It never ceases to amaze me how much some people pay for financial advice. A key motivator for Ian and me launching Candid Financial Advice was to change this, by offering high quality low cost financial advice.
I suspect half the battle for most people is not knowing how much they are paying in the first place. And because most advisers are paid via product providers it’s easy to neglect how much you’re paying them when you don’t have to write out a cheque (especially as advisers are typically quite coy about their fees in any case).
So here’s a simple guide to help you find out how much you’re paying and to gauge whether it’s reasonable.
When you take advice you’ll usually end up paying fees to three parties, as follows:
Advisers usually charge a one-off fee at outset when they give you advice followed by an ongoing annual fee for continuing to look after you.
Few advisers openly publish their fees, but from experience there is a growing trend towards a 3% initial fee and 1% annual fee. Very high in my opinion on all but the smallest sums.
Assuming you already use an adviser then the initial fee should be history, although many advisers like to continue charging this when you invest more money, for example topping up ISAs or pensions. Ongoing initial fees are unfair, unless there is a significant amount of work involved – our view is that advisers should be covering the cost of this work from their annual fee.
Some advisers instead charge an hourly fee, which typically range from £100 per hour to over £300. When working on this basis it’s vital to either cap the overall fee at a sensible level or agree a fixed price for the work, else you could end up with a hefty bill.
Your financial adviser should have set out in writing what he or she is charging you when you became a client, with updates if required, but if unsure just ask them. If your adviser is uneasy providing the information then that’s usually a telling sign…
As a rule of thumb initial advice fees over £3,000 are probably steep and fair annual fees should likely be in the region of £1,000 - £3,000 depending on how much money and work is involved.
We’ve pitched our own fees at what we feel are very fair levels, so you might want to take a look as a guide.
Fund managers charge a percentage annual fee on the value of your investment. Initial fees used to be commonplace, but are now largely extinct since sales commissions were banned at the start of 2013. The exception is advisers who sell their own funds and continue to operate a commission style system, for example St James’s Place.
In general there are three styles of fund, each with a fairly distinct band of charges. Typical annual charges (‘ongoing fund charges’ (OCF), which includes some ancillary costs) are as follows:
Index-tracking funds: 0.1% – 0.5%
Actively managed funds: 0.5% - 1.0%
Funds of Funds: 1.2% - 1.8%
Advisers who use funds of funds are effectively outsourcing the job of selecting and monitoring funds. Perhaps fine if they reduce their annual fee to compensate, but most don’t so you end up paying high annual charges in total. The same also holds true when advisers outsource to a discretionary investment service.
Our approach is to combine trackers with some decent actively managed funds, with total annual fund charges averaging around 0.5% - 0.8%.
Again, your adviser should have provided you with fund charge information in writing, but if not ask them for the ‘ongoing charge figure’ for your portfolio.
An investment platform is an administration service that effectively means you can combine many different investments in a single account, e.g. pension or ISA. While a good idea, they’re an added cost.
Most platforms charge annual percentage fees, which seems most unfair given there’s often little extra work administering a £1 million pension versus a £50,000 pension.
Because of this it invariably makes sense to use a fixed fee platform for larger sums, but in my experience most financial advisers don’t because they do whatever’s easiest for them are in any case not very cost conscious.
For example, on a £500,000 ISA portfolio the popular Cofunds platform would charge a total £1,255 a year via percentage fees and Transact £1,500. By contrast fixed fee platform Alliance Trust Savings charges £225.
Yet again, your adviser should have confirmed platform fees, if relevant, in writing. But you can always ask them. And remember, platforms are simply administration services hence have no impact whatsoever on your investment performance – so no point paying over the odds in this area.
Once you’ve established what you’re paying your adviser, fund managers and platform(s), work it out in pounds and pence. The total may well shock you.
As a rule of thumb more than 2% a year in total is steep, and if you have several hundred thousand pounds invested you should be aiming for 1.5% or less.