In personal finance, one of the ways you might be introduced to a financial adviser is through a personal recommendation. Your best friend, or brother-in-law perhaps, has been dealing with a very nice chap he has known for a long while and he has no hesitation in recommending the said nice chap to you. But what if the happy bunny understands very little about financial planning, nor what it should cost? At the end of the day you are perhaps better off taking personal responsibility for your choice. Firstly, it’s important to recognise you do a have a choice in the matter. There are many advisers out there who’d be more than happy to look after your business, so do have a good look at what you’re being offered and the costs involved before proceeding.
If 10 years later you discover that what you have bought is an expensive bill of goods, the horse will have potentially bolted along with a very large amount of your money in unnecessarily expensive fees and charges. This is where the true value of independent advice lies. The independent adviser is duty bound to make his or her recommendations then research the market and find a suitable product for your needs, and also one that is competitively priced. A restricted adviser on the other hand is one who effectively only offers the products of a single company. They may be very good products but they may also be very expensive. The brochure for the product you are being offered may be the glossiest, the lunch you are being treated to may be the finest and the patter the slickest but, if you stop and think for a moment, it’s worth asking yourself who is paying for these things, given the general scarcity of free lunches on planet Earth!
Talking about the charges that apply to investment contracts is a topic I’ve shunned for a while. Having buttonholed you however, I’m now going to do just that. Since the Retail Distribution Review (RDR) in 2013, there has been a greater requirement for transparency, and also for advisers to provide value for money. Hourly rate adviser charging is one of the solutions that has come to the fore. This can work quite well but it has its limitations. If as a couple you are investing £20,000 each into his and hers ISAs, the adviser might spend 4 hours all told preparing and then implementing the advice. If the hourly rate is say £250, the end result would be in the ballpark of the percentage fees being charged currently.
If however you came along with £10m to invest, the hourly rate model becomes a problem. It may be that the adviser spends 20 hours, researching the case and attending meetings, and that this therefore gives rise to a £5,000 advice bill. If the advice is good and the investment fulfils its purpose, it may make an you average of 4% per annum, or £400,000 per annum in cash terms and rising. An annual review for the investment may generate 4 hours of work, or a bill of £1,000. The discrepancy between what each party gets out of the advice process then makes it commercially unviable for the adviser, given the fixed business costs.
In this instance it might make sense for the adviser to offer a flat fee option. This would of course be subject to discussion. At the outset a fee of X amount based on the value to you as a client might be agreed, and then the cost of an annual review might be charged at Y amount, with the annual fee reviewable annually along with the investment.
The most common method of advice fee charging however is on a percentage basis. Recent research tells us that with this model the typical initial charge for advice ranges between 2% and 3% of the investment amount. One of the major effects of the RDR has been the driving down of initial adviser fees by more than a half for most companies. Annual fees are typically anywhere between 0.5% and 1%. Where larger investment amounts are concerned there is clearly more room for flexibility, and you should always ask for a discount for more significant investment amounts. The important thing is that this whole process should be transparent. All reputable companies now provide their clients with a detailed annual costs and charges document, which will list every single penny that has been taken from your investment to cover their management and administration charges and also the adviser fees.
I would go so far as to say that any company that isn’t prepared to provide such a document isn’t worth its salt. Every so often some years ago a substantial cream-coloured envelope with my name and address embossed in gold would land on my Willoughby House doormat. I could always guess its contents. Inside a card bearing my name contained a similarly gold-embossed invitation to lunch at a not at all shabby Park Lane Hotel. The lunch was to be followed by a seminar about inheritance tax planning. What would be not to like? I was just left wondering which of my neighbours might be paying for this lunch. None of them of course… at the start of proceedings. But perhaps at some point along the way, then yes perhaps! If this scenario sounds familiar and you do hold an investment the costs of which are a mystery to you, an independent review is highly advisable. Typically you could save 1% per annum in fees, which on a decent-sized sum would make a huge difference to your investment outcome. Any mathematician, or even common sense will tell you that what puts the biggest drag on your returns is the annual charge levied on your investment.
If any part of what I have been describing sounds familiar, please feel free to get in touch. It won’t cost you anything to find out where you stand, but it may well cost you quite a lot if you prefer not to be distracted whilst enjoying your free lunch!
Joe Coten is a member of the Personal Finance Society.
He may be reached on 0207 588 9626.