How do you pay for financial advice - a complete guide to financial adviser charges and fees
Tuesday 1st June, 2021
I am often asked by people, "How do I pay for financial advice? What fees do financial advisers charge?"
This is an incredibly important question, as fees and charges create a drag on investment performance. If they are too high, how are you to make the investment returns you need to achieve your goals? If they are too complicated, how are you to know if they are too high?
There are many people who could benefit from taking financial advice. There is a mountain of evidence that shows that taking financial advice makes a real difference. However, many people are put off by the fees and charges. We have therefore put together this guide to help explain all the charges involved in paying for financial advice, including the advice fees and the fees on the investments and platforms themselves.
Guide to financial advice fees and charges
Are you thinking of taking financial advice? There are two key question you are probably mulling over:
- How much do financial advisers charge?
- How are the financial advice fees paid?
The answer to this question is quite broad and really depends on what you are looking for. There are a number of different types of financial advice offerings out there from free guidance to various levels of advice service and cost, depending on your needs and requirements. It is down to you to find the approach that suites you.
That being said, financial advice fees are complicated. This is a legacy from the past where clients were not aware at all of what and who they were paying and what they were getting for it. The backlash is that advisers are now required to describe in forensic detail each fee that is being paid and who it is going to.
It is a bit like if you were to go out to buy a car for £20,000 and the sales person were to go through the how the dealership arrived at the £20,000 price tag by breaking it down into its constituent parts like: £2,000 for the wheels from Michelin and £1,500 for the windscreen from SAAB etc. You would still be paying £20,000, but you would know exactly why you were paying that. There are real pros and cons to this approach and it can be confusing.
So, I've broken it down into bite sized chunks below. Hopefully, you’ll find it useful and it will provide some clarity.
The initial financial advice fee
When you approach the financial adviser with a sum of money to invest, they will go through a process by which they find out about you, your circumstances and goals and your attitude to risk. Based on this they will produce a recommendation, which they will provide for you in the form of a report.
The financial adviser will charge you for this recommendation, as well as the implementation of the advice if you decide to go ahead with it. This is called the initial advice charge and it can be charge either as a percentage of the funds being invested or as a fixed fee agreed right at the beginning.
The percentage is normally between 1% to 3% of the funds being invested, however I have seen it reach the dizzy heights of 5% with some advisers.
Regardless of how the fee is charged, you normally have the option to pay the fee directly to the adviser out of your own bank account. Alternatively, you can have the fee paid to the adviser out of the product by the product provider.
Under certain circumstances, depending on the fund or investment vehicle being invested into, there may be an initial investment fee charged by the product provider. This doesn’t happen much, but it is worth being aware of. This once again tends to average between 1% and 3% of the funds being invested, but it also can increase to 5% depending on the investment provider. This is more common with Venture Capital Trusts and Enterprise Investment Schemes, where there is far more complexity in the actual investment process.
The ongoing advice fee
After the funds have been invested, you may want the financial adviser to continue managing those assets for you on a long-term basis. This involves rebalancing funds, annual reviews and adapting the plans put in place in line with your changing circumstances, amongst other services. In return for these services, you will pay the adviser an ongoing advice fee.
Once again, it's usually a percentage of the money that's been invested or the overall assets that are being managed. Alternatively, it can be a fixed fee, agreed right at the outset.
The fees can be paid directly out of your own personal bank account to the financial adviser, which gives you an element of control and also creates less drag on your investment. Or, it can be paid from the investment or from the product.
The average fees for the ongoing advice fee are about 0.5% through to 1.25% and that is just paying for the financial adviser who continues to provide you with advice. Now, study after study have found that clients with an ongoing relationship with a financial adviser end up better off financially than their non-advised counterparts. Research shows that people who seek financial advice benefit from investment growth that is on average 2% greater per annum (after costs) than the growth achieved by a DIY investor. I am therefore very much in favour of taking financial advice. However, I think it is really important to find out what you're getting for your fees.
The platform charge is a generic phrase to cover what you are going to pay for either a platform, pension wrapper or offshore bond wrapper to hold your various investments.
When your financial adviser recommends a general investment account or an ISA, they’ll also need to recommend a platform for them to be held on. There are a number of different platform providers out there, all with platforms offering different levels of functionality.
Alternatively, if the adviser recommends investing into a pension or into an offshore bond, then they will have to be held within an offshore bond or pension wrapper. And the providers of the platforms, pension wrappers or offshore bonds are going to want to get paid as well.
The platform charge is normally a percentage of the funds held in the platform/wrapper or a fixed fee, depending on the provider you're using. This is paid from the product, so you're not having to make regular payments out of your own account to the platform provider.
The fee can be as low as 0.1% for the platform charge, but in reality it's normally between 0.15% and 0.5%.
You may question the need for a platform charge, but the platforms themselves provide a really useful function, keeping all your investments together. They provide regular statements, and provide easy access for you to view the performance of your investments and your holdings. In addition to this, they provide capital gains tax statements and detailed valuations. They are therefore very useful and worth paying for.
The pension and offshore bond wrappers are a necessity if you would like to utilise the flexibility and potential tax efficiencies that these wrappers can offer.
Your financial adviser will then invest your money into a portfolio of funds. That will probably be quite a diverse portfolio and be in a number of different funds, representing a wide range of regions, industries and asset classes.
Those funds are run by companies like Vanguard or Invesco Perpetual. Those fund providers aren't doing it for nothing. They're managing the investments, and the investment decisions within those funds and in order to do this, they have to utilise large teams of highly qualified researchers, complex algorithms and high-speed technology. All of this is pretty expensive stuff, and the fund providers want to get paid for that and make a profit. Once again, there'll be payment for that service, which will be taken as a percentage of the value of the funds invested and will be taken from within the investment fund itself.
Fees vary dramatically depending on the provider, asset class, investment strategy and whether the fund is actively or passively managed. The average fees can be really low, all the way down to 0.1% per annum. Alternatively, they can be really high at 2.3% of the fund value per annum. The funds you choose need to reflect your approach to investment costs. Whatever you choose, fund costs will inevitably create a drag on your investment returns.
There are also internal fund costs, which you're not going to see. They are to do with the actual trading costs of the fund itself and no one really knows what these costs are. We can estimate what that cost are likely to be and, in some circumstances, they can be all the way up to 1% per annum. These costs will also vary depending on the fund, the turn over of the assets and a number of other factors.
All of the above ongoing fund and platform costs are then combined together to give you your total expense ratio or TER. The TER reflects the total ongoing costs of running the fund and taking ongoing advice. This can also be expressed as an ongoing charge figure OCF. In addition to the TER or OCF, you also have to include the adviser fees.
As you can see, the costs themselves can seem quite complicated. However, it is important to bear in mind that at the end of the day, what you are actually paying for is:
- An initial advice fee for recommending an investment/ISA/pension/Investment bond and then implementing it
- An ongoing advice fee, if you elect to receive ongoing advice from your financial adviser
- The Total Expense Ratio or Ongoing Charge Figure for the platform/wrapper and the fund’s annual management charge
- Unseen trading costs
I hope this brings some clarity to the financial advice charging structure, but if you have any questions or concerns, or you think you are paying too much, don’t hesitate to give us a call.