How Financial Advisers Charge & What You Need to Know
Have you ever wondered whether you are getting good service and value for money from your financial adviser?
In this article we will help you to understand:
- What your financial adviser should be helping you with.
- The ways financial advisers charge their clients.
- How to monitor investment performance.
- Other things to look out for.
The Value of Financial Advice
A qualified and regulated financial adviser should:
- Help you manage your money in a tax-efficient way.
- Make sure you understand the importance of becoming an investor.
- Recommend suitable investments.
- Stop you from making mistakes.
Tax efficiency
Financial advisers help their clients to achieve their financial (and life) goals as quickly as possible. Setting up your financial affairs to be tax efficient is one of the main ways of doing this. A good advisor will emphasise the value of pensions in terms of tax efficiency and help you make the most of your pension allowances.
The importance of becoming an investor
Keeping money in cash makes your bank balance look good, but unfortunately, due to inflation, you won’t be able to buy as much with it in a year’s time as you can today. A good adviser will help you understand this and learn what you can do about it. Becoming an investor will protect your savings against inflation in the long term.
Recommending suitable investments
A good adviser will recommend the most appropriate investments for you based on your circumstances and willingness to take risks. They would also make sure you weren’t investing money you couldn’t afford to lose. (Regulated advisers are required to make these checks by the regulator the Financial Conduct Authority.)
Stopping you from making mistakes
One of the challenges in becoming an investor is the tricky business of being human. When our investments fall in value, it hurts. Instinctively this makes us want to cash in those investments to protect what we have left. By doing so, and not sticking to the long-term financial plan, investors are likely to miss out on the recovery, which is when the biggest gains are made. A good adviser will help you to become aware of this and understand that investing is for the long term.
Hopefully, your financial adviser is helping you and providing value for money in all of these areas. If they are, the next thing you should understand is how they charge for their services.
How Financial Advisers Charge for Advice
Good financial advisers provide a valuable service, and valuable services don’t come for free. You are paying for their knowledge and expertise, which brings many benefits:
- Increased growth on your savings and investments
- Reduced tax bills
- Improved financial wellbeing
- Saved time
However, as with any big purchase, it pays to shop around when choosing your adviser, as small differences can add up over time. Here are some examples of the types of charges you might see and their effect on your investment portfolio over time:
Entry fees
Some advisers charge fees when you pay money into an investment.
If you’re making a regular investment of £300 a month into an ISA and your adviser is taking 5% every time you do this, those £15 charges are going to add up over time. Charges also push back the day that you reach financial independence, which ultimately means working for longer.
Exit fees
We’ve met women who were shocked to learn they would have to pay an exit fee of up to 6% when they left their financial adviser. It is vital to check the terms and conditions carefully before signing up, as not all advisers charge exit fees.
Ongoing percentage fees
This is an area where small differences can have a big impact over time.
Some advisers take a percentage fee from their clients’ investments every year. This fee often sounds quite small in percentage terms. However, when these fees are being charged over many years, they can act as a drag on your investment’s performance.
We’ll explore an example of how different charges can affect your investment over time in the next section.
Subscription based charges
Some financial planning firms charge on a subscription basis – like a gym membership but for your financial health. At Women’s Wealth this is how we charge – we believe it is transparent and democratic.
It’s transparent because you know what you are being charged each month – it comes out of your bank account. It’s democratic for two reasons. Firstly, the amount you are charged won’t automatically increase as your investments increase in value. Secondly, you don’t have to be rich already to benefit from our service.
Fixed fee financial planning
You will also find some financial planning firms charging on a fixed fee based on the complexity of your financial situation. The rule of thumb usually is that the more money you have, the more complex your affairs are likely to be, so you will pay more for the service.
Example Portfolios – How Different Charges Affect Returns
Here are three example portfolios that show how different charges can affect your investment over time.
Each portfolio starts with an investment of £100,000 and grows at 6% a year for 20 years.
Portfolio 1 has an entry charge of 5% and an annual charge of 1.6%
Portfolio 2 has an annual charge of 1.6%
Portfolio 3 has a one-off £650 set up fee and an annual charge of 0.6%
If we assume an investment will grow at an average of 6% a year over 20 years you can see in the chart the difference these charges make.
£100,000 in portfolio 1 (5% entry charge, annual charge 1.6%) grows to £236,597.
£100,000 in portfolio 2 (annual charge of 1.6%) grows to £224,768.
£100,000 in portfolio 3 (£650 fee and annual charge of 0.6%) grows to £284,433.
Portfolio 3, where the investor only pays fees of 0.6%, is nearly £50k bigger than the portfolio where they pay 1.6% in fees. It can really pay to shop around.
This is a simplified example that aims to demonstrate the importance of thinking about charges. You should take care to understand exactly what charges would apply to your financial situation. Understanding this allows you to assess whether your financial adviser provides value for money.
At Women’s Wealth our clients pay an annual charge to the platform that holds their investments and they also pay a monthly subscription for ongoing financial planning and advice. We are proud to say that we never take a penny from our clients’ investments to cover our fees.
Investment Performance
When your adviser is recommending an investment to you, it is worth knowing whether they are choosing from the whole market of investment products.
Advisers who can only choose from a narrow range of investments may be recommending more expensive investments or investments that perform poorly in comparison to the best investments available on the market. Only advisers who are restricted in the products they can recommend will do this.
Independent advisers can choose from the whole investment market. This allows them to choose the lowest cost and best performing investment products for their clients.
You should also understand what your adviser is recommending and why. Do they think they can beat the market? Do they have evidence to support this (huge) claim? Or is their aim to guarantee good performance at a reasonable cost?
Other Things To Look Out For
Commission for recommending insurance products
Insurance is a useful financial planning tool that will protect you and your family against worst case scenarios. It’s wise to be covered, but it’s also worth knowing that some advisers earn commission for recommending insurance products to you.
Do other clients pay less for the same service?
If you pay your adviser on a percentage basis you will be paying more if you have £600k invested with them than someone who has £500k invested with them. This is a quirk of percentage-based charging.
It has also recently come to light that one of the big advisers allows its clients to negotiate a cheaper rate for their services. So, other clients, who weren’t aware of this, now feel cheated by being charged a higher rate. You wouldn’t expect a solicitor to charge different prices to different clients – if you are a professional, your price should be your price.
Is Your Financial Adviser Providing Value for Money – a Checklist
- Are they helping you to be tax efficient?
- Have they explained the benefits of being an investor?
- Can they explain their investment approach?
- Are they an independent adviser?
- Will they earn commission on any recommendations they make to you?
- Do you understand how their fees work?
- Have you calculated how much you will pay for their service in total?
- Have you compared that cost to at least two other advisers (who charge in different ways)?
Conclusion
This article has given you the information you need to assess whether your financial adviser is providing good value for money. Great financial planning and advice can be hugely valuable and will set you on the path to achieving the things you want from life.
If you need help with making the most of your financial resources and would like a service that is focused on helping women, we would be delighted to help you. If you would like to explore how we could help you, you can book a time to talk to me here.
We offer independent financial advice on a subscription and fixed fee basis. Women’s Wealth never take a penny from our clients’ investments and don’t take commission from product providers. We always aim to be transparent and fair in our pricing and we offer excellent value for money.