Thursday 18 July 2019

Are the fees that my financial advisor wants to charge me appropriate?

David Quinn answers readers' personal finance questions
David Quinn answers readers' personal finance questions

Q. I am dealing with a financial advisor regarding my pension. He is advising me to go with Irish Life MAPS 3 fund. I am being offered 100pc allocation of the regular premium. I am transferring into pension from an AVC a sum of €113,000 and regular monthly premium of €900.

My query relates to the following. My financial advisor is telling me that to give me this level of allocation, the commission received by them as financial advisors is low and the only trail commission offering allowable is 0.25pc.

They say that the standard trail commission their company charges is 0.5pc and are thus proposing a fee of €500 per annum in addition to the 0.25pc trail commission, and this covers the cost of annual pension review. Can you advise if this is normal practice?

Maureen, Cabinteely, Co Dublin

A. There are a few key questions that need to be answered in this case. Firstly, I would question why MAPS 3 has been chosen.

Have you completed a risk questionnaire? MAPS 3 is a medium risk model portfolio run by Irish Life with a number of 'sub-funds' which are monitored and adjusted to maintain a consistent risk profile for your pension. Depending on your age, this may or may not be appropriate, particularly if you are younger and have a long time to retirement.

A key factor in your decision will be the annual management fee charged by Irish Life. The lowest pension contracts on the market charge 0.40pc for a fund value of €100,000+, and 0.60pc for your regular monthly contributions. The most expensive contracts can charge 1.50pc.

You should compare the cost of the recommended portfolio to these rates. It looks like your advisor is offering a clean and transparent charging structure and is being up-front about his remuneration.

A charge of 0.5pc per annum would be a standard annual charge for most financial advisors. The charging structure being proposed is closer to 0.65pc when you combine the trail fee and €500 fixed fee.

With any professional advice, I would always consider whether the advice being offered is worth that amount of money? Would you pay an accountant or solicitor the same amount for that level of work?

In general, it can make sense to pay the advisor fee out of your pension contract, whereas paying the fee directly yourself is more expensive, as the payment is coming from net income after income tax. Paying the advisor directly is more flexible as you can negotiate the fee annually.

Q. I am 40, and have two young children. We have a small amount of excess income every month and would like to set up a small investment fund for my children's education. What are the best types of investment for a monthly savings amount?

Donal, Navan, Co Meath

A. As we see continued recovery in income levels and further employment stability, more families are starting to see surplus income. I haven't seen as much demand for monthly savings accounts since the heady days of SSIA accounts.

There are broadly two options open to parents who would like to set aside a monthly amount to build up a nest-egg. The main banks offer monthly savings accounts, generally with preferential rates and a limit on the balance.

Nationwide UK currently has the best of these, with 4pc interest offered on monthly amounts up to €1,000, for a 15-month term. This is hard to beat in the short term as it would require returns in excess of 5pc from an investment portfolio when fees are accounted for. Achieving a return in excess of 5pc requires a reasonable level of risk, whereas the Nationwide UK account is almost risk-free.

For a wider spread of investments, the life assurance companies all offer monthly savings accounts which can be invested in an investment portfolio. None of these contracts are particularly competitive, and all have relatively high charges.

Aviva have the only contract with no exit penalties, and there are other providers such as Friends First who have lower annual management fees, but some early exit penalties.

I would recommend seeking advice from an independent advisor on which provider to choose and which investment funds to use within the product. There are significant commissions available on these contracts so that should be monitored closely.

Q. I'm 28, working for Kerry Group for six years now. I'm in a Defined Benefits (final year salary) pension scheme for at least the last five years. I'm taking it that I'm in a good position. Is that the case? I don't pay any AVCs, and would typically pay very little attention to my annual pension statement. Should I be doing more?

If it's relevant, I'm married with two children (ages 3 and 1) and mine is the sole income. I have a mortgage of €80,000 over 35 years which just began this January.

Bernard, Naas, Co Kildare

A. I always recommend clients take some time to understand their pension benefits fully, by sitting down and reading the documentation provided by the pension provider or employer. If the documentation is too difficult to understand, seek out some advice from your HR department, pension provider or an independent advisor.

Defined benefit pensions are being phased out as companies generally cannot afford the generous benefits they provide.

They are worth their weight in gold as an employee - so if you are one of the lucky ones to be part of a DB scheme, try to stay in the scheme for as long as possible.

Once you understand the scheme, you will be able to make an assessment as to whether the benefits are going to be sufficient in retirement. Usually you accrue a percentage of salary for each year worked.

At age 28, I would guess they should be adequate, but if you have surplus cash, or you feel the benefits will not be sufficient, AVCs will boost your retirement pot and get you generous tax relief on the contributions.

You are allowed to contribute a total of 15pc of gross salary per annum, which includes any contribution to the main DB Scheme.

David Quinn is managing director of Investwise

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