• Noel Watson

How much does a financial adviser cost for retirement planning (and am I getting good value)?

Updated: Nov 1


Table of contents


Overview

One-off financial advice?

Guidance vs financial advice

The fee vs value tradeoff

Comparisons are tricky

The different types of fees and when they might apply

Real-world examples

Conclusion

Next steps

About us


Overview


If you run an internet search, you will find many articles that discuss how much engaging with a financial adviser might cost.


However, there are often several limitations with these, including:


  1. They don't tend to differentiate between various scenarios. For example, the needs of a person with several decades until retirement and looking to start their investing journey will be very different from someone approaching retirement with complex needs. A complicated situation is likely to absorb more of a financial adviser's time and therefore increase fees, but this isn't always reflected in the examples provided.

  2. They tend to concentrate solely on cost without considering whether you are getting value for the fees you are paying.

  3. There's usually a focus on what the financial adviser will do with your investments. Given that investment management is becoming increasingly commoditised, and there are several stages to retirement planning, these articles don't seem particularly relevant to those planning for retirement.

  4. They tend to focus on financial adviser fees and don't look at total costs.


This blog addresses these shortcomings and is aimed at two groups:


  1. Those that don't currently have a financial adviser but are thinking of engaging one to assist with their retirement planning

  2. Those with an existing financial adviser relationship starting to plan for retirement.


We will help both groups build a picture of:


  1. What fees they are paying.

  2. Whether these fees represent good value.



One-off financial advice?


It might be possible to engage an adviser for a one-off financial advice and retirement planning exercise. But, in my experience, an ongoing relationship tends to yield the best results for the reasons described below. We believe that paying for a one-off piece of financial advice is similar to paying a personal trainer for a one-time consultation. You either have the knowledge, motivation and desire to do things yourself, or you don't. One session with a personal trainer is unlikely to provide much education or eliminate your destructive behaviours! My book 'Planning for Retirement: Your guide to financial freedom' is available from Amazon for those who want to plan their retirement on a DIY basis. I send this book to all potential clients and, perhaps counterintuitively, the vast majority of those that read it go on to become clients. The feedback I receive is that once they absorb the knowledge and work required to build, implement and maintain a retirement plan, they are happy to pay for financial advice on an ongoing basis.



Guidance vs financial advice


Financial advice is generally considered a personal recommendation based on your specific circumstances and your financial objectives. Guidance is a much broader term and is more about providing general information. Only firms that the FCA regulates can give financial advice, whereas anyone can provide guidance.


If you are unsure whether you are receiving guidance or financial advice, ensure you ask for clarification.


This blog focuses on the various financial advice offerings and does not consider guidance alternatives.



The fee vs value tradeoff


Volumes could be written on financial adviser charging structures! I will try and point out the salient nuances to look out for. Let’s first put the fee discussion in context. In an ideal world, individuals planning for their retirement would be able to:


  • Undertake a life planning exercise to understand the cost of their ideal lifestyle both now and in the future;

  • Create and maintain a financial plan designed to deliver the life planning goals, iterating where required;

  • Create a suitable investment portfolio with sufficient diversification that balanced the risk (volatility) required to deliver the plan against the risk (volatility) they were happy to accept;

  • Construct a withdrawal strategy that provides the desired income in retirement whilst giving sufficient confidence the investment portfolio would not be exhausted and adjust as necessary depending on market conditions;

  • ·Ensure lifetime taxation is optimised;

  • Generate returns in line with broad market indices and not succumb to investor pressures. (e.g., buying high, selling low etc.).

  • Pay no fees.


Realistically, this utopia is very unlikely. For example, it can be challenging to be objective enough to undertake your own financial planning exercise. Indeed, many financial planners have their own financial planner for this very reason. Funds and platforms charge fees. The general public does not widely use cashflow and retirement planning tools, and many investors are subject to bias that impacts their returns.


When considering the cost of financial advice, you should look at it not through the lens of an ideal implementation but instead with real-world pragmatism. In 'Is the 4% safe withdrawal rate still valid for UK retirees? I examine the effect of fees on safe withdrawal rates. There is no escaping the reality that costs, all else being equal, have an impact.



Only you can decide that the fees that the financial adviser will charge are a price worth paying.


Comparisons are tricky


So how do you go about comparing financial adviser offerings and fees? It is vital to do your absolute best when comparing competing offerings to ensure you are comparing apples with apples. So, for example, if Adviser One is offering just financial advice relating to the creation of an investment portfolio (item #3 below) for £2,000:



1. Life planning

2. Financial planning

3. Investment portfolio construction & financial advice

4. Withdrawal strategy


and Adviser Two is offering all four stages for £3,000:


1. Life planning

2. Financial planning

3. Investment portfolio construction & financial advice

4. Withdrawal strategy



If you believe that stages one, two and three are of importance, (and after reading 'The five stages of planning for a successful retirement', I hope that you do!) you will most likely conclude that Adviser Two offers much better value, despite costing 50% more.


It is also essential to consider the total cost over the lifetime of the adviser relationship and not just compare initial fees.


The following sections take a deeper dive.



The different types of fees and when they might apply


The lifetime cost of working with a financial adviser can broadly be broken down into three areas:


  1. Initial fees

  2. Ongoing fees

  3. Exit fees


We will examine each of these in turn and then give some worked examples to bring the discussion to life. Before we begin, let’s look at the five main types of costs that may be incurred:


  1. Financial adviser fees: Charged by the financial adviser for providing financial advice

  2. Fund management charges: Charged by the fund manager for looking after your invested money.

  3. Fund management transaction costs: The expenses the fund incurs when trading underlying holdings.

  4. Discretionary investment management (DIM) fees: Discretionary Investment Management is a service offered by investment managers. They manage a portfolio on behalf of a client in line with the client’s objectives and risk profile. One of the goals of a DIM service is to generate excess risk-adjusted returns (effectively beat the market). In practice, this can be a tough ask as you are paying two lots of fees, those of the DIM and those of the underlying fund managers. This is a challenging hurdle to overcome, and if your financial adviser recommends this (not all do), ensure you are happy with the value you are receiving, given the headwinds DIMs face.

  5. Platform fees: A platform can be thought of as a supermarket. Instead of stocking groceries, it stocks investment funds and assets. It also facilitates their monitoring, purchase, and sale, and for this, they will charge a fee.



Initial fees


There are effectively three ways a financial adviser can charge for initial financial advice:


  1. On a percentage basis: For example, if a financial adviser charges a 1% initial fee, and the total sum invested is £500,000, the initial financial advice fee would be £5,000. If the total sum invested were £1,000,000, the initial financial advice fee would be £10,000.

  2. On a time and complexity basis: The amount of money invested doesn't always directly relate to the amount of work a financial adviser needs to undertake. For example, should someone with an investment pot of £1,000,000 but in a relatively simple situation (for example, no complex lifetime taxation modelling) pay twice as much as someone with £500,000 with more complex needs? Those financial advisers charging on a time and complexity basis try and cater for this.

  3. On an hourly rate basis: For example, a financial adviser may estimate the retirement planning process will take 20 financial advisers hours, ten paraplanner hours and ten administrator hours and would quote a total initial financial advice fee of £5,700 as shown below.


An example of how hourly financial adviser fees might be calculated.
An example of how hourly fees might be calculated.


Unbiased estimate an initial financial advice fee of £3,000 on a retirement pot of £250,000. The FCA states the average initial fee is 2.4%. With the average customer having assets of over £150,000 with a financial adviser, this equates to an initial financial advice fee of over £3,600.


One really important thing to check is whether your financial adviser plans to charge you for new money invested in future years. For example, suppose a couple both contribute to their ISAs each tax year and the financial adviser charges an initial financial advice fee of 5%. In that case, this could be a total of £2,000 additional fees to pay per year!


While many debate the fairest way to charge financial advice fees, we believe as long as the costs are transparent, you know what you are paying, and you feel you are getting value for money, that is all that matters.


The days of fund managers charging 5% to access their funds is mostly a thing of the past, especially if you are investing via a platform. However, it's not uncommon to incur small indirect costs for investing in a fund; examples include the fund being dual priced. This essentially means you are paying slightly more for purchasing the fund than someone selling the same fund simultaneously. This is often known as the bid-ask spread.


It's rare for a DIM or platform to charge an initial fee (but you should still check!)



Ongoing fees


Similar to initial fees, there are many ways to charge for ongoing financial advice. The FCA estimates that ongoing financial advice fees average 0.8% per year with total ongoing costs of 1.9% per annum. Research consultancy the Lang Cat estimate total ongoing costs of 2.18% per annum, with a breakdown as follows:




Lang cat research on ongoing total annual fees when working with a financial adviser.
Lang cat research on ongoing total annual fees when working with a financial adviser.



The FCA research does not mention whether fund management transaction costs are included in their total fee calculation, while the Lang cat appears to exclude them.


Fund managers tend to charge on a percentage basis, so an investor holding £100,000 with the fund manager in the Lang Cat screenshot above will pay £750 a year. In addition, some may charge an additional performance fee if they outperform a predefined target by a certain amount. The Lang Cat research mentions active fund management, which is typically more expensive than passive fund management.


Fund manager transaction charges are specific to the fund, can change over time, and sometimes be negative!


In my experience, platform charging is most commonly undertaken on a tiered percentage basis. In the example shown below, an investor with £500,000 invested would pay £2,000 or 0.4% per year.



Example platform fees
Example platform fees


Exit fees


Exit fees are a hotly debated topic, typically charged if a client terminates a relationship with a financial adviser within a specified time. Before entering into a relationship with a financial adviser, you might want to check to see if exit fees might apply to you.



Real-world examples


Example One: £500,000 initial investment and £40,000 annual contributions


Let's now look at some examples - the spreadsheets are available from the 'Planning for Retirement website'.


Our first imaginary client has a total of £500,000 to invest and, in addition, plans to contribute £40,000 per year over the next ten years.


Gross investment returns are assumed to be 5% per year.



Example client with £500,000 to invest
Example client with £500,000 to invest


Our client is comparing the fee model of two imaginary firms, Abacus Financial Planning and Teak Wealth Management.


Abacus Financial Planning is a medium-sized independent financial adviser firm with ten financial advisers. It offers a full financial advice and retirement planning service (all four stages), for which it would charge an initial financial advice fee of £4,000 for our imaginary client.



1. Life planning

2. Financial planning

3. Investment portfolio construction & financial advice

4. Withdrawal strategy



This initial financial advice fee is based on the complexity of the preparatory work required and how long it is likely to take (we described this approach earlier).


Total ongoing fees for Abacus Financial Planning are 1.1% per annum, as shown in the screenshot below. Like the initial financial advice fee, Abacus’ ongoing financial advice fee depends on how much ongoing work is required to look after the client. It will therefore tend to reduce in percentage terms as the investment size increases, and for this example equates to 0.6% (note this will consequently reduce in percentage terms as the investment balance grows. However, for this particular exercise, I will assume it stays at 0.6%).


Platform fees are 0.2% and, with some platforms offering fixed fees or tiered charges, will also come down in percentage terms as the investment size grows. But again, for this example, I will assume they remain flat.


Abacus Financial Planning constructs their portfolios using low cost, globally diversified passive funds, with fund management costs of around 0.2% a year and fund management transaction costs of 0.1%.


They don't charge for regular additional client contributions or exit fees.



Abacus Financial Planning fee structure for £500,000 initial investment
Abacus Financial Planning fee structure for £500,000 initial investment


At the end of the ten years with Abacus Financial Planning, the investment balance is £1,223,914, with a total of £92,147 taken in fees.



Abacus Financial Planning - ten year summary with £500,000 invested.
Abacus Financial Planning - ten year summary with £500,000 initial investment.


Teak Wealth Management is a national wealth management firm offering restricted advice through a vertically integrated model and has around 500 advisers within the company. They are very much an investment-focused firm and do not typically offer life planning, financial planning or planning around retirement withdrawals.



1. Life planning

2. Financial planning

3. Investment portfolio construction & fin

4. Withdrawal strategy



Teak Wealth Management charges a percentage-based initial financial advice fee of 5% on all ISA money invested. This equates to £12,500 for the £250,000 ISA. They do not charge an initial financial advice fee for pension money but instead charge an exit fee of 3% if you withdraw your money within the first five years.


Total ongoing fees are 2.2%. Teak Wealth Management group their ongoing financial advice fee, fund management charges and platform fees together. These total 2% a year, with the financial adviser receiving 0.5% from this. Their total ongoing fees are higher than Abacus Financial Planning in part because their investment management approach is based around active fund management. Fund management transaction costs are 0.2%.


Teak Wealth Management charges for regular contributions in the same way they charge for initial contributions, meaning the fee for the annual ISA contribution is £1,000 in addition to the annual fees charged on the money already invested.



Teak Wealth Management fee structure for £500,000 initial investment
Teak Wealth Management fee structure for £500,000 initial investment


Comparing the end balances of the two offerings is eye-opening. Abacus Financial Planning has charged less than half the total fees of Teak Wealth Management and have delivered net returns over £125,000 more than Teak due to far lower charges. And that is not forgetting that Abacus Financial Planning offers a far more comprehensive service, both initially and ongoing, than Teak Wealth Management.




Fee and investment balance comparison between Abacus Financial Planning and Teak Wealth Management
Fee and investment balance comparison between Abacus Financial Planning and Teak Wealth Management



Example Two: £1,000,000 initial investment and £40,000 annual investment


Let us briefly cover another example client with an initial £1,000,000 to invest and a further £40,000 per annum. Their needs are slightly more complex and time-consuming than our first example, meaning Abacus Financial Planning would charge an initial fee of £5,750 - an increase of £1,750. Due to the increased size of the investment, ongoing financial advice and platform fees reduce, from 0.6% to 0.4% for the financial adviser, and 0.2% to 0.1% for the platform. Total ongoing fees therefore reduce from 1.1% to 0.8%.



Abacus Financial Planning fee structure for £1,000,000 initial investment
Abacus Financial Planning fee structure for £1,000,000 initial investment

Teak’s fixed percentage fee structure means the initial financial advice fee for the ISA investment has doubled to £25,000.



Teak Wealth Management fee structure for £1,000,000 initial investment
Teak Wealth Management fee structure for £1,000,000 initial investment

At the end of the ten years, the client with Teak Wealth Management has paid not far short of three times the total cost of Abacus Financial Planning (£375,000 vs £135,000), and their portfolio is worth over £300,000 less.


In addition to the differences in overall costs, Teak’s fee structure has some additional potential downsides:


  • If you are a client of Teak Wealth Management in retirement, and assuming you have sufficient means to do so, your financial adviser should encourage you to spend your money. You should enjoy life while you still have your health and mobility. However, in a flat percentage-based approach fee approach, this constitutes a potential conflict of interest for the adviser because they will be paid proportionately less whenever you take money from the pot.


  • There is also the issue of cross-subsidisation to consider. Teak Wealth Management may have a wide range of clients, some with £100,000 invested and others with £1,000,000. Do you really think the financial adviser is adding ten times the value to the second client? Of course, the second client is likely to have a more complex scenario, but will it take ten times as much time and resources? One could conclude that the client with £1,000,000 might be subsidising the one with £100,000.


  • ·Who is the relationship with? You or your money? If all you require from a financial adviser is for them to select a range of funds, you could get this offering far cheaper elsewhere. However, if you value the financial planning relationship, based as it is on human contact and discussion, it is debatable whether the charges should be directly proportional to the amount of money you have invested.

  • ·Teak Wealth Management operates a charging model where they only get paid if they sell you a financial product. This is known as contingent charging. It may be the case that the best course of action for you to reach your objectives would be to retain your current investment portfolio or not to invest at all. A financial adviser working under a contingent charging model would not get paid in this scenario. Is this approach going to be in your best interests? Is this really financial advice, or is it actually sales?


  • Abacus Financial Planning offers a far more comprehensive service than Teak Wealth Management, and the Abacus Financial Planning ongoing financial advice costs are slightly more than Teak Wealth Management's (0.6% vs 0.5%). Owing to the lower overall ongoing costs of Abacus Financial Planning, this equates to a more significant percentage of the total ongoing fees (55% vs 23%).



Teak Wealth Management fee breakdown
Teak Wealth Management fee breakdown

With Teak Wealth Management, 77% of the total ongoing fees go on non-financial adviser costs! With a pricing structure like this, it is crucial to precisely understand the costs in each part of the chain and ensure each of these parts adds value.



Example Three: Taking both initial and ongoing fees into account


The screenshot below emphasises the need to consider both initial and ongoing financial advice fees, not just the initial advice fee in isolation. Company One charge an initial financial advice fee of £600 and a total ongoing cost of 2%. Company Two's initial financial advice fee is far higher at £3,000, but their total ongoing costs, at 1.1%, is just over half that of Company One.

At the end of the ten years, the investment balance with Company Two is over £50,000 higher.



Comparison of initial and ongoing advice fees
Comparison of initial and ongoing advice fees


Conclusion


As can be seen, determining how much a relationship with a financial adviser is likely to cost is not an easy task. Some questions to ask a prospective financial adviser include:


  • Can you give me a breakdown of total fees for both initial and ongoing financial advice in pounds and pence?

  • For these fees, how much goes to each part of the chain, and how do you justify these?

  • Financial adviser

  • Platform

  • Fund manager

  • Fund manager transaction costs

  • Discretionary Investment Manager (where appropriate)

  • How will your fees impact how long my retirement investments last for?

  • Do you charge exit fees?

  • Do you get paid for giving me financial advice even if I do not proceed with your recommendation?

  • How much will a client typically pay relative to me if they have half/twice what I have invested?



Next steps


If you are planning for retirement and are in one of the following situations:


  • Struggling to understand what you are paying (or might pay) for financial advice.

  • Know what you are paying and the fees are closer to Teak Wealth Management than Abacus Financial Planning.

  • Your financial adviser meets you once per year to discuss investments (we call this the postman delivery service!)


please get in touch with us - we'd love to talk to you.



About us


Noel Watson and the team at Pyrford Financial Planning are Independent Financial Advisers based in Weybridge, Surrey. We specialise in retirement planning and provide pension advice, investment advice and inheritance tax advice.


Our office telephone number is 01932 645150.


Our office address is Wellington Way, Weybridge, Surrey, KT13 0TT

Please note: This blog is for general information only and does not constitute advice. The information is aimed at retail clients only.


Although best efforts are made to ensure all information is accurate, you should not rely on this blog for your personal situation or planning.

The value of your investment can go down as well as up and you may not get back the full amount you invested. Past performance is not a reliable indicator of future performance.


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