Question
What should an independant financial adviser charge for their services - initial and annual?Answer
There’s basically two ways financial advisers charge for their services – either a percentage of the amount invested (via commission or fees) or an hourly fee for the work undertaken.
Percentage fees and commissions are pretty much the same thing. The adviser receives a percentage of the amount invested at the outset and a smaller percentage every year based on investment value. The fees or commissions are usually deducted from the amount you’ve invested; although the fee route should also give you option to write a cheque instead – reducing the drag on your investments.
Opting for percentage fees gives you a bit more control provided the adviser has waived all commissions; if you become unhappy with the adviser you can simply stop paying the fees and take your business elsewhere.
Typical commissions tend to be 3% initially and 0.5% a year for unit trusts. But it’s not unknown for some products, especially investment bonds, to pay as much as 6 or 7% initial commission if the adviser chooses not to take trail commission. Such levels are totally excessive and should be avoided, especially as without trail commission the adviser has no financial incentive to look after you post sale.
The advantage of ongoing percentage fees/commissions is that they give the adviser a financial incentive to grow your investments – it’ll earn them more money. However, unless the percentage reduces as you invest more the fees could prove excessive.
For example, a 3% initial and 0.5% annual fee/commission on a £50,000 portfolio equals £1,500 upfront and £250 a year. But on a £500,000 portfolio this rises to £15,000 and £2,500 respectively unless the adviser reduces their cut.
Hourly fees sound attractive on the surface and can work well provided the adviser gives you a firm quote for the total costs you can expect to incur. There’s obviously a danger of advisers artificially inflating their overall fees by billing for more hours than they’ve worked (as with any profession charging an hourly rate), so beware. Typical rates range from £100 to over £250 per hour depending on location and experience.
What’s a fair charge? It really depends on how hard the adviser will have to work. If you want them to come and visit you at home (which personally, I’d avoid) rather than meeting at their office or speaking over the phone then be prepared to pay more. Likewise, having lots of regular chats will take up more of their time versus a simple annual review. Plus some advice, for example inheritance tax planning and pension transfers, tends to be more complex than advising on where to invest your ISA allowance.
However you pay for advice, I’d be wary of paying more than £1,000 to £2,000 upfront and £500 to £1,000 a year, unless your needs are complex.
I do have some sympathy for advisers in that the costs of regulation and associated red tape have soared; it’s only fair that some of this is passed on to the customer. But in general I feel far too many advisers (and their employers) are still more focussed on hitting sales targets (and charging as much for advice as they can get away with) rather than the quality of advice they give their clients. So when speaking to a potential adviser ensure you’re comfortable that they have your best interests at heart, as there’s a good chance they probably won’t!
What should an independant financial adviser charge for their services - initial and annual?Answer
There’s basically two ways financial advisers charge for their services – either a percentage of the amount invested (via commission or fees) or an hourly fee for the work undertaken.
Percentage fees and commissions are pretty much the same thing. The adviser receives a percentage of the amount invested at the outset and a smaller percentage every year based on investment value. The fees or commissions are usually deducted from the amount you’ve invested; although the fee route should also give you option to write a cheque instead – reducing the drag on your investments.
Opting for percentage fees gives you a bit more control provided the adviser has waived all commissions; if you become unhappy with the adviser you can simply stop paying the fees and take your business elsewhere.
Typical commissions tend to be 3% initially and 0.5% a year for unit trusts. But it’s not unknown for some products, especially investment bonds, to pay as much as 6 or 7% initial commission if the adviser chooses not to take trail commission. Such levels are totally excessive and should be avoided, especially as without trail commission the adviser has no financial incentive to look after you post sale.
The advantage of ongoing percentage fees/commissions is that they give the adviser a financial incentive to grow your investments – it’ll earn them more money. However, unless the percentage reduces as you invest more the fees could prove excessive.
For example, a 3% initial and 0.5% annual fee/commission on a £50,000 portfolio equals £1,500 upfront and £250 a year. But on a £500,000 portfolio this rises to £15,000 and £2,500 respectively unless the adviser reduces their cut.
Hourly fees sound attractive on the surface and can work well provided the adviser gives you a firm quote for the total costs you can expect to incur. There’s obviously a danger of advisers artificially inflating their overall fees by billing for more hours than they’ve worked (as with any profession charging an hourly rate), so beware. Typical rates range from £100 to over £250 per hour depending on location and experience.
What’s a fair charge? It really depends on how hard the adviser will have to work. If you want them to come and visit you at home (which personally, I’d avoid) rather than meeting at their office or speaking over the phone then be prepared to pay more. Likewise, having lots of regular chats will take up more of their time versus a simple annual review. Plus some advice, for example inheritance tax planning and pension transfers, tends to be more complex than advising on where to invest your ISA allowance.
However you pay for advice, I’d be wary of paying more than £1,000 to £2,000 upfront and £500 to £1,000 a year, unless your needs are complex.
I do have some sympathy for advisers in that the costs of regulation and associated red tape have soared; it’s only fair that some of this is passed on to the customer. But in general I feel far too many advisers (and their employers) are still more focussed on hitting sales targets (and charging as much for advice as they can get away with) rather than the quality of advice they give their clients. So when speaking to a potential adviser ensure you’re comfortable that they have your best interests at heart, as there’s a good chance they probably won’t!
Read this Q and A at http://www.candidmoney.com/questions/question220.aspx
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