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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
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.
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.
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'.
More about this:
More from us
- How to find a good financial adviser after RDR
- Banks suspend advisers as RDR deadline looms
- How to pick a good fund for your ISA and pension
- Never trust an IFA? Why advice is undervalued
- Stick to your plan in good times and bad
- Don't throw good money after bad
- The Citywire Money guide to the RDR savings revolution
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by Michelle McGagh on Dec 17, 2014 at 08:00