I had a meeting last week with a family lawyer who explained that some of her clients are reluctant to use a Financial Planner because of the fees they charge.
Leaving aside the fact that our fees are typically much lower than those charged by solicitors (!), we believe it is important that our clients understand our charges and, most importantly, the value they receive.
From 31st December 2012, commission in its current form will be abolished and will be replaced by ‘adviser charging’.
This rule change applies to all financial advisers (independent and tied/restricted) and means that the product provider will not influence the level of remuneration received by the financial adviser.
All advice charges need to be disclosed to clients up front and in writing. The investor will therefore have the opportunity to agree charges with their adviser before any work is done.
To illustrate the type and level of fees an IFA may charge, I have shown below the typical charging structure used at Informed Choice.
We have been charging fees rather than accepting commission since 2004, since it is much fairer and transparent. It means our clients knows exactly what the advice will cost.
Our fee structure at Informed Choice covers three distinct stages in the advice process:
Advice fee. This is the fee for doing the necessary research and providing the initial written report outlining our recommendation.
It is a fixed project fee and will generally range from £735 to £1,350, depending on the expected amount of work involved. We price our advice fees consistently by considering value, expertise, risk and profit.
An invoice for our advice fee is raised following the satisfactory completion of the advice. This means at the time of payment you have received the service and therefore know exactly what value you have received.
Implementation of new investments and/or arrangements. If the advice is for new investments or switching of existing investments, there will be a separate implementation fee for providing this service.
We typically charge an implementation fee of 2% of the amount invested, with lower implementation fees for larger investment amounts.
Review and ongoing service. We typically charge a fee equivalent to 0.6% of the value of investments under management, depending on the intensity of the ongoing review service we provide.
This fee covers the cost of providing a comprehensive review report, meeting and any follow-up activity (such as portfolio rebalancing) at least once a year to review your plans and check progress against agreed objectives.
Do I have to write a cheque for these fees?
Our implementation and review fees can be deducted from your investments and we typically find this is the most efficient way for clients to pay our fees.
If the advice report includes a recommendation for investment you can choose to also have this fee deducted from your investment. In these circumstances, there is no cheque to pay for our fees.
The advantages of having the fee deducted from your investments, rather than pay as a separate payment by cheque, is that when you compare the value of your investment at a later date you will be taking into account all the costs involved; advice, investment management and platform administration.
If you have paid the fee separately you need to deduct the fee from any increase in the value of your portfolio to see your true return after costs.
How do these fees compare to other advisers?
The charges levied by other financial advisers vary. Some IFAs will charge 3% for a combination of advice and implementation as well as 1% for an ongoing review fee.
Make sure you have fully understood what your adviser will charge and what service you will receive.
Why do you charge a % implementation fee?
The reason we express our implementation fees as a percentage, rather than a monetary amount, is that although the time involved in completing this stage is typically quite small (relative to the advice provided), all the regulatory charges are based on product implementation rather than advice.
For example, our professional indemnity insurance premiums, Financial Services Compensation Scheme levies (which represented 5% of our turnover this year) and other regulatory fees are all based on how much our clients invest in products.
The pricing at Informed Choice is designed to be neither the cheapest nor the most expensive but excellent value for money.
Obviously as a business we price for profit but we are not greedy and always want to deliver value for money. This ensures that we can maintain long-term, often life-long, relationships with our clients and they feel confident referring us regularly to people they know.
As a firm of Chartered Financial Planners we provide exceptionally good quality advice and charge appropriately and in a transparent manner which we believe is fair for our clients
What does the ongoing review fee cover?
Our ongoing review fee will cover the time involved in preparing a comprehensive review report and meeting with you to discuss:
– Changes to your financial and personal circumstances since we last met
– Review of your current portfolio performance since we last met
– Review of any risk profile changes and your current views on investment risk
We will then discuss any necessary changes to your portfolio as a result of the above discussion and implement these changes. This typically involves portfolio rebalancing, to ensure your pension and investment assets remain appropriately invested.
Why pay when my bank will do it for free?
A number of financial advisers (particularly those in banks) will make a recommendation to you without charging an explicit fee. However, this does not mean that you haven’t been charged for this advice.
The adviser will have been paid by commission from the product provider which has been funded by higher charges on your investment product.
The charge could be anything from 2.6%-8.2% as an initial charge followed by 1-1.3% on an annual basis.
Compared to our charges of 2% and 0.6% you can see how this charge can seriously impact on the long term performance of your investment.
Commission based advice can be dressed up to appear free, but can often prove more expensive in the long term than paying a fee. Bank advisers may tell you they provide free advice but they don’t. The cost of advice comes out of product charges.
Consider who your adviser works for. If they have sales targets and are rewarded for selling their employers products then they work for their employer, not you. By paying a fee you will receive truly independent advice since the advice is not influenced by which provider or which product is paying higher commission.
From 31st December 2012, commissions will be abolished for bank advisers as well as independent financial advisers. They might still choose to provide advice for ‘free’, working on a speculative basis with the aim of charging a bigger fee when they implement their recommendations.
Again, this can skew the advice they provide; they are more likely to recommend an investment product so they can make an implementation charge, regardless of the suitability of this course of action. Paying a fee for advice removes this element of bias.
How can I ensure best advice?
We believe that the best way for our clients to ensure they receive the best possible advice is to pay a pre-agreed fee for advice, implementation and review. You should always get this in writing, in the form of an engagement letter, before proceeding with the services from the financial adviser.
Any financial adviser who is reluctant to discuss their fees and the value they offer should be treated with caution.
Between now and the end of the year, be very wary of financial advisers who are still working on a commission basis as they are likely to be ‘making the most’ of the opportunity to charge you on the less transparent commission basis.
From 31st December 2012 onwards, avoid advisers who work on a speculative basis, appearing to offer advice for ‘free’.
Do get in touch if you have any questions. We offer an initial meeting at our expense and without obligation, which is your opportunity to find out more about us (and for us to find out more about you, your goals and objectives).
