How much to pay for advice and management of a £1m SIPP?
|Retirement | SIPP
Asked by bcpyrford, submitted
11 February 2014.
I have a personal pension fund (£1 million+) with an insurance company with investments in a variety of funds that was set up by an IFA a few years ago. It is not managed currently, is in income drawdown, and has a 1.20% annual charge.
I am looking to getting this managed by a third party, probably via a SIPP. There appears to be a variety of potential charging structures for initial set up, ongoing platform charges and discretionary management charges.
Is there anywhere where comparisons are made on these?
My assumption is that for the first two there is no particular value add by different suppliers.
What range of charge is reasonable for the third party and how does one evaluate the different suppliers in terms of value for money?
Answered by Justin on 09 June 2014
Firstly apologies that it has taken me some while to answer your question.
There are three levels of charges to consider: those levied by the pension (SIPP) provider, underlying investment funds and the financial adviser or discretionary manager.
If you simply want to invest in funds and shares (which can include exchange traded funds and investment trusts) then most low cost SIPPs should fit the bill. Since all such SIPPs do more or less the same thing then cost should be a key consideration.
SIPPs that charge annual percentage fees will likely prove very expensive on a £1 million plus pension fund; hence those with fixed annual fees are likely to offer better value. Service is obviously important so well worth calling potential SIPP providers with a few questions to gauge how helpful they will be. If you use an adviser then this will be more the adviser’s problem so you can leave it to them, albeit take care that they recommend a SIPP that is in your best interests and not theirs.
As all SIPPs must now use ‘clean’ versions of funds (that do not have sales commission and platform fees built in) for new investments then annual fund charges should be largely identical across SIPPs for a given fund (give or take a few minor differences). When looking at fund costs be sure to use the ‘ongoing charge (called ‘OCF’) and not the annual management charge (‘AMC) since the former includes other costs paid out of the fund (hence ultimately your pocket).
Of course, fund charges can vary widely. There are trackers available for 0.15% or less a year while some expensive funds of funds can cost up to 2.00% or more a year. In general, if you build a portfolio of both tracker and actively managed funds you might expect to end up paying annual ongoing fund costs somewhere in the region of 0.60% - 0.80%.
As for financial advisers and discretionary fund managers, comparing costs can be very difficult and is not helped by almost all financial advisers failing to publish their fees (either actual or indicative) on their websites. My guess is most are too afraid their high fees will deter potential clients or they prefer to keep things opaque and ultimately try to charge as much as they can get away with.
However, as a rule of thumb: most discretionary investment managers tend to charge around 1.00 – 1.50% a year plus underlying investment (e.g. fund) charges and possibly dealing fees on top. And most financial advisers seem to charge 0.50% - 1.00% a year plus underlying investment charges, although I would expect them to significantly reduce a percentage fee on a portfolio of this size. Whether either delivers value for money depends on how good their advice/performance is and this is hard to measure. However, it is always worth asking for a sample portfolio to see how they invest (i.e. is there a sensible spread of investment and seemingly good investment choices) and a full summary of charges in pounds and pence.
As for financial advisers you will have to judge their investment expertise, which can range from pretty good to almost non-existent. If the adviser recommends ‘funds of funds’ or a discretionary manager then be wary, as they are effectively shifting the burden of choosing funds and managing the portfolio across to a fund manager – so you end up paying the adviser’s fee, the fund of funds/discretionary manager’s fee and the underlying fund fees which becomes expensive – especially since most advisers do not reduce their fee despite the reduced responsibility.
You can compare SIPP providers very easily on my www.comparefundplatforms.com website.
A good source of fund data including ongoing charges is www.trustnet.co.uk.
I’m afraid the only way to compare adviser charges is to speak to them and ask how much they would charge for their initial and ongoing advice, but in my opinion (on this size of pension) if they try and charge more than around £2-3,000 for the initial advice (including any ‘extras’ such as ‘implementation fees’) and likewise a year for ongoing service then you are probably paying too much. And if your situation is very straightforward (e.g. no other financial planning required and pension income withdrawals too small to risk running your pension fund dry) then arguably you should be paying less than these amounts.
To put all the above in percentage terms, for a £1 million pension I would aim to keep overall pension, fund and adviser costs in the region of 1.00% - 1.20% a year.
If you opt for the discretionary management route overall costs will almost certainly be higher and getting to an overall cost of c1% a year is probably unrealistic unless the manager exclusively uses trackers, which is probably not very sensible for a portfolio of this size. So perhaps target an overall cost of 1.50% a year and satisfy yourself that the manager will add sufficient value to justify their fee.
Obviously, if you decide you don’t need advice or discretionary management then you can chop this part of the overall cost from the above figures.
Finally, it would be worth establishing what happens if you are unhappy with the adviser/discretionary manager in future. If you are not careful you might face hefty dealing or exit fees to take your business elsewhere.
You might also find the guide to cost of financial advice, available to download on the homepage, useful.
Hope this helps.
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Readers' Comments (4) - To post a comment please register or login
Comment by shimself at 9:57pm on 09 Jun 2014:
you say 1% of £1M ie £10,000 is reasonable
so 2-3000 for setup plus 2-3000 a year (say £5000 total) is half what you just said is reasonable, but now you say it's too much.
Comment by justin at 9:22am on 10 Jun 2014:
As I state in my answer the 1% refers to overall annual costs, i.e. adviser, fund and SIPP wrapper. And excludes initial advice fees.
If we assume £7,000 in fund charges, £2,500 for advice and £500 annual SIPP costs that equals £10,000 = 1% of £1m.
Comment by mcoomber at 7:31pm on 25 Jul 2014:
In his comments Justin has shown how out of touch he is with reality in terms of fees and operating costs.
He has also overlooked one key financial PLANNING aspect that could very easily land the individual with an unexpected tax bill.
Advice: if you are not 100% in what you are doing then see a professional.
(You wouldn't attempt DIY dental surgery, would you?)
Comment by mcoomber at 7:35pm on 25 Jul 2014:
....and he hasn't been a FSA/FCA-regulated adviser since 2009 !!!