Broker funds are also called broker bonds, and have a bad reputation for high charges and lousy performance. A broker fund is a fund of funds. Your money is invested in a range of funds in proportions decided by your independent financial adviser, stockbroker or other intermediary, and switched about at his or her discretion. The supposed advantage is that even with relatively small amounts of money, you can diversify your risk. The intermediary has more expertise and more time to watch different markets.
In practice, there are serious disadvantages, not least that you are paying twice. Typically a percentage fee is levied by the intermediary in addition to the percentage fee levied by the management company on the underlying unit trust or other fund. The broker fund may also be administered by a life insurance company that also takes a cut.
You can end up paying 2 to 3 per cent a year, and that is on top of the basic initial charge on your investments of perhaps 5 to 6 per cent. Charges this high will inevitably lead to poor performance. A further problem is that an adviser may have a bias that steers you towards an in-house fund rather than elsewhere, and the fund itself may have a bias towards underlying funds managed by the partner insurance company. The so-called independence of the advice becomes a sham.
There is certainly nothing to lose by complaining first to the intermediary and then to the regulator - the Personal Investment Authority in the case of financial advisers, and the Securities and Futures Authority in the case of stockbrokers. You can also try the new Financial Services Authority helpline on 0845 6061234.
Poor investment performance is rarely enough reason for a complaint to succeed and for compensation to be awarded. But the more complaints a regulator gets about specific firms, the greater the chance of that firm being investigated.
In practice, even very cautious investors may do better to bypass broker funds and invest directly in unit or investment trusts.
As a general rule, is it better to maximize the lump sum available on retirement from a pension scheme ?
Most people do take the optional lump sum on offer from company pension schemes and personal pension plans. With some employers' schemes the lump sum comes automatically as part of the package on top of the pension income. It's hard to resist a tax-free payout, but for others the quid pro quo is a reduced pension income. Here are some points to consider:
q You may feel able to live on a reduced pension now, but what will that pension look like in 15, 20 or 30 years' time? If you have the choice of an index-linked pension or belong to a scheme which has traditionally offered good discretionary increases in the pension, it may be worth maximising the pension and forgoing the lump sum.
q If you have a personal plan or belong to a scheme where you have to buy an annuity, consider taking the lump sum even if you want to maximize income. You could then use the lump sum to buy a separate annuity. Unlike your main pension annuity, part of the annuity bought voluntarily with your own money is tax-free. But look at the figures and see how the net income from a voluntary annuity compares with the pension annuity that the same money would buy.
q Whatever sort of scheme you have, you may still want to take a lump sum. Get advice on (or work out for yourself) whether you can invest the sum (for instance in a tax-free, high-income PEP) to produce an income which goes some or all the way to making up the pension you have given up. Even if you cannot match the pension forgone, or even if you choose to take a lower investment income in order to allow for a rising income, you might prefer to have some access to your capital.
q Are you likely, at some stage, to be near the income level where you qualify for means-tested state benefits? If so, get advice on how your income level or your capital (which would be boosted by a pension lump sum) would affect your entitlement.
q If you are in bad health or for whatever reason do not expect to live to a ripe old age, you may do better to take as much money as you can at retirement (by way of a lump sum).
I am thinking of starting a share club with seven friends. We propose to allocate a small lump sum topped up with regular monthly payments. None of us has any experience of stocks and shares. Could you recommend any relevant publication or other sources of advice?
An organisation called Proshare (set up to promote share ownership by individuals) publishes the Investment Club Manual at a cost of pounds 25. It also runs a club service, which gets you a quarterly newsletter and a helpline. Call 0171-394 5200 or write to Proshare, Library Chambers, 13-14 Basinghall Street, London EC2V 5BQ.
q Write to the personal finance editor, `Independent on Sunday', 1 Canada Square, Canary Wharf, London E14 5DL and include a phone number, or fax 0171-293 2096, or e-mail firstname.lastname@example.org. Do not enclose SAEs or any documents you wish to be returned. We cannot give personal replies or guarantee to answer letters. We accept no legal responsibility for advice given.