Hi Babyegg

This was a fascinating insight into the mind of a commission based IFA. You mention that the IFA is part of your family so I will play it carefully with my words.

The initial charges on the investments range from 4.5% to 5.25%, with the weighted average being approximately 5.15% on the £31,000 invested. Immediate goodbye to £1,595 unless your IFA rebates it all back to you.

The annual charges on the investments range from 1.25% to 1.75%. Your IFA will get a kickback (sorry trail commission) of 0.5% pa. However the total expense ratio of these funds ranges from 2% to 3%, with the weighted average being 2.53%. Goodbye to a further £785 pa.

£10k in ING is indeed a sensible course of action as an emergency fund, or for identified later use.

Of course your IFA recommends not paying down the mortgage. This is non commission bearing activity. Even if we assume that all of your £31k investment is carried out with no marginal tax impact (ie ISAs, use CGT allowance, no higher rate tax on dividends), then if your mortgage aer is, say, 5.5%, your investments will need to earn 9% pa or better over a 5 year period (after amortising the initial fees) for this to have been a better decision than paying down the mortgage. (or 8.5%pa over a 10 year period, for example). Is this what your IFA can convince you that his portfolio can earn? Its way ahead of most forecasts, and remember the mortgage saving is "guaranteed"

However if you did wish to invest the funds with a this bullish (bull***t?) view of their growth prospects, in an environment of lower returns, cost control of the investments you buy is imperative. At 2.5% pa average annual fee, almost 28% of your 9% expected retruns disappears in fees.

I am heartily in favour of providing for children and godchildren and this in itself may be reason enough not simply to pay down the mortgage by as much as you can. Of course setting them up a stakeholder pension and contributing the £1000 to it (and getting a further £282 tax rebate each from the government) would earn the IFA rather little. Annual fees on stakeholder pension investments are around 1%.

As to the VCT investment - if you are a higher rate taxpayer, AND you already have a diverse portfolio of other investments, AND you are comfortable with putting the money away into the most illiquid investment of your life, then you might want to have a think about it.

In short, family member or not, it seems this IFA is trotting out the usual "diverse portfolio of investments, invest in asia for long term hypergrowth for the kids" crap that earns them such disdainful scorn on the Fool boards. I'm not blaming him as an individual - its just what they all do as they are trained to do that - the structure of financial service provision in this country renders him incapable of doing anything else or he would starve.

I am no IFA. I am not registered to give advice. I am simply a Fool. With that in mind, here is what I would do if I had £41,000 (+£500pcm free)and had circumstances like yours.

LUMP SUM
£10,000 into ING account.
£2,808 each into Stakeholder pension for the Godchildren (Government makes it up to 3600 max). I would use Prudential and go for the discretionary fund, broadly exposed to UK and overseas equities, bonds and property, but any fund choice (except the cash or retirement ones!) are fine
Balance of £25,384 pay off mortgage.

Monthly £500

EITHER: ISA, some global tracker fund, or asian or more sexy fund if I had to. Total expense ratio must be below 1% pa.

OR (eliminating immediate access ability): Add to my pension provisioning



But as I said, I'm just a Fool. Your IFA is the one who has been trained extensively in the provision of independent, impartial, fair, useful, and profitable advice. I'm sure he is value for money. I'm sure he has your interests at heart before his own. I'm sure he knows something I don't. I'm sure he has hundreds of satisfied customers. So I would take anything I say with a pinch of salt.

Good luck.

anc1