Informed Choice chartered financial planner Nick Bamford wrote in Money Marketing this week about how difficult it can be to make a comparison between how different IFAs charge their clients.
Q: My new IFA has quoted me a fee of £650 to provide advice about my retirement income options. This seems like a lot of money, is it good value?
A: You might be aware that, from the end of next year, all financial advisers will have to agree their charges with their clients before any services.
This is part of a new regime created by the retail distribution review implemented by the FSA. It also abolishes the payment of commission.
The abolition of commission does not automatically mean your adviser will charge you a fee.
Many advisers work on a speculative basis, only receiving a payment if they convince you to buy a commission-paying financial product. This way of working will still be possible after the RDR when commission (an amount determined by the product provider) is replaced by adviser charging (determined between you and your adviser).
By paying your IFA a fee for advice, you are potentially doing a number of things.
First, you may be ensuring you are getting access to an adviser whose focus is on advice rather than on a product solution, although the two are quite often closely correlated.
Second, you are removing the need for the IFA to sell you a product in order to be paid. This reduces the risk of product bias (because some retirement planning solutions pay more commission than others), as they will still be remunerated for their time and expertise, even if the best advice for you is to not take any action.
IFAs who charge for advice will still, in most cases, charge you separately for a product solution but it may be possible for you to either implement the product solution yourself or use a different adviser to implement it, for example, someone cheaper.
Using an IFA who levies a charge for advice means you are not cross-subsidising the cost of the services they deliver to other people.
When an IFA works on a speculative basis, they will use the revenue from successful product sales to subsidise the provision of “free” advice to clients who do not buy a product. The removal of this cross-subsidy means each client pays less.
None of what I have said is meant in any way to suggest a commission-based adviser will offer anything other than suitable advice.
As to whether the £650 fee represents good value, this will depend on what is on offer, along with your circumstances and financial goals.
For some people – those with smaller pension funds or relatively simple needs – it is likely to represent poor value. Your IFA should have explained why their fee is good value based on your circumstances. If you have a modest pension fund you may find the commission route is cheaper for you.
We tend to find that clients who are reaching retirement need to carefully consider all the retirement income options and how these interact with their wider financial plans before making important decisions which will typically last for the remainder of their lives.
Choosing the most appropriate retirement income option is about much more than selecting the most competitive annuity rate, although this can play a part in the process.
From a value perspective, it is also important to understand how the fee for advice fits into the IFA’s wider proposition. Ask at the outset what they will be charging you to implement any recommendations and what sort of ongoing service they offer, if this is required.
Value for money is a very subjective thing and making a direct comparison between the fees proposed by different IFAs for different clients is difficult to do, not least because we each make value judgements based on personal views of the world.
