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Understanding IFA fees: a simple guide

The rules on charging clients are changing for independent financial advisers. Make sure you're asking the right questions and get the best deal.

Understanding IFA fees: a simple guide

Earlier this week, consumer group Which? set out a list of questions you should ask your independent financial adviser (IFA) about how they get paid. We’ve expanded on Which?’s questions to bring you a straightforward guide to asking the right questions on financial advice costs and understanding the answers.

1. How does your adviser charge?

Your adviser should explain to you exactly how they calculate their payment. Unlike accountants and solicitors who usually charge you a simple hourly rate, financial advisers can charge in a number of different ways.

Hourly charge

Some IFAs have followed accountants and charge a set fee per hour. The rate of the fee depends on the adviser, as there are no minimum or maximum rates that IFAs must adhere to. Most IFAs who charge this way have time-cost sheets that each member of staff fills out to show exactly how much time was spent on a piece of work.

Pro: it’s easy to calculate what you owe, and time cost sheets offer peace of mind that your adviser isn't pulling the number of hours worked out of thin air.

Con: knowing that you are paying by the hour could make you are more prone to clock watching rather than listening to what the adviser has to say. You may be less inclined to pick up the phone for some reassuring advice when markets tumble if you know you are going to get billed for it.

Percentage charge

This is most popular charging structure for IFAs, and the usual charge is what's known in the industry as 'three plus a half'. For example, if you have £100,000 to invest, the IFA will take 3%, or £3,000, as an initial charge for investing your money and a further 0.5% annually for looking after your money – hopefully increasing your portfolio of money and justifying their pay.

Pro: if the IFA wants to retain your business, they will have to justify that 0.5% annual charge by making you some money. Nobody wants to be lumbered with an annual charge for a portfolio that has lost money.

Con: if your adviser invests your money well or the market rockets over the year then you could be shelling out a lot of money to your adviser, but you'll also have made a decent return.

Fixed fee

Charging a fixed fee for work is becoming increasingly popular with advisers who want to be transparent about their charging and pass any kickbacks the product providers or investment houses may give them back to you.

Advisers usually charge from a menu of fees. For example, there will be a set price for setting out a financial plan, another cost for investing your money, and a separate fee for transferring pensions (although of course the services aren't limited to these activities).

Charge from the product

Historically, advisers were paid via the product they invested you in. This was quite a cloak-and-dagger operation, which allowed some unscrupulous advisers to take high commissions while the unsuspecting customers thought they were getting free advice. Remember: there’s no such thing as a free lunch!

The City regulator has been unhappy with the commission arrangement for some time, and is banning it from 31 December 2012. Advisers will still be able to take money from the policy, money you have invested, to cover fee costs but those costs will be explicitly laid out to you.

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1 comment so far. Why not have your say?

Philip Melville

Jan 18, 2012 at 17:56

If I might make a suggestion to clients or to potential clients of the UK financial services industry it is to ask and then to ask again - " what do I get out of this relationship ? "

I don't think anyone minds paying for anythink if we can see a value in it for ourselves.

The financial services industry has rarely shown concern for its customers mainly through its ability to obscure its activities and charges without any visible constraint.

Not many of us actually expect to be made immune from world financial affairs but being kept informed and helped to factor the possibilities into our lives may be thought to be worth paying for just as much as specific investment returns.

You do not have to become obsessed with your financial arrangements to make sure you get value for money but you will feel better if you take an interest in what is after all your money.

So just ask what's in this relationship for me and don't be happy with platitudes about your advisers status because that is something between him and the regulator not you.

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