believed that they were only paying an annual management charge and typically they would have been told that this was 1%pa or less.
The packaged retail insurance and investment regulations (PRIIPS) required that, from this year, advisers provide you with a Key Investment Document (KID) which sets out the impact of the charges.
Bizarrely, these regulations do not apply to pension contracts. Equally, they require that the agent provides the document at the point of sale.
However, what these documents confirm is that the actual cost you pay including then commission is more than 1%. In some instances it's more than 2%.
If you want the adviser to act as YOUR agent. Then you must pay by a fee.
Here's where the symantics allows for an argument with less informed posters who will maintain I'm wrong even when I'm trying to explain how to obtain the service they so desperately crave. Here goes anyway...
Unbundling
In order to receive the most sophisticated solution you need to unbundle the various components of a pension.
The test I always suggest is simply the number of forms you are being asked to complete.
If it's just one form from an insurance company then you have a packaged retail product and most of your costs are hidden from view.
Despite the lack of transparency, this is almost always the most appropriate and suitable solution for "smaller" pensions and small regular contributions.
This is not to say that these contracts are value for money. Only that that the alternative is simply to be disenfranchised from having a pension at all. This is just a fact of the economics of distribution of private pensions.
Ireland is too small to be able to economically provide pension contracts for the workforce.
At the recent consultation on auto enrollment the government publicly chided the pensions industry for its failure to achieve more universal pensions coverage.
If you are fortunate enough to have at least €80,000 in your pension fund (per type of pension not in aggregate) then you should consider an unbundled solution.
This involves employing an adviser as your agent to arrange a pension trustee, a custodian and a fund management solution.
Each of these parts are interchangeable and allow for the lowest cost solution overall.
Your adviser will agree their fee with you (known as customer agreed remuneration) rather than be paid a commission by a life company for selling a contract.
The most common fee structure globally is for the adviser to be paid an annual fee from the pension account for providing an ongoing service.
The key distinction being that this fee is disclosed annually and can be turned off by the client - something that can't happen on a traditional life assurance contract.
Interestingly I am currently working with an adviser who has just been sacked by his client after many years of in my view excellent advice and service.
The funny thing is that the client also believes he has received excellent advice and service.
He just doesn't want to pay for ongoing advice anymore. He can't see the point.
Whilst free to sack his adviser because he can't see the value he has requested a meeting to discuss how his pension works.
The various parties to his pension are all explaining that they don't deal directly with clients (or they would have to charge more for their service) and that if he wants advice he needs to pay an adviser for it.
This speaks to the crux of this thread and the tension created by the financial service providers and those seeking a DIY pension solution.
Deep down we all want something for nothing.
We perceive that surely it can't be that hard to do, I'll do it myself.
Here, these pension thingys are complex as hell, can someone tell me how I can do it myself....
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+1
Should be required reading for all Irish people considering entering into a pension.. Thanks for that.
PS the next thing to research is how these funds managed by the local pension providers actually perform. I find it difficult to actually find any true data on performance. Maybe some of the fund advisers on here can reveal that data in a spirit of transparency?
Should be required reading for all Irish people considering entering into a pension.. Thanks for that.
PS the next thing to research is how these funds managed by the local pension providers actually perform. I find it difficult to actually find any true data on performance. Maybe some of the fund advisers on here can reveal that data in a spirit of transparency?
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We already publish quarterly an analysis of the main investment options available in Ireland for the advisers we work with.
What's really interesting for me as a practitioner is the degree of dispersion of fund performance over any period.
I recently was asked for an opinion on some investments.
Analysis of a “portfolio”
One of the biggest challenges facing Financial Advisers in Ireland today is making the transition from the traditional product-focused approach to a more client-centric financial planning approach and in doing so, validating an annual retainer fee.
The focus here is on solid risk profiling and consideration of the tax status of the client - both ordinarily required by the Consumer Protection Code.
This analysis is a real case study that vividly illustrates these points. There is so much “wrong” with these client’s existing investments that its hard to know where to start.
I should start by saying that hindsight portfolio management always has the advantage. But some of the issues raised by this analysis were known to prudent investors in 2014 (I wrote extensively at the time about how many Absolute Return strategies could be replicated with a relatively naive 40%/60% Equity Bond portfolio for example.)
Equally, we knew that Global REITS make more sense for investors than property funds (better liquidity for one), even if we didn't know in advance how Brexit would impact this particular UK Commercial Property fund, we did know that the antidote to something like Brexit has always been to be globally diversified.
Finally, we've always known that the only free lunch when it comes to investing is diversification, so this is a case study in how a diversified portfolio improves the risk adjusted returns for clients compared to an adviser picking plausible sounding marketing stories.
These clients are probably far from "average investors" and we can't infer that the degree to which they have missed out on market returns (that were there for the taking) is in any way representative of the population at large. But I do believe that the approach taken of picking one or two popular marketing stories still represents the Modus Operandi of many advisers in Ireland today.
These investors invested in a Life Assurance Bond in 2014 and placed their whole investment in just two funds
· Property 50%
· Absolute Return 50%
Investment Risk and Return Characteristics
For the 4 years ending Sept 2018 the client portfolio has the following characteristics:
Average annual return in Euro 0.60%pa
Average annual volatility 3.47%pa (ESMA 3)
Source FE
If the adviser had simply put the clients into an equivalent-risked ”multi- asset” portfolio from any one of the Insurance Companies in Ireland (including the one they are with) they would have added considerably to the returns
Taking an average of 4 randomly selected multi asset portfolios with the same risk characteristics and that were available in 2014 the average portfolio returned 2.08%pa over the last 4 years.
We just added nearly 1.5%pa (1.4825%) over the client’s return for each of the last 4 years. Job done!
Standard deviation is an appalling measure of the risk of a property fund
Over the 5 years ending September 2018 the volatility of the Property Fund that the client is invested in was just 4.33%. Something doesn't seem right.
Over the 15 years ending September 2018 the volatility of the Property Fund was 5.79%
Source FE
Naturally, this leads many investors and their advisers to conclude that property funds are “low risk”
However, the peak to trough decline between 16/8/2007 and 8/7/2009 was -36.47% hardly low risk. Source FE
The effect of an appraisal valuation (these look like “steps” on a graph) makes the variability of the property fund seem less than a daily priced equity fund. But in reality, they both lose the same over this time period (compared to FTSE All World in Euro which declined by 33.04% over the same period).
We need to “restate” the risk of the portfolio to reflect this?
If we substitute the volatility of the Insurance Company's own Global Real Estate Fund for the client's Property Fund, then the restated volatility of the portfolio is now 6.5 over the last 4 years. Even this paints an interesting story as the available REIT fund under performed the Global REIT fund we use in our portfolios by 5.7%pa over the 4 years. But that's another story about using best-in-class.
Let’s make the same comparison as before with the same 4 randomly selected Life Company multi-asset portfolios but this time with a step-up in risk, so that the reference volatility is now increased to around 6.5.
We now have an average annual return for the higher risked (ESMA 4) Life Company multi-asset portfolios of 4.785%pa over the last 4 years compared to the client's actual portfolio return of 0.60%pa.
Now we are adding 4.185%pa each year compared to the client portfolio.
But we are still letting the original adviser drive the portfolio construction process…..
What is the "right" risk for this client?
We tested the client’s risk tolerance and found that the client has a higher risk tolerance than we might think by looking at their current portfolio.
Our analysis confirms that we are still being far too conservative with our portfolio comparisons.
Stepping up the risk again to a volatility of more like 10 (ESMA 5), the average annual return of our 4 life companies is now 6.88%pa compared to the client’s actual return of 0.60%pa.
Simply matching the client to a more appropriately risked multi-asset portfolio would on average have added 6.28%pa for these clients for each of the last 4 years.
On an investment of €100,000 that’s €6280 each year or €27,586 compounded up over 4 years on average!!
We’re not done yet however….
Unsuitable contract?
The clients jointly earn around €40,000pa and are therefore basic rate taxpayers paying income tax at 20% and Capital Gains Tax at a rate of 33% yet have been invested in a contract paying Exit Tax at 41% on all income and gains.
Our analysis indicates that on average, allowing for the effects of more beneficial taxation and lower charges, a tax efficient portfolio should add around 0.75%pa to investment returns compared to an Insurance Company fund subject to exit tax.
The comparison is now with our Irish specific tax-optimised portfolios.
Using the same approach as before, we’ll take the average of 4 portfolios so as to not overstate the case.
The average annual return of these portfolios over the last 4 years was 10.255%pa
We therefore would have added on average 9.655%pa for each of the last 4 years.
In addition to the better overall performance, we believe on average these portfolios would have added an additional 0.75% through a combination of better tax efficiency and lower overall costs.
Not having to pay the life levy, for example, is worth 0.20%pa over 5 years.
So, adding those two together we get a total of 10.40%pa
Compounding that up we get €48,551 over 4 years.
The moral of the story is that adviser alpha is real and can be quantified after the fact by simply comparing a clients realised returns with the theoretical returns that they should have received for the investment risk that they took less reasonable costs. Remember that the portfolios presented at the end of this analysis are implemented using Index funds .
I'm not claiming that we can always add 10% a year but I think I've demonstrated that by better risk profiling and consideration of the client's tax status, an adviser can demonstrate clear added value and thereby justify their ongoing advice fees.
What's really interesting for me as a practitioner is the degree of dispersion of fund performance over any period.
I recently was asked for an opinion on some investments.
Analysis of a “portfolio”
One of the biggest challenges facing Financial Advisers in Ireland today is making the transition from the traditional product-focused approach to a more client-centric financial planning approach and in doing so, validating an annual retainer fee.
The focus here is on solid risk profiling and consideration of the tax status of the client - both ordinarily required by the Consumer Protection Code.
This analysis is a real case study that vividly illustrates these points. There is so much “wrong” with these client’s existing investments that its hard to know where to start.
I should start by saying that hindsight portfolio management always has the advantage. But some of the issues raised by this analysis were known to prudent investors in 2014 (I wrote extensively at the time about how many Absolute Return strategies could be replicated with a relatively naive 40%/60% Equity Bond portfolio for example.)
Equally, we knew that Global REITS make more sense for investors than property funds (better liquidity for one), even if we didn't know in advance how Brexit would impact this particular UK Commercial Property fund, we did know that the antidote to something like Brexit has always been to be globally diversified.
Finally, we've always known that the only free lunch when it comes to investing is diversification, so this is a case study in how a diversified portfolio improves the risk adjusted returns for clients compared to an adviser picking plausible sounding marketing stories.
These clients are probably far from "average investors" and we can't infer that the degree to which they have missed out on market returns (that were there for the taking) is in any way representative of the population at large. But I do believe that the approach taken of picking one or two popular marketing stories still represents the Modus Operandi of many advisers in Ireland today.
These investors invested in a Life Assurance Bond in 2014 and placed their whole investment in just two funds
· Property 50%
· Absolute Return 50%
Investment Risk and Return Characteristics
For the 4 years ending Sept 2018 the client portfolio has the following characteristics:
Average annual return in Euro 0.60%pa
Average annual volatility 3.47%pa (ESMA 3)
Source FE
If the adviser had simply put the clients into an equivalent-risked ”multi- asset” portfolio from any one of the Insurance Companies in Ireland (including the one they are with) they would have added considerably to the returns
Taking an average of 4 randomly selected multi asset portfolios with the same risk characteristics and that were available in 2014 the average portfolio returned 2.08%pa over the last 4 years.
We just added nearly 1.5%pa (1.4825%) over the client’s return for each of the last 4 years. Job done!
Standard deviation is an appalling measure of the risk of a property fund
Over the 5 years ending September 2018 the volatility of the Property Fund that the client is invested in was just 4.33%. Something doesn't seem right.
Over the 15 years ending September 2018 the volatility of the Property Fund was 5.79%
Source FE
Naturally, this leads many investors and their advisers to conclude that property funds are “low risk”
However, the peak to trough decline between 16/8/2007 and 8/7/2009 was -36.47% hardly low risk. Source FE
The effect of an appraisal valuation (these look like “steps” on a graph) makes the variability of the property fund seem less than a daily priced equity fund. But in reality, they both lose the same over this time period (compared to FTSE All World in Euro which declined by 33.04% over the same period).
We need to “restate” the risk of the portfolio to reflect this?
If we substitute the volatility of the Insurance Company's own Global Real Estate Fund for the client's Property Fund, then the restated volatility of the portfolio is now 6.5 over the last 4 years. Even this paints an interesting story as the available REIT fund under performed the Global REIT fund we use in our portfolios by 5.7%pa over the 4 years. But that's another story about using best-in-class.
Let’s make the same comparison as before with the same 4 randomly selected Life Company multi-asset portfolios but this time with a step-up in risk, so that the reference volatility is now increased to around 6.5.
We now have an average annual return for the higher risked (ESMA 4) Life Company multi-asset portfolios of 4.785%pa over the last 4 years compared to the client's actual portfolio return of 0.60%pa.
Now we are adding 4.185%pa each year compared to the client portfolio.
But we are still letting the original adviser drive the portfolio construction process…..
What is the "right" risk for this client?
We tested the client’s risk tolerance and found that the client has a higher risk tolerance than we might think by looking at their current portfolio.
Our analysis confirms that we are still being far too conservative with our portfolio comparisons.
Stepping up the risk again to a volatility of more like 10 (ESMA 5), the average annual return of our 4 life companies is now 6.88%pa compared to the client’s actual return of 0.60%pa.
Simply matching the client to a more appropriately risked multi-asset portfolio would on average have added 6.28%pa for these clients for each of the last 4 years.
On an investment of €100,000 that’s €6280 each year or €27,586 compounded up over 4 years on average!!
We’re not done yet however….
Unsuitable contract?
The clients jointly earn around €40,000pa and are therefore basic rate taxpayers paying income tax at 20% and Capital Gains Tax at a rate of 33% yet have been invested in a contract paying Exit Tax at 41% on all income and gains.
Our analysis indicates that on average, allowing for the effects of more beneficial taxation and lower charges, a tax efficient portfolio should add around 0.75%pa to investment returns compared to an Insurance Company fund subject to exit tax.
The comparison is now with our Irish specific tax-optimised portfolios.
Using the same approach as before, we’ll take the average of 4 portfolios so as to not overstate the case.
The average annual return of these portfolios over the last 4 years was 10.255%pa
We therefore would have added on average 9.655%pa for each of the last 4 years.
In addition to the better overall performance, we believe on average these portfolios would have added an additional 0.75% through a combination of better tax efficiency and lower overall costs.
Not having to pay the life levy, for example, is worth 0.20%pa over 5 years.
So, adding those two together we get a total of 10.40%pa
Compounding that up we get €48,551 over 4 years.
The moral of the story is that adviser alpha is real and can be quantified after the fact by simply comparing a clients realised returns with the theoretical returns that they should have received for the investment risk that they took less reasonable costs. Remember that the portfolios presented at the end of this analysis are implemented using Index funds .
I'm not claiming that we can always add 10% a year but I think I've demonstrated that by better risk profiling and consideration of the client's tax status, an adviser can demonstrate clear added value and thereby justify their ongoing advice fees.
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We are into Page 4 of this thread which initially I thought would occupy 3 or 4 posts. The more I read, the more I think anybody with a lumpsum to invest on retirement would be better off toddling down to the local post office at some quiet time and asking for free help in choosing guaranteed return government savings. There's no commission to pay, your investment return is guaranteed and you are even helping to keep that post office open. Throw a few bob on Prize Bonds too (advertised at length on another thread here) which guarantee no loss and the possibility of a decent win.
On the other hand you can toddle down to your Investment Advisor who will charge to inform you of what you could have get free in the post office. But, he is in-the-know (and after reading through nearly four pages we learn this is a myth). The one over-riding lesson here appears that putting your trust in Irish Financial Advisors is nearly akin to visiting the Bookies in the hope of a win.
Anybody looking in please feel free to tear the above two paragraphs apart, if you can. From what have learnt here that after paying commissions, tax, risk, etc you can have little or nothing at the end of the day.
On the other hand you can toddle down to your Investment Advisor who will charge to inform you of what you could have get free in the post office. But, he is in-the-know (and after reading through nearly four pages we learn this is a myth). The one over-riding lesson here appears that putting your trust in Irish Financial Advisors is nearly akin to visiting the Bookies in the hope of a win.
Anybody looking in please feel free to tear the above two paragraphs apart, if you can. From what have learnt here that after paying commissions, tax, risk, etc you can have little or nothing at the end of the day.
You’re not far off the mark with some of your analysis.
A really important point to make is: what are your expectations of an adviser?
If you think the job of an adviser is to make some kind of forecast about the future then you are doomed. There are no crystal balls. Your adviser isn’t going to be any better at guessing the future than you are and you shouldn’t be paying them for that.
To your point about state savings;
My own calculations indicate that anything less than 50% in equities in an Irish insurance contract (not a pension) would probably be better off in a state savings bond.
One of the biggest issues facing people in retirement has been described as “reckless conservatism”
Not taking adequate investment risk coupled with a long retirement is a recipe for poverty in old age or at least declining living standards and a reduced inheritance for the family.
Prize bonds however, are hopeless. Read any post by Dub nerd.
A really important point to make is: what are your expectations of an adviser?
If you think the job of an adviser is to make some kind of forecast about the future then you are doomed. There are no crystal balls. Your adviser isn’t going to be any better at guessing the future than you are and you shouldn’t be paying them for that.
To your point about state savings;
My own calculations indicate that anything less than 50% in equities in an Irish insurance contract (not a pension) would probably be better off in a state savings bond.
One of the biggest issues facing people in retirement has been described as “reckless conservatism”
Not taking adequate investment risk coupled with a long retirement is a recipe for poverty in old age or at least declining living standards and a reduced inheritance for the family.
Prize bonds however, are hopeless. Read any post by Dub nerd.
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elacsaplau
Registered User
- Messages
- 892
I'm under time pressure so unfortunately will not be able to post much to this thread today.
I would, however, like to acknowledge that I agree with much of what Marc is saying in post 63.
Marc - can you elaborate of what your mean by both the quoted comments below please?
Point 1 above seems to be a general comment which got my eye - so really just a curiosity. Of more interest to me is point 2 - Isn't this exactly what I'm looking for and how much would this cost to set up assuming it is a straight-forward case (on the understanding that any complications would cost extra)?
I would, however, like to acknowledge that I agree with much of what Marc is saying in post 63.
Marc - can you elaborate of what your mean by both the quoted comments below please?
Point 1 above seems to be a general comment which got my eye - so really just a curiosity. Of more interest to me is point 2 - Isn't this exactly what I'm looking for and how much would this cost to set up assuming it is a straight-forward case (on the understanding that any complications would cost extra)?
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Colm Fagan
Registered User
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Hooray!! The voice of common sense. That's precisely what I'm advocating for the new state- sponsored auto-enrolment pension scheme. You put your pension savings in a special deposit account, the employer's contribution and the state's top-up contribution are also paid into that account on your behalf. The account is credited with interest each month (or quarter). In the current interest rate environment, the average interest rate is likely to be more than 4% a year, which is a multiple of what you could get on a post office account at present. At any date, the rate could be higher or lower than the average but it's most unlikely to fall below zero or to exceed (say) 10% in any year. If auto-enrolment were to start today, operating on the proposed lines, my formula would indicate an interest rate in month 1 equal to the monthly equivalent of 5% a year (and that's net of the management charge of 0.5% a year).
There are no admin fees (other than the 0.5% deduction from the interest rate mentioned above) and no need to spend money on a financial adviser - or anyone else for that matter - on whether you should be in risky or safe assets at different stages in your career. The account earns the same interest rate irrespective of whether you're young or old, working or retired.
You start withdrawing from the account when you retire (either normally or from ill-health), but the account still earns interest at the same rate as when you were working. There will be a special facility from age 75 whereby you can make sure the balance in your account at that date will last for the rest of your days.
Read my submission setting out the proposal in detail. I hope the government will take it on board. (The submission is attached to post #52 on this thread.)
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Colm Fagan
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As I said, the starting rate is around 5%. The quoted 4% leaves a margin for safety. I set out precisely how the rate is calculated in the submission. It's not a difficult read (I think).
1)Maybe I’ve spent too long “tutting” about Brexit but it’s remarkable how easy it is to see solutions to problems once you lose the shackles of the Nation State.
Take for example the largest superannuation pension scheme in Australia.
Founded in 2006, AustralianSuper has become Australia’s largest industry superannuation fund, managing assets on behalf of more than 2 million members, representing around one in 10 working Australians.
Try to apply those numbers to Ireland. How would you hope to get anywhere near that scale?
Not a cat in hell’s chance. However, apply a little harmonization of European pension rules with IORPS and hello is that a pan-European pension structure on the horizon??
2) how might one go about pricing a service which is "pay as you go?"
Ok so we have initial regulatory obligations of AML and KYC. Let’s assume that we are distance marketing so that nobody needs to go anywhere.
AML
I have an app to deal with the anti money laundering requirements.
You download it to your smart phone and take a photo of your ID, bank statement and your own face ( just to check you are the person in the photo ID)
It provides an audit trail which hits the spot with both the CBI and the garda fraud squad.
The thing is I have to pay a monthly license fee. It’s not pay per use. So how do I apportion your share of the cost?
Equally, I’m legally required to update your ID with your pension provider so I need to periodically revisit your file and update the records, an ongoing compliance obligation.
KYC
I’ve developed an online KYC Fact find which you can complete online with two step verification etc.
You are doing some of the initial leg work so fair enough saving me time. But I’ve paid to develop the functionality and integration with Salesforce. That costs a fairly sizeable annual license fee just to be able to provide that convenience for you.
Again, these are Fintech infrastructure costs which improve data protection, massively improve convenience etc.
It’s not easy to work out what the fair share of these costs for each new client might be. There is certainly an element of cross-subsidy.
Equally, I have an obligation in the consumer protection code to demonstrate ongoing suitability. The only way i can think to do that is by keeping your file up to date and ensure that the advice you receive today is still suitable in the future.
Experience
I’ve spent a considerable amount of time this year putting our process and proceedures into an online Knowledge database and precedent library.
My staff can now search a “how to” online and benefit from my 25 years of experience.
This is a fantastic time saver and helps to reduce errors.
If I was to sell it on the open market how might I value it?
If I pay myself minimum wage and capitalize the hours I’ve worked since 1992 then the value of my time at work is €450,000.
If I apply an hourly rate of €100 an hour the value of my experience to date is €4,500,000.
Is a new client paying for my time or my experience? I accept it’s a bit of both and that should be reflected in my hourly rate.
I’m not going to list all the business expenses of rent, salaries, license fees, regulatory compliance etc etc etc but I’m trying to make the point that a new client doesn’t just take an hour of my time fills in some forms and then goes away happy that they paid a few quid for the advice they wanted.
The reason why professional financial planners charge an ad valorum fee is because it represents the best compromise, and I accept its a compromise, between the cost of being in business, the cost of completing new business and the ongoing regulatory obligations on an adviser to demonstrate ongoing suitability of their advice.
The way I recommend advisers we work with address this is simply to charge a fixed fee for a project - like setting up a pension. Agree that with the prospective client and apply VAT.
Agree an annual retainer fee to ensure that the ongoing AML and KYC obligations are met. If this is not paid as an ad valorum AUM fee then this is also subject to VAT.
Apply an hourly fee for all information and advice requests outside of these agreed services again subject to VAT.
The problem with this approach is that the actual project fee plus a retainer make this relatively poor value to clients with smaller pension accounts and/or who are not VAT registered and can bill their companies for the advice.
The alternative is of course the preferred advice model which is why it is preferred.
Take for example the largest superannuation pension scheme in Australia.
Founded in 2006, AustralianSuper has become Australia’s largest industry superannuation fund, managing assets on behalf of more than 2 million members, representing around one in 10 working Australians.
Try to apply those numbers to Ireland. How would you hope to get anywhere near that scale?
Not a cat in hell’s chance. However, apply a little harmonization of European pension rules with IORPS and hello is that a pan-European pension structure on the horizon??
2) how might one go about pricing a service which is "pay as you go?"
Ok so we have initial regulatory obligations of AML and KYC. Let’s assume that we are distance marketing so that nobody needs to go anywhere.
AML
I have an app to deal with the anti money laundering requirements.
You download it to your smart phone and take a photo of your ID, bank statement and your own face ( just to check you are the person in the photo ID)
It provides an audit trail which hits the spot with both the CBI and the garda fraud squad.
The thing is I have to pay a monthly license fee. It’s not pay per use. So how do I apportion your share of the cost?
Equally, I’m legally required to update your ID with your pension provider so I need to periodically revisit your file and update the records, an ongoing compliance obligation.
KYC
I’ve developed an online KYC Fact find which you can complete online with two step verification etc.
You are doing some of the initial leg work so fair enough saving me time. But I’ve paid to develop the functionality and integration with Salesforce. That costs a fairly sizeable annual license fee just to be able to provide that convenience for you.
Again, these are Fintech infrastructure costs which improve data protection, massively improve convenience etc.
It’s not easy to work out what the fair share of these costs for each new client might be. There is certainly an element of cross-subsidy.
Equally, I have an obligation in the consumer protection code to demonstrate ongoing suitability. The only way i can think to do that is by keeping your file up to date and ensure that the advice you receive today is still suitable in the future.
Experience
I’ve spent a considerable amount of time this year putting our process and proceedures into an online Knowledge database and precedent library.
My staff can now search a “how to” online and benefit from my 25 years of experience.
This is a fantastic time saver and helps to reduce errors.
If I was to sell it on the open market how might I value it?
If I pay myself minimum wage and capitalize the hours I’ve worked since 1992 then the value of my time at work is €450,000.
If I apply an hourly rate of €100 an hour the value of my experience to date is €4,500,000.
Is a new client paying for my time or my experience? I accept it’s a bit of both and that should be reflected in my hourly rate.
I’m not going to list all the business expenses of rent, salaries, license fees, regulatory compliance etc etc etc but I’m trying to make the point that a new client doesn’t just take an hour of my time fills in some forms and then goes away happy that they paid a few quid for the advice they wanted.
The reason why professional financial planners charge an ad valorum fee is because it represents the best compromise, and I accept its a compromise, between the cost of being in business, the cost of completing new business and the ongoing regulatory obligations on an adviser to demonstrate ongoing suitability of their advice.
The way I recommend advisers we work with address this is simply to charge a fixed fee for a project - like setting up a pension. Agree that with the prospective client and apply VAT.
Agree an annual retainer fee to ensure that the ongoing AML and KYC obligations are met. If this is not paid as an ad valorum AUM fee then this is also subject to VAT.
Apply an hourly fee for all information and advice requests outside of these agreed services again subject to VAT.
The problem with this approach is that the actual project fee plus a retainer make this relatively poor value to clients with smaller pension accounts and/or who are not VAT registered and can bill their companies for the advice.
The alternative is of course the preferred advice model which is why it is preferred.
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You seem to be saying that the market return smoothed out will be 4%? Its not clear but it doesn't seem to be an "interest rate" to me. Seems like a grand gesture to assume that future growth will be so forgiving in the "current environment". I didn't see any mention of taxation in that paper? When and how does the government pinch some of the punters money?
Colm Fagan
Registered User
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Like it does at the moment. My ARF withdrawals are taxed as earned income. It will be the same for withdrawals from the pension account.
Colm Fagan
Registered User
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No, I'm saying that I expect it to AVERAGE around 4% if interest rates stay as they are at present and the experience of the last 100 years or so is repeated in terms of the premium return earned for taking a risk.
Colm Fagan
Registered User
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Sorry, I should have said 5%. 4% is my actuarially conservative estimate 
OK. I like the fact of a proposal, great job, and thanks. For me the details are important because you cannot trust the government not to mess it up.
However I don't want anybody who is in, near, around, or advising government to get their hands on my money. I want the option of DIY and this simply doesn't exist in any meaningful way, reversion to the mean of Irish management and governance seems to be the norm.
However I don't want anybody who is in, near, around, or advising government to get their hands on my money. I want the option of DIY and this simply doesn't exist in any meaningful way, reversion to the mean of Irish management and governance seems to be the norm.
I looked at going with an unbundled pension option a few years ago and concluded at the time that it wasn't the lowest cost solution overall. But maybe it's time to revisit that decision.
At the time, I was looking at the following costs:-
- 0.40% for the pension wrapper (pension trustee and custodian);
- 0.25% underlying fund OFC (blended); and
- 0.75% ongoing advisory fee.
The tracking error between my unit-linked pension funds and the net total return of the indices that they purports to track has been less than 0.70% over the last five years (as against a disclosed AMC of 0.40%).
And what would the tax rate be on that?