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How to understand financial advisers' charges

Are you thinking of using a financial adviser? Read our guide to adviser charges first. The way you pay for financial advice has just been changed.

 

by Michelle McGagh on Jan 25, 2013 at 13:00

How to understand financial advisers' charges

Adviser charges are in focus right now because financial advisers are no longer allowed to accept commission from the financial companies whose products they recommend.

This is probably the most important reform of the FSA's 'retail distribution review' (RDR) which took effect at the start of this year. It means that consumers now have to pay financial advisers directly.

Although financial advisers are required to be clear about their fees and tariffs, the variety of different adviser charges is confusing.

Read our guide below before seeing a financial adviser.

What’s the RDR?

The retail distribution review (RDR) is the biggest shake-up to ever happen to financial advice firms. In order to better protect consumers, the FSA has raised the minimum professional qualification financial advisers must have.

It has also widened the scope of financial products and investments that advisers must research and know about if they want to practise as an 'independent' financial adviser (IFA).

Advisers who don't meet this challenge or who prefer to specialise on a narrower area of expertise must label themselves as a 'restricted' adviser.

The third reform is that financial advisers can no longer be paid commission by the pension and investment companies whose products they recommend.

Pros and cons of scrapping commission

The abolition of commission is a huge change in financial services. It has raised fears of an 'advice gap' if consumers refuse to pay adviser charges or are left behind as more financial advisers focus on wealthy clients.

Although the abolition of commission will take time to get used to it is a good thing to have done.

The commission system was unclear and misled the public into thinking financial advice was free, when it wasn't. This is because pension and investment companies recouped the cost of paying commission to advisers through higher charges on their products which consumers paid.

Also, the existence of commission raised the fundamental question of who advisers were really working for. Their client or the company who paid them commission? The payment of commission led to suspicion that advisers were biased towards selling financial products because they wanted the money rather than because they were right for their customers.

The abolition of commission should make financial advisers far more professional in everything they do. But it means you have to pay them directly for their advice.

Do I have to write a cheque to get advice?

No, you won’t have to write a cheque necessarily, although you will be able to if you want. The new adviser charging system means the adviser has to make it clear to you just what their advice costs and you can then choose how to pay them.

You may want to write a cheque out to your adviser or you can agree for the cost to be paid out of your invested money (just like commission used to do but this time you should know exactly what is being deducted).

Your adviser should give you the option of how to pay and explain what their service costs. If they are not doing this then they are breaking the regulator’s rules.

How do advisers set their fees?

The fees charged by advisers will vary depending on the services you require and how the adviser decides to charge. There is no set minimum or maximum they can charge you and no set way they have to charge you – they just have to make sure that the fee is explained to you explicitly.

However, this doesn’t mean that you will get a pounds and pence breakdown of the cost. Advisers can charge in different ways.

Percentage fee:

This is the most common way for advisers to charge, based on a percentage of the money you want advice on or managed.

There is usually an initial percentage charge for taking you on as a client and investing your money, and then an ongoing percentage charge levied each year for continuing to manage your money.

These charges often take the form of ‘three plus a half’: this means 3% taken from the money you transfer to the adviser or each time you invest plus an annual charge of 0.5% of your money under advice.

This charging structure most closely resembles what advisers used to get paid in commission, which is why many have adopted it as their new charges.

The trouble is the more money you have with an adviser, the more you pay for the advice and ongoing service. Many advisers get round this with a sliding scale that lowers the percentage as the amount of money increases.

Fixed fee per service:

Some advisers take a different approach and charge a fixed fee for the one-off projects that many people go to see them about: such as, setting up a financial plan; consolidating different pensions picked up during a career; or simply investing your money.

Fixed fees are a good idea if you don’t want ongoing advice and just want help with a specific job.

However, if you want to keep in contact with the adviser and receive regular updates and an annual review you will have to pay a percentage fee. At least then the adviser is incentivised to see your money grow and not fall in value!

Most advisers now have a menu setting out the different levels of service they offer and the different fees and tariffs for each.

Hourly charge:

Some financial advisers are trying to mimic other professionals like accountants and solicitors and charge by the hour. If they do this they should provide a full breakdown of the work they’ve done and how long it took. Some will even let you know what member of staff has completed the work as many advisers pass on tasks to their paraplanner (their technical assistant) or an administrator and these people are cheaper on an hourly rate than the adviser.

Don’t be scared to ask for a detailed breakdown of the work and who did it – if the advisory firm is working on this basis it should have a strict process in place for determining costs.

Advice isn’t the only cost

The fee your adviser charges you, whether on an hourly, percentage or fixed basis, isn’t the only cost you’ll incur. The fee you pay to your adviser is for the service they provide – advising you and managing your money.

You adviser will invest your money, whether it’s in investment funds, a pension, or ISA , and all these products have their own charges that will have to pay.

Don’t be embarrassed to ask your adviser what you’re paying for. Get details of the advice costs and the costs of any investment products to try and get a good picture of just what you’re paying and whether your adviser is providing you with good value.

Questions to ask a financial adviser:

  • Is there an initial charge for investing my money?
  • What are the ongoing charges for investing my money?
  • What exact services are included in the charge?
  • Are there any extra charges that are levied for other services?
  • How many times a year will I see you, and are the meetings included in the cost?
  • Will I be charged if I contact you between meetings?
  • What are the costs of the products you are investing my money in?
  • Are there any extra costs that I will incur?
  • Will the cost of advice reduce the more I invest?

For more on these important changes read our 'guide to the RDR savings revolution'

20 comments so far. Why not have your say?

Ian Lees

Jan 23, 2013 at 10:44

I would challenge Michelle McGragh when she confirms, the removal of " commissions is a good thing ". This is a poorly worded statement, lacking in quality and substance. Commisions or bonuses are the payment of money by a thrd party - for work carried out on behalf of the customer. They are open to abuse - and have been abused in this way by companies such as the insolvent insrance company scottish widows - now currently advising on auto enrolment - and introducing to Clerical Medical ( a company now defunct ) - but pays scottish widows as an introducer - and outside the FSA regulations. How does that work ? Similarly, edinburgh based company - standard life permit or refuse clients or customers into Fidelity Funds Network - becasue they run the wrap account. Commisisons against advisers independent and tied - are the means of the carrot and the stick - abused by directors of these insolvent insurance companies . Commissions of up to 8% on lump sums - are paid to banks such as Edinburgh based bank TSB _ who purchased Lloyds, currently trade as LloydsTSB, who owns Halifax Bank of Scotland Scottish Widows Clerical Medical St Andrews Life ( ex halifax ) and TSB Life Hill Samuel etc etc., Commisions used properly by advisers and product providers have many attractions - one being No VAT. Secondly, many people are attracted to advisers being paid out of their savings or investment or life assurance - rather than out of theri already overly charged employee salaries or self employed earnings. As advisers we can elect to enhance benenfit sin lieu of commissions - except at scottish widows. I applied for an agency and have been refused - becasue we as fee based advisers charge a fee - then enhance benenfits - for customers - to encourage more savings - introductions to other people who are serious about saving. To claim commissions - led people to believe " advice is free ", is a complete nonsense - as everybody and their granny knows commissions are paid to advisers ( except in banks - and even Coutts - now RBS - was found churning bonds for commissions under the FSA Rules and Regulations ) - they are told how much they are prior to purchase and have been for many years. RDR has not helped consumers. RDR has not made any more information available. RDR has destroyed advice for millions of consumers ( see fidelity report) - restrcting their access to advice and increasing the cost of advice - directly from their already overtaxed pockets - in the most sinister monopoly, from the economic folly of a bankrupt Labour Gov't to the restrictive monopoly - created by this Conservative Liberal pact.

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TA via mobile

Jan 23, 2013 at 14:52

@Ian Lees

I've seen your comments on LinkedIn as well and do cringe.

You really are damaged goods and a classic example of a Victor Meldrew.

How dumb can you be to think that commission didn't make people think that advice was free? If they didn't write out a cheque it was "free" in their minds wasn't it? That's precisely what Michelle is saying.

Instead of acting like a buffoon and having a go at everyone else whose opinion you disagree with, get on with your day job...

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Bernard Bedford

Jan 23, 2013 at 15:41

From a punters perspective it's a good comprehensive article, Michelle.

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Michael Peters Fenwicks

Jan 23, 2013 at 15:43

In my opinion RDR should have been delayed thus some elements requiring a little more time.

We need to see changes over the next 18 months while in short term let's see if these radical changes of policy really deliver expected improvement.

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Alan, Bristol

Jan 23, 2013 at 16:00

@ Ian Lees

Oh what a poor sad ba$tard - presenting a rant with political undertones and little understanding of well-written English. It’s no great surprise to me that you unsuccessfully tried to become an agent for Scottish Widows.

Get a proper job – get a life!

Meanwhile, in the real world, RDR will not make any difference to the banks/advisors who want to make a living out of screwing dumb potential investors. There will be many ways for the unscrupulous to make a living from the unsuspecting, gullible, public.

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Ian Lees

Jan 23, 2013 at 16:21

@ anony mouse You may have missed the point . . that commissions are disclosed prior to the sale . Consumers are made aware of the earnings of the adviser before the sale . . . . so ho wwould anyone sensible person think . . " product advice was free ? ".

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TA via mobile

Jan 23, 2013 at 17:03

@Ian Lees

I've missed the point? No I do know that commission is disclosed to everyone, but you know what salesmen say?

"Well, for you my advice is free and I'll get paid by the company when you take out/invest in this product"

Are you for real in not understanding that?

I suggest you stop ranting on LinkedIn as you are simply embarrassing your profile further. If you can't write properly (and forgive me if there are obvious reasons for this), it's best to keep away from these blogs as you do give advisers a bad name.

RDR is the starting point in making Financial Planning the most trusted profession in the country.

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Ian Lees

Jan 23, 2013 at 17:05

@ alan bristols . . . thank you for those few kind words. I have a job ! I have a life ! and the reason behind the corrupt activity at scottish widows is their fraud and corruption - and contempt for advisers - and their client banks . . . . . . . .by employees - the wage slaves on behlaf of their corrupt directors ( at scottish widows and edinburgh based bank TSB) . It is well known in edinburgh - that scottish widows is run by the incompetent for the incontinent . Whilst scottish widows purchased one of ednburgh's " black holes ", or Morrison street as it is known - they have destroyed millions of customers life savings - whilst pocketing their bonuses. If scottish widoews were competent in their dealings - they could be honest in their dealings. It is the dirty tricks of scottish widows - who ( a ) refuse to provide an agency ( b) contact our clients ( and your ) direct ( c ) do dealsbehond the advisers back - to maximise commisons and bonuses for the advisers of TSB scottish widows - and the directors.

With regard to polictiacal undertones you might have missed that it was the scottish MP's in Parliament - or as they are known the scottish Labour Party - who permitted RBS and Edinburgh based bank TSB - to purchase the English banks like Halifax Natwest - to bring a monopoly. This may have been to reduce and restrict access to independent advice - or restrict the market place to those who - lobbied Labour. You may have missed gordon Brown sold off the UK Gold . You may have missed that banks are signing cheques for fines imposed by the FSA - when they have no reserves. If you Alan or I signed a cheque when we did not have the resources behind us - we would be in the pockey before we knew it> Big Bob Diamond retains his job as adviser to Barclays - hector gets knighted - and the banks remain insolvent - now that really is solvent " abuse ". Given that Dave Cameron - is reducing the Police once again as well as the armed forces - probably allows more people to cheat the system - because in my opinion - there are not sufficient police - to investigate these corrupt and fraudulent activites.

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Ian Lees

Jan 23, 2013 at 17:20

@TA via mo "bile" . . . you clearly do not understand the relationship of an adviser with his or her client. A good adviser spends a lot of time work energy and money - attracting clients. It is not in theri best interest to continuously seek to find clients ( often described as being a " hunter", - direct sales or bank advisers are hunters ! Sometimes they are called predators - scouring through client banks playing the numbers game - speak to 30 people 10 appointments ONE sale ! this is what banks do . When someone has funds eg salary or inheritence ar windfall the manager of eg TSB contacts the victim direct. scottish widows alerts TSB managers to this and allows them to get a head start on their targeted victim - for their commissions. Advisers you would find if you looked into the way they operate - look for repeat business. commisons are made clear ( a requiremetn under FSA Rules - applied by product providers - except in the case of Nationwide - where L& G do not staple the commisssions page - and the commission may be left out). The vast majority of advisers are running their own businesses - and it is in their best interests to look after their customers for two reasons (1 ) New and repeat on going business (2) referrals to potential new clients. Advice comes from good advisers - and if that is what you refer to as "Financial Planners", you may find with proper due diligence that many advisers have incorporated such work into their client care agreements - for decades !

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TA via mobile

Jan 23, 2013 at 17:50

@Ian Lees

Ian, do yourself a favour and stop waffling on like a dithering idiot.

It was a well written article by Michelle, to the point.

If you are frustrated with RDR, all these blogs and life in general, take a breather and just don't come and rant in appaling English...it just might reflect your state of mind!

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Anonymous 1 needed this 'off the record'

Jan 25, 2013 at 14:37

I have been contacting local IFA's to get a 'feel' for their charges.

1% of money invested per annum seems a popular sum but they all tell me that my funds will be put on a 'platform' but I'm not sure of how I gain by that being done.

Another local IFA has changed companies, he tells me that his role is that of a financial planner backed up by a paraplanner and an admin assistant and I would have telephone contact with both.

Yet another IFA tells me that his company have been taken over by a S Irish company and my funds would go on their platform (not under FSA rules??) and as such the IFA would not have to get his Level 4 qualification, presumably he would become an introducer only?

It seems to me that RDR has the best of intentions but is becoming a minefield for the unwary!

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Daveh2h

Jan 26, 2013 at 13:38

I am currently in negotiation with my IFA, who has a % based charging method for placing trades.

My quible with it is that the charge for buying a stake in a fund or shares increases with the value of the transaction and bears no relationship to the work involved.

Do any of you IFAs have a comment.

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hooligan

Jan 26, 2013 at 14:42

so what is a ful llist of charges for someone who has a £100,000 pot saved and saves £1,000 a month (say that person is 45 planning to retire at 65) with a financial adviser? Let's say the pot holder has investments in emerging markets equity fund (25%), a corporate bond fund (50%) and a property fund 25%).

for the £100,000 pot,

IFA charge of 1% per annum (p.a.)

Platform fee of 0.25% p.a.)

Emerging markets equity 2.0% p.a. on 25% = 0.5% p.a.

Corporate bonds1% p.a. on 50% = 0.5% p.a.

Property 1.5% p.a. on 25% = 0.375% p.a.

total fees on the £100,000 pot = 2.625% p.a. = £2,625 p.a.

for the £1,000 a month contributions

for the £1,000 a month = ave ann balance (AAB) of £6,000

IFA charge of 1% p.a. on AAB = £60

platform fee of 0.25% on AAB = £15

Investment maagement fees of 1.375% on AAB = £82.5

Total annual fees £157.5

Mid to offer spread for purchasing units over the year:

EM Equity = 1% on each of 12 purchases worth £250 = £25

Corp bonds = 0.5% on each of 12 purchases worth £500 = £25

Property = 1.5% on each of 12 purchases worth £250 = £37.50

Total cost of 12 x £1,000 monthly contributions = £87.5

Overall cost to investor = £2,625 + £87.5 = £2,712.5 for an average balance of £106,000 over the full year or 2.55%.

Not bad money if you can get it. Good business for someone, with all the risk being borne by the investor and none by anyone in the value chain I have shown.

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hooligan

Jan 26, 2013 at 14:51

woops £2,712.5 PLUS £157.5 management fees on contribs = £2,870 or 2.71% on the 106,000 AAB

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Michael Peters Fenwicks

Jan 26, 2013 at 15:44

Following comment summarises RDR which leads to ask are IFA going to be required to provide some kind of compensation should their advice not yield results promised thus new fee structure?

For me what am looking for clearer terms when it all goes wrong countless circumstances.

I would to hear if from anyone who has fully scrutinized that side of RDR.

"Not bad money if you can get it. Good business for someone, with all the risk being borne by the investor "

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Rightcharlie1

Jan 28, 2013 at 04:45

It is my experience that all the commission charges made on a product were unclear and cloaked in jargon to mis-lead or hide the real cost from the customer.

I have had one adviser comment on why I held a particular product stating that "whoever sold it to me made a huge profit (i.e. comission) from it". It was the wrong product for my situation and was changed. This is tantamount to mis-selling.

These new rules are a good thing, and the fact that advisers are opening companies in Ireland to hold their business in England to avoid the new rules shows just how much is at stake.

These rules should go further, caps on fees, no commission if the recommended products fail to acheive set targets. Achieving financial growth is the function of FAs, so if they fail why should they be paid commissions regardless of performance?

And I agree with comments above, Ian Lees' written word is appalling!!

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TA via mobile

Jan 28, 2013 at 08:54

@Rightcharlie1

You are partly right in that commission charges were unclear and hid the real cost...but not all. Commission has been disclosed for a long time and its the fault of the adviser for not explaining things properly.

However when you say the rules should go further to cap fees and that no commission should be paid if set targets are not achieved brings the usual amusement. I say that because later you write that it is the FAs job to make gains!

What you (and the rest of the DIYers) should know is that an IFA is there to provide advice. That means advice on what you should do with your money, how to utilise allowances and the like. Investment advice will be around meeting set targets as you say in the future. That involves taking risk - which is a gamble.

What you say about refunding money if those targets aren't achieved is laughable as it's similar to saying "I read the paper and saw the team Liverpool were going to put out against Oldham so it's likely the Reds will score more than 4 goals... but hang on bookmaker, can I have my money back that a supposedly superior team were humiliated by Sunday League standards?"

Do you get it that it's a gamble? So how can it be the FAs job to make money? How daft an assumption is that?

The new rules state that you have the option of agreeing an ongoing service - which is more in line with wealth management. If there is consistently poor returns and the explanations are insufficient you are perfectly entitled to complain, as the agreement would have clearly stated what you get for ongoing fees...

But just give up this stupid idea that professional IFAs are there to make you money by taking gambles and then refund it if the investments fail to make gains.

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Willie P

Jan 28, 2013 at 17:23

In my view old fashioned stockbrokers have quietly turned themselves into wealth managers- because the original business plan made no sense with everybody dealing with execution only brokers on the net. But they have not been in general upfront with their existing clients and have used RDR as the excuse for changes while they hope the client will not ask for the rate sheet, and if they do that they are not good at mathematics. My just retired broker contact said clients never notice the 0.25% quarterly of portfolio value disappearing from their cash balance. Then you add VAT and administration fees.

This whole RDR scam claims to assist clients with greater disclosure, but the cost comes much more now out of the client's taxed income.

If you have a good portfolio of investment trusts and OEICs you don't need to pay somebody else for active management. Just get somebody to take a strategic look once a year at your portfolio.

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Anonymous 1 needed this 'off the record'

Jan 28, 2013 at 18:00

Thank you all for comments.

One question is there a legal/FSA difference between a wealth manager and an independent financial advisor?

An IFA I rang suggested, when I mentioned the size of my portfolio, that he should act as a wealth manager!

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richard twoshoes

Mar 20, 2013 at 23:27

Just found these posts, very interesting!

I suggested elsewhere that IFA's ought to be paid by performance and got flamed for it!

I'd love to find someone to manage my portfolio who would share the risk and rewards, but such a person seems not to exist.

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