How much should an IFA charge for setting up a SIPP?

[WhatFreshHellIsThis]

We're setting up a SIPP (self invested pension type thing) and using it to buy a commercial property for DP's business to rent.

We've had an IFA advising us and he's going to set it all up for us, but he's proposing to charge 4% of everything we pay into the SIPP.

As we're buying property, that's quite a lot! Is that normal for this sort of investment? And is it 4% of the first payment in, or of anything paid in forever and ever?

Any IFAs out there, or financial wizards, can advise?

Thanks

[brassick]

I work for an IFA company (am not an IFA myself). We charge 3% for setting a contract up (whether it be ISA, SIPP, Unit Trust etc), 1% of the value of your funds for ongoing servicing and 1% of any fund switching we recommend (so if we recommend a switch out of a fund where you hold £1,000, we receive £10).

I would imagine he's proposing a 4% upfront charge, but without knowing more, it's hard to say.

Is he proposing to review your DP's SIPP on a regular basis? Has he explained what he will charge for this?

[WhatFreshHellIsThis]

Thank you brassick - I've emailed him to get some more details, so I should be able to update the thread soon. So the 3% you charge is a one off, is that right?

[brassick]

Well the 3% is for all "new money". So if you invested some cash into an ISA (for example) we would charge 3% of that (and 1% + 1% on an ongoing basis).

I know it sounds like money for nothing, but remember that the IFA will have had to do work to make sure the SIPP is the right thing for your dp, as well as work out which SIPP to use. Processing the application and making sure it's all set up correctly also takes time, which obviously costs money.

An accountant or solicitor giving professional advice would charge a flat fee, or a time-based fee, this is just another type of fee, but means that you don't have to find the money to pay up front. If, however, you would prefer to pay up front, then the IFA should agree to it - was that offered to you as an option instead of taking it out of the investment amount?

[brassick]

Oh, and did the IFA give you a "terms of business" document? That should clearly state his fees for all types of business.

[WhatFreshHellIsThis]

Thanks brassick - he hasn't given us one that I know of, but I will root through all the paperwork!

The SIPP is for both of us, it's a joint investment, and I agree that he has put some work into working out who to use and how to set it up etc, so am not quibbling the size of the fee - just thought we should check out whether it was on a par with what IFAs generally charge before we signed on the dotted line.

I'll ask him about maintenance/reviews - although we have had good service from him so far, he sorted out our life insurance six months ago and proactively called us for a review meeting, so I suspect he's into the long term relationship type approach. He has also said that should we start paying larger amounts into the SIPP in the future, the 4% is negotiable.

Thank you for useful input!

[PigletJohn]

You may do better to pay a fixed fee, not a percentage commission.

SIPPs can have very low charges, but if you want to include Commercial Property there are fewer providers, and the charges are higher. IMO though you should be paying charges that relate to the work done, which will vary from years when you are trading, and years when you are not; rather than just on the value of the fund.

If you are going to be paying large percentage fees on fund value, be careful only to pay in the amounts you need for the Commercial Property aspects of your SIPP. You can have a very much cheaper off-the-shelf SIPP for the more usual investments such as cash, equities and funds. This need only cost you about 0.1% per year. You might, for example, think it sensible to have only 25% of your total investment in Commercial Property, with the rest diversified. Before you retire, there may be another period like the last 2 years, when a lot of commercial property has lost 50% of its value. If you have only one property, you could be hit very hard if the location, style or quality of yours happened to fall out of favour.

IFAs are not interested in selling schemes with low charges, since they do not make large commissions out of them.


Have you worked out how much of your money will end up in the saleman's adviser's pocket over the next 20 years? You may be shocked...

I have a feeling you did not research the market for comparative pricing. no offence intended.

[WhatFreshHellIsThis]

none taken, PigletJohn! To be honest we were not looking to take out a SIPP as we weren't really aware of how they worked - we asked our IFA for advice on how we could minimise DP's corporation tax bill and also invest our money in an office for the business, and this was the most tax efficient solution he came up with. We both also have personal stakeholder pensions so this SIPP is purely to manage the commercial property side of things.

The charges are quite high from the provider as well, as you say - I think it's around £400 per annum per person on the SIPP, does that sound about right?

When you say how much of our money will end up in his pocket - if we are only using this SIPP to purchase one property, then presumably all he will get is that initial 4%, as we won't pay in any more than we need to purchase the property?

[PigletJohn]

he'll probably be getting Trail Commission every year on the value of the fund for ever.

Might be 0.5%, might be 1%, might be less, shouldn't be more. It will help to fund his comfortable retirement, especially if over his career he manages to handle a hundred clients, each with a million-pound pension, and gets 1%, or even 0.1%, trail off each of them...

hence why I prefer the fee-based, no commission, low charges route.

I have a simple SIPP myself, which excludes commercial property, fine wine, Old Master paintings etc, so is very low cost.

I don't work in Life and pensions any more, but formerly worked for a well-known company in Norwich, and another in an large, red-brick building in High Holborn, and it was very noticable that the early SIPPs were designed to maximise revenue for the company and the salesman advisor

For my own schemes, I pay a lot of attention to low charges and low costs. They add up over the 20 or 40 years life of a pension plan.

Out of interest, have a look at the Schedule of Fees on www.alliancetrustsavings.co.uk/pensions/full-sipp/
this one does not pay commission, unless you ask it to, so is not often sold by Independent Financial Salesmen Advisors

Others are available.

[PigletJohn]

I should have added, if you are thinking of buying a second-hand car, you don't walk into a dealer's showroom and ask to speak to an Independent Transport Advisor. You know what the job is of the friendly man in the shiny suit behind the big desk.

[WhatFreshHellIsThis]

Hmmm, I'm not sure I buy your analogy, there. After all, you're assuming that I know that I need a car, whereas I would probably say that our situation was more of one where we knew we needed to get from A to B but weren't sure what our transport options were.

So there is a case for saying that the advice that the most efficient method for us would be a car, assuming it's independent advice, is advice worth paying for.

But I do take your point generally - I guess my question is - actually, given that we do want commercial property in this SIPP, that's the whole point of the SIPP (rather than starting with 'we want a SIPP' we started with 'we want to buy a commercial property') then do these low cost ones offer something that includes a SIPP?

And furthermore, how ethical would it be for us to take his advice re SIPPS and then just go and buy one elsewhere?

[WhatFreshHellIsThis]

"then do these low cost ones offer something that includes a SIPP?" - d'oh! I meant

"then do these low cost ones offer something that includes commercial property?"

[PigletJohn]

a "full" SIPP has the capacity to buy commercial property, and has higher charges than the more common, run of the mill SIPP which enables you to invest in shares, gilts, cash deposits, and investment funds.

for most people, the simpler, cheaper option is more than adequate.

There is no reason why they can't be operated by the same company; and they often are.

as for Essex, it would be reasonable to ask what his fee would be if you paid a one-off charge at the beginning, rather than dribbling money away over the next 20 or 40 years.

my offensive description of IFAs as Salesmen is that they have a long tradition of guiding their trusting buyers into the products that pay the highest commissions, rather than the ones that will give the best value to the customer. I need only mention with-profits endowments and compare them to term life assurance. Even the salesman who says "I have looked at 100 products to find the one that suits you best" omits to say "I looked at the 100 products that pay the highest commission, and out of them, I found the one that suits you best".

sadly most victims customers are not really aware that commission comes out of their pocket, and think they are getting a free service. Nothing could be further from the truth....

[PigletJohn]

p.s. if you walk into a car showroom, and consult an Independent Transport Adviser, he is going to try to sell you a car, even if bus, train or cycle would be cheaper and quicker.

Most IFAs should be called "Life and Pension Salesmen"

p.s. has yours suggested Term Assurance as the most economical way to provide for your family in the event of your death? No, I thought not.

[WhatFreshHellIsThis]

term life assurance? we did recently review our life insurance and that phrase did come up, can't remember the context. what is it, in a nutshell?

Not sure who/what Essex is?

So from what you're saying, we do need the full SIPP with the higher charges, so I'm confused about what the issue seems to be? I will ask him about upfront fees and see what he says though.

[PigletJohn]

Essex = Ethics :)

you do need a full SIPP if you want to include commercial property in it; and a full SIPP will cost you more than the 0.1% a year with no upfront charges that a simple SIPP can cost.

If he is going to charge you e.g. 4% upfront and 1% per year, and if the commercial property is worth a million (many are) you are going to be paying him £40,000 upfront and £10,000 a year (index linked to the value) until you retire, and then possibly an additional % fee when you start to draw on the scheme. If you have a working career of 20 years ahead of you, that would be (£40,000 + (20 x £10,000) = £240,000 which is rather a lot of the £1,000,000 that the scheme cost you.

you can see that I am not in favour of commission-driven sales.

I bet you could find someone willing to act for you on an hourly rate of fixed fee that would cost you far far less.

richer people generally pay finance professionals a fee not a commission. Apart from being better value for them, it removes the temptation that the salesman will be biased to whatever scheme pays him the most commission. Imagine how you would feel about your doctor, if you asked him about your bad back, and you found out he would be paid £50,000 commission if he recommended spinal surgery, and nothing if he recommended aspirin.

[WhatFreshHellIsThis]

ok before we go any further, I should point out that this property will be worth nowhere near a million! try something around £150,000 instead. You seem to be confusing us with people with stacks of cash.

Also, there's no mention of a 1% fee or a fee when we draw on the scheme that I can see - just 4% of transfers in/contributions to the SIPP. Which as we're only using it to buy this one property, so far, is a one off payment as far as I can see. Or are you saying we're paying those fees through the commission that the provider pays him?

I get your argument that commissions bias advice, of course I do, just trying to work out whether we have the right product and therefore it doesn't matter.

[PigletJohn]

Ask if there is an annual charge (there usually is) and if there is Trail Commission, how much. 1% is not unusual, as brassick mentioned.

Also ask what Transaction fees there are.

The company I use is noted for its low charges, so see how yours stack up. For their Full SIPP, they say
"We believe in transparent flat rate charges, so you?ll simply pay an establishment fee of £395 +VAT and an annual fee of £550+ VAT, which is reduced to £450+ VAT if invested in a Single Investment Account*."

when you start to draw an income, they charge again:
"Taking benefits from the SIPP
Set up Unsecured Pension £100
Annual Unsecured Pension fee (taken in advance) £150
TOTAL £250
Total ongoing fees in retirement
SIPP annual administration fee £550
Annual Unsecured Pension fee £150
TOTAL per annum £700
(All fees are subject to VAT)"

If I am allowed to post links, look at the Schedule of Fees in Related Documenst on
www.alliancetrustsavings.co.uk/pensions/full-sipp/

I have no business connection with this company, I am just trying to show an example you can look at to see how yours compares.

[PigletJohn]

p.s.

on a fund of £150,000

4% is £6,000
1% per year for 20 years is (20 x £1500) = £30,000
plus the original £6,000
total £36,000
(in fact the annual amount will increase each year as the value goes up)

So he ends up with nearly a quarter of your money
(£36,000 x 4 = £144,000)

seems a lot to me

[WhatFreshHellIsThis]

Right - fee structure

Scheme establishment - £500 plus VAT
Registration - £150 plus VAT

then member fees
£495 initial fee
£395 admin fee

payment of pension via payroll - £150 pa
benefit calculations £100
scheme pension calculations - £400
pension reviews - £100
scheme pension reviews £400

then it says
your financial adviser agrees the level of their remuneration directly with you. May be a set amount or percentage of the fund.

no mention of Trail Commission.

[PigletJohn]

OK

Ask the adviser if you can have a Fee (not a percentage commission), and say you would prefer not to have Trail Commission either. See how much the fee is. You can try negotiating it down if you like. As long as you do not have any commission arrangements in place, the plan provider will not be snipping money out of your plan to pay the adviser. Many customers are not conscious of commission payments dribbling out over the years, and having a fee-based arrangements means you always know what you are paying him, because you have to agree and write the cheque yourself.

It is perfectly reasonable that the size of the fee should reflect the amount of work done.

ATB

[WhatFreshHellIsThis]

Have checked, there's no trail commission so I think he's a good 'un. Thanks for all your advice!

[tomme]

Pigletjohn
It seems to me that in the past you were one of those high commission ifa's. These days I don't know an if a who doesn't charge fees and offer the client which way they prefer tp pay.
We charge aprox £300 to 500 to set up any scheme depending on time taken and if there is any travelling.
We also charge 1 per cent per annum to provide an annual review , quarterly valuations and priority telephone and email response.
Your condemnation of ifa's may have been true 5 years ago but thankfully is well out of date.
If a client doesn't pay for an annual review it is amazing how quickly the funds they care invested in do not match their attitude to risk