Although you may not like the idea of paying for financial advice, it could save you money by preventing you from making an expensive mistake. Also if you take financial advice and something goes wrong you may get compensation. If you make your own investment decision, you cannot claim compensation unless a firm goes bust.
Why do I have to pay for financial advice?
Since the beginning of 2013, consumers have had to pay for financial advice. This followed the introduction of new rules by the government as a result of the Retail Distribution Review (RDR). Other rules were also introduced at the same time, such as minimum qualifications for advisers.
The old system
In fact, consumers have always had to pay for financial advice. But it wasn’t so obvious because the money was channelled through the financial companies, such as the banks, insurance companies and fund management companies instead. These companies paid commission to financial salesmen and advisers using the charges they deducted from the money they received from consumers.
In the case of funds, for example, there was typically an ‘initial charge’ of 5% when you first invested, of which 3% went to the adviser. This was intended to cover the cost of the adviser’s time spent finding out clients’ investment needs and recommending appropriate funds. There was also an annual management fee of around 1.5%, of which 0.5% went to the adviser. This covered the ongoing financial advice that advisers were meant to be given to clients about whether the funds were still suitable for their needs.
One of the useful features of the old system was that it enabled advisers to help smaller investors because there was a cross-subsidy from larger investors who generated larger commissions. On the negative side, it was felt that advisers’ recommendations were unduly influenced by the fact that some products paid more commission than others, while some, such as National Savings products and investment trusts, paid no commission at all.
The new system
Under the new system, advisers will have to agree their fees with investors in advance. The advantage of this approach is that the adviser is not under any pressure to sell you something in order to cover his costs and you will know what you have to pay. The disadvantage is that if you only have a small sum of money, the cost of advice may be disproportionate. Many advisers nowadays will only accept clients with more than, say, £75,000 to invest.
Normally your first meeting with an adviser will be free so you can discuss your needs and what it is likely to cost. It will also give you a chance to establish whether you are going to get on with that person. Depending on the adviser, you may be charged an hourly rate, a flat fee or a percentage or a combination of charges.
- Hourly rates: Rates may vary between around £50 and £250 an hour. Simple to understand but it’s important to get an estimate of how many hours you are likely to be charged for.
- Flat fee: A set fee may be charged for specific advice. Or you may be charged a flat fee for an initial assessment and implementation of a financial strategy, and a monthly or annual retainer after that for keeping your finances on track.
- Percentage charge: This is still the most common approach which most resembles the old commission approach. If you have a lump sum to invest you may be asked to pay an initial percentage for setting up your investments of between, say, 1% to 3%, and an annual fee of between 0.25% and 1% after that for monitoring your investments.