When and why should I appoint a financial adviser?
With most banking and investment plans now offering high quality online management, people are increasingly inclined to manage their own finances.
Cash accounts and guaranteed savings, like current accounts, cash ISAs, premium bonds and other NS&I products are easy and safe to manage yourself. Once let loose on an online S&S ISA, general savings account or pension portfolio, mistakes can be very costly.
Paying for financial advice
In the UK, regulation has ensured the cost of financial advice is transparent. You will see advisory cost deductions in your pension or investment statement. However, in most countries, (and still within old-style UK policies) costs are wrapped into one charge. While the one-charge approach is simpler to understand and calculate against holdings, some regulators have concerns that customers can be misled.
It is important to know how much of a total charge is paid for the ‘product’, the ‘investment management’, the ‘administration’ and the ‘advice’. By separating each cost can appear complex, it does offer total transparency and increased control for an investor to compare and negotiate costs.
Whether charges are wrapped or layered transparently, it is always important to understand the costs of investment planning. While transparency is great, everyone likes to make cost savings. This has led to many investors disengaging from ongoing advisory services, or not appreciating the value a financial adviser brings.
When to appoint an adviser
If you’re buying a house, you use a solicitor. If you’re getting divorced with financial assets, you will ensure you’re legally protected and have explored your rights. When considering a new pension, investment, or reviewing either, it’s pertinent to get proper, regulated and educational financial advice.
A good adviser will meet with you regularly to ensure that strategy remains suited to your needs, and make adjustments, when appropriate, to fit with your changing circumstances.
A good long-term financial plan will include:
- Short term cash savings for needs within 2 years
- Long-term regular savings, including pensions
- Lump sum investments
- Trust planning for excess wealth
- Current cashflow planning, modelling efficiency of inflows and outflows
- Long-term cashflow modelling for retirement income planning
- Tax planning and exposure management, utilising tax allowances and bandings
- Personal financial protection, including life cover, sickness and unemployment cover, accounting for any employee benefit package
- Private healthcare, such as dental and medical plans, where affordable
Financial advice when making important financial decisions
There are key events where a financial adviser should be consulted:
- For decisions on investing large amounts of money
- When you receive, or may be due, an inheritance
- If expecting a potentially large tax bill
- When separating assets, e.g. divorce
- Planning for death
- Before taking on debt
- When considering the transfer of a final salary scheme
Financial advice ongoing for reassurance and professional planning insurance
Ongoing advice is a good idea. Having a long-term relationship with a financial adviser will ensure:
- Sound planning for the long term
- Better results
- Accountability for any administration or advice errors
Where you pay for regulated advice or administration, you have the reassurance of being able to hold them accountable if something goes wrong.
What a good adviser brings
Financial advisers are people. Unfortunately, the industry does have a few ‘cowboys’, particularly offshore. A good financial adviser can be hard to find; the right adviser will bring:
- Savings in product and portfolio costs
- Savings in tax
- An understanding of your finances and planning options
- Removal of personal administration and hassle
- Personalised professional financial reports
- A long-term, trusted relationship
- New planning opportunities as they arise
- Adjustments to changes in tax, to keep your planning efficient when tax allowances change
- Adjustments for changes in financial planning rules and financial legislation
- New financial products
- New investment opportunities
Fees & ways to pay
Financial advice can be paid ‘from the pocket’, but is more commonly charged to your pension or investment fund. All pensions and investment plans which allow a financial intermediary (adviser) can let you pay for advice from your plan rather than from your everyday bank account.
Typical costs of financial advice
The arrangement of a new investment or pension can be a fixed-fee or percentage of the invested amount. Usually, a fixed fee is charged when arranging a new regular savings plan, while a percentage initial fee is taken when investing or transferring a lump sum.
Ongoing advice is typically charged as a percentage of investment value. This has some benefits, notably, a percentage charge ensures the adviser has an interest in growing your funds. Ongoing advisory charges are typically 0.5% – 1.5% pa, dependent on the level of service you want, and the complexity of your portfolio.
Remember, while seeing costs deducted from a declining investment value appears particularly painful… a tough year for investments is when you will value having an adviser to hand the most!
What you should know about advice fees
Some specific advice must be non-contingent
Contingent costs are when you only pay if you take up the advice. For example, you may ask an adviser for a proposal for investing £100,000, and that adviser may offer you a short report, but say their fee is 3% if you proceed with it. That allows you to effectively put your case to tender; ask a few advisers for their ideas and select just one to take up.
In certain areas of advice, contingent fees are banned. The UK regulator, the Financial Conduct Authority, sees a risk of pressure-selling in contingent fees. Where an adviser is ‘pitching’ for the business, and only gets paid if the client takes their advice, the FCA warns customers could be pressurised or mis-advised.
For defined benefit pension advice, a fee must be quoted and charged whether or not the client proceeds with a pension transfer. While this removes any pressure for a client to proceed with a transfer in order to be able to use their pension funds to pay the adviser’s fee, it has raised a lot of concerns about ‘freezing out’ those individuals who cannot afford to pay advisory fees personally. If you are concerned about this, you may qualify for a special treatment under ‘carve out’ rules. Contact us for more information on this.
Most insurance policies can pay an adviser a commission. This means that you don’t have to pay an adviser a fee personally for their work. Instead, for example, if your insurance plan costs £50 per month, a small amount of that cost goes toward paying the adviser. While you can pay an advisory fee and take out a lower-cost insurance plan, the difference in cost can be marginal.
Full commission disclosure for insurance advice comes as standard in the UK and upon request for most other regions.
Ongoing advice services
Long-term planning advice is usually by agreement of a fee taken from an investment or pension plan. Advisory fees can be charged annually, monthly or infrequently for project work. In some cases, investment funds pay an ongoing servicing commission to intermediaries.
If your investment fund costs over 1% pa, it may be because it’s including advisory commissions; check with your investment provider if a ‘clean’ share class is available – a fund which doesn’t pay adviser charges!
How to check if you’re paying an adviser already!
If you have a pension, investment or insurance ‘product’, which was arranged by a financial adviser, they may still be getting paid on your plan! Since 2012, new UK financial products have to be totally transparent, but there are a lot of old-style policies which may still be linked to an intermediary firm. It is important to get a second opinion on any financial plans you have in place.
Use our research toolkit, which includes questions about adviser remuneration and ongoing commissions. This will help you understand the breakdown of costs within your policy, and who is profiting from your money!
The power of ongoing advice
Royal London recently published some key statistics about the benefits of having a financial adviser.
- Speaking to an adviser multiple times over 10 years gave customers, on average, nearly 50% more in their pension savings than those who took advice only once
|Advised Generally||Appointed Ongoing Adviser||Benefit|
|I feel more in control of my finances||68%||81%||+19%|
|I feel financially secure and more stable||63%||75%||+19%|
|I feel prepared to cope with life shocks||44%||52%||+18%|
|I feel confident about the future||42%||50%||+19%|
|I feel anxious about my household finances||32%||28%||-8.75%|
- 90% of customers in regular contact with their adviser says they’re satisfied with their adviser’s service
- Most agree that the financial and emotional benefits of having a financial adviser outweighs the cost
ILC What it’s worth, revisiting the value of financial advice December 2019
Royal London customer research – Feeling the benefit of financial advice, September 2020