Introduction
In my article ‘How to pick a financial adviser‘ I said I would give some examples of typical adviser charging structures. These are as at mid 2018 and are only examples, but should give readers an idea of what is competitive and what is not.
Fees for dealing platforms may be in addition, although the ‘product’ based offerings usually don’t involve accessing an independent platform or wrap, so their prices are perhaps better value than they first seem.
Fund management fees will be in addition if you invest in funds as opposed to individual shares, even if you use a stockbroker or buy a wealth management package.
This article is about adviser fees, so does not deal with the costs you would have to meet if you are a DIY investor, but there is a ‘How to’ article on selecting a dealing platform, here.
Stockbrokers
A typical stock broker will not be giving financial planning advice, so will not charge any up front fees, apart from modest fixed costs per share or fund if you re-register assets with them. Annual fees are usually in the range 0.75% to 1% with dealing fees sometimes in addition and sometimes inclusive. If you have a large portfolio, say in excess of GBP1 million, you can expect to be able to negotiate a discount rate with the smaller firms.
Stockbrokers may charge extra less obvious fees for using their in house dealing platform, but these would typically be relatively small. You need to ask about that.
Remember that if your IFA refers you to a stockbroker, you will be paying both of them! Make sure you know what the relative costs relate to.
Wealth Management Firms
Most of these firms (like St James Place, Towry, BestInvest) will be actually selling you a product, a structure that they have designed and want you to buy. It will look like a personal service but in fact you get pretty much the same as all the other customers!
Here you may well pay an up front fee and if you negotiate a discount, you will almost certainly get hit with a penalty if you leave them after a short period. Initial fees will be around 3% of what you invest, even if it is very large sum. So if you invest GBP1 million, you will pay GBP30,000 – a complete rip off in my opinion. Ongoing fees are typically 0.75% and that is on top of what is charged for running the funds selected for you. There is a link to a newspaper research article explaining why this approach generates large profits for the firms in this category in the main ‘How to’ article.
IFAs
Most IFAs are happy to comply fully with the rules of their regulator and give you a charges sheet and quote up front.
Percentage fees for new work will be in the range 1% to 3% of the sum invested as a rule. Ongoing fees for the IFA’s service offering, if selected, will typically be in the range 0.5% to 1.25%. Sometimes the percentages are based on slices of investment, for example 1.5% on the first GBP50,000, 1% on the next GBP200,000 and then 0.5% on any excess.
A minority of IFAs charge fixed fees and even fewer charge strictly time based fees, like lawyers and accountants.
Fixed fees for new work often end up mysteriously similar to the percentages mentioned above. However, a well managed IFA practice will base the fee on a time based estimate and that could save you a huge amount of money.
Fixed fees for ongoing service are usually in bands (eg Gold, Silver, Bronze) according to the service to be delivered. These will vary widely from as little as GBP500 per annum for a basic service to maybe GBP10,000 per annum for a premium service with quarterly meetings and extensive investment reporting and telephone support. Some advisers will charge extra time based fees for unexpected ‘ad hoc’ work but most will include routine services like an annual ISA top up within the service offerings above the ‘budget’ level.
Hourly rates are often set by checking what other professionals charge locally, rather than strict management accounting, so will vary geographically. A range from GBP150 to GBP250 per hour for a qualified adviser is likely and lower rates will be charged for support staff work.
What is fair? and what is not!
As there are plenty of advisers to choose from, the market should be competitive, but an ex FCA senior employee was quoted in mid 2018 as suggesting that their research would show it is not! Potential clients tend to feel that they are in a weak position to negotiate and put more emphasis on ‘trust’ (often given without much real experience) and perception of security, as opposed to price. Frequently, in spite of all the bureaucratic legislation, people actually don’t know what they pay for their advice services.
My proposition would be this:
Ask your prospective adviser how long it will take them (and their support staff) to do the initial work you are thinking of contracting and how much time is committed to the review service. Then multiply that by the sort of price you would be happy to pay your lawyer – say GBP200 per hour, less for support staff, say GBP75 per hour. That will give you a realistic price.
So if for example you are transferring a GBP800,000 pension fund and the work is estimated as 12 hours adviser time and 15 hours support staff, the cost ought to be about GBP3500. If you are told the fee is 2% (ie GBP16,000) then you are being stitched up!
If you have agreed one review per year with a meeting at the adviser’s office and nothing else included, you can assume your adviser will be giving you about 3 hours of their time in preparation, meeting and follow up and the support staff will spend a couple of hours before and maybe the same after preparing your reports and effecting any transactions needed. So the total cost should be GBP900 and your monthly fee (if you pay that way) would come out at GBP75. If you are being charged 0.75% (on the example GBP800,000) then you will be paying GBP6000. You may get a Christmas hamper and a day at the races thrown in, but the excess is enough to buy you a cruise!
Clearly percentage fees work well for investors with smaller balances, but that means they are being cross subsidised by investors with more money. That sounds like a wonderfully socialist idea! In reality adviser firms seek to make a profit from every client, so that is just a fantasy!