Portfolio Rescue

One of the aspects of my job which gives me the most satisfaction is helping clients extricate themselves from bad products and/or portfolios they have previously acquired from another adviser. You see a lot of older Pension or Investment products had high ongoing charges applying to them and were often invested in costly, low performing ‘active’ funds.

I met a new client called Peter about three years ago and at that time could only take over the ongoing servicing of his plan – you will see why later, but this gave me the time to plan a successful ‘exit’ for him.

He had invested around £720k in a Self Invested Pension Plan (SIPP) with a Life Assurance Company’s Investment Bond as the underlying product he had used to buy a portfolio of funds recommended by his adviser, but which had not been reviewed since he had met the adviser 6 years before. Incidentally he had not seen or heard from him for a few years and when he called the mobile number on the business card he had kept it was ‘unobtainable’! Peter had been introduced to me by his Accountant, who felt he was in need of some professional financial planning.

Peter was drawing heavily on his pension fund during a particularly volatile period for world stockmarkets – £280k to be exact including the 25% ‘tax free cash’ sum, and as a result had severely depleted his fund to £490k. He had therefore only made around £50k over the preceding 6 years – or just under 10% of his investment of £540k after the cash sum had been taken.

I discovered that there were ‘surrender penalties’ still applying to the Bond, and these reduced over the first 10 years to nothing on a sliding scale. Even though he was paying a 1% per annum charge for the lifetime of the product, it was too much of a bitter pill to swallow and pay the penalty. Basically this was designed to recoup the considerable amount of commission paid to the adviser at the start of the plan, and protect the product provider if the Bond was encashed in the first 10 years.

I therefore restricted my advice to the underlying portfolio of funds for the time being, which had not been ‘rebalanced’ or reviewed since he had invested. Some of these had performed acceptably – quality funds from household names you would no doubt have heard of yourself. However, the adviser had also recommended some ‘structured products’ which, because of the volatility in world stockmarkets meant that these had come been worth nothing at the end of their term.

I also identified that some of the funds had also paid an additional amount of commission to the adviser, and subsequently had not performed well compared to their sector – partly due to the additional cost but also because the managers were poor. The average annual management fees of the Portfolio of funds was 1.9% pa.

I subsequently removed all the rubbish from his portfolio – replacing many with cheaper ‘passive’ index tracking funds and rebalanced in line with his current attitude to risk – which was now lower as a result of his experience and nervousness about financial markets. This reduced the ongoing fund management fees to an average of 0.55% pa.

Now although only in the 9th year of the ‘Bond’ Peter had had enough, and the surrender penalty was a more palatable 0.75% of the fund. If he stayed, although at the end of the year the surrender penalty would cease, with this particular product the 1% ongoing product charge would still apply for the rest of his life. This was in addition to the 1% pa he paid from the funds to the adviser’s old firm for ongoing service. He was particularly aggrieved at this as he hadn’t exactly had any!

By selling the Bond and reinvesting the funds into a similar product with another provider – but with only enough commission to pay Peter back the 0.75% surrender penalty, and pay me an agreed amount to sufficiently cover the cost of my time. This not only meant a more limited establishment period of 5 years, but an establishment charge of only 0.45% pa – less than half that he would have paid to the existing Bond provider – and for the rest of his life not just for 5 years.

So overall – with changes I made to the SIPP’s underlying investment product and the funds, I had reduced his annual costs by nearly 2% per year – or around £10k based on the current value.

Needless to say Peter is very pleased with his new arrangement and also really appreciates the regular advice I give him regarding changes to asset allocation and occasionally funds in his portfolio. Incidentally this is at half the cost (0.5% pa) of the ongoing fee paid to his previous advisory firm for no service.

Next on my hit list is his SIPP provider whose trustee fees I consider to be fairly excessive compared to others I know.