The definition of good financial advice is that it costs you less than the benefits it delivers – but when the cost is taken up front before the benefits are delivered, how on earth are we to judge what constitutes good value in advice?
Advice Rules have Changed
Since the rules changed and advisers were no longer allowed to take was was often ‘hidden’ commission from the investments they sold you, the cost of advice is now much more transparent. Another new rule to change the dynamics of advice is that advisers must now undertake an exhaustive process of due diligence on your financial affairs before providing advice. On the face of it this makes a lot of sense – you want the advice you receive to be relevant to your own individual circumstances. However, the scale of the due diligence required means that advisers now have to charge a significant sum to cover the time it takes them. For those with a relatively modest pension pot to invest, the scale of these initial fees can make the whole idea of advice uneconomic, leaving them without access to affordable financial advice. You can read more about this Advice Gap in one of our earlier posts.
How much will you pay for advice?
With many advisers not publishing their rates and fees on their web sites, and most reluctant to talk about fees until after they have met you for an initial consultation, you could be forgiven for being worried about being ripped off by an unscrupulous adviser. You may even decide to put off looking for advice altogether, considering it too stressful. Well, help is now at hand. www.unbiased.co.uk is one of the main websites providing a directory of financial advisers and they have released a table showing average adviser rates and fees from across the industry for a number of typical advice scenarios. Although the table does not cover every individual case, the variety means that you can work out a rough cost of advice for your own particular circumstances. Their table is shown below.
Information is power
The variation between the lowest and highest fees can be huge. Some advisers work on a percentage basis, in that they will charge a percentage of the pension pot you wish them to advise on. This works well for smaller size pots. Others charge a fixed fee or charge on a per hour basis. This works best for those with larger pots.
Regardless of the size of your pot, the information provided in the table should allow you to have a sensible initial discussion with an adviser, based on your new found knowledge of what is an average fee for the services you require.
Naturally, if the adviser is coming in over the average, you will want them to explain why you should pay them more, particularly if they are quoting a high percentage fee for a large pension pot – the overhead costs of investing and managing £30,000 is pretty much the same as investing £100,000.
The one area where you may need to pay more is if you have a particularly complex or messy financial situation, with many different sources of capital needing consolidation. You will see in the table that the most expensive fees are incurred for these most complex situations. It will take the adviser longer to unravel such a situation and fully understand your aspirations, so a higher fee is entirely justified. But if this is the case, do make sure that the higher fee is only charged on the advice element of the relationship and not also applied to investment of the consolidated pension pot, where no additional work is required.
Closing the deal
Although psychologically difficult, don’t be pressured into signing up with the first adviser you speak to, just because they have given you an hour of their ‘free’ time. The introductory discussion is all part of doing business and is now an accepted part of the process of buying advice. An easy way to make this more comfortable for you is to tell the adviser up front in your initial call that you are planning to speak to several advisers before making a decision. Therefore, you will not be making any commitments during your introductory meeting. This way there should be no question of any uncomfortable tension at the end of the introductory meeting, and no pressure from the adviser .
Once you have visited several advisers you will have a good idea of the going rate for your particular requirements and situation. However, price should be just one factor in your decision. Most advisers should be able to deliver a similar return or income based on your appetite for risk, so perhaps consider some of the softer aspects of the relationship you are about to enter into. The adviser could be looking after your financial security for around 20 years of retirement so it is important that you like them; that you feel they understand your situation; and that they will be responsive should you have any questions or concerns down the line.
Over to You!
Any guidance on what financial advice costs has to be a good thing, but do these costs match what you have paid or have been quoted in the real world? Do you think such ‘average’ fee guidance is helpful for your planning and negotiation with an adviser? We would love to know. Drop us a note in the comments section beow.