Table of contents
Introduction
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 issues and limitations with these articles, including:
They don't tend to differentiate between various scenarios. For example, a person's needs several decades from retirement and looking to start their investing journey will probably differ significantly from someone approaching retirement with more complex needs. A complicated situation will likely absorb more of a financial adviser's time and, therefore, increase fees, but this isn't always reflected in the examples provided.
They tend to concentrate solely on cost without considering what service you are receiving for the fees you are paying.
There's usually just a focus on what the financial adviser will do with your investments. However, investment management is becoming increasingly commoditised. It is just one of the several stages of retirement planning, meaning these articles aren't much help for those seeking an adviser to help with their retirement planning.
They tend to focus on financial adviser fees and not look at total costs, including platform and investment fees.
This blog addresses these shortcomings and is aimed at two groups:
Those who don't currently have a financial adviser but are thinking of engaging with one to assist with their retirement planning
Those with an existing financial adviser relationship who are starting to plan for retirement.
We will help both groups build a picture of:
What fees they are paying.
Whether these fees represent good value.
One-off financial advice?
Engaging a financial adviser for a one-off financial advice and retirement planning exercise might be possible. But, in our experience, an ongoing relationship tends to yield the best results. We believe 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; perhaps counterintuitively, many who read it become clients. The feedback I receive is that once they understand what we actually do and the work required to build, implement and maintain a retirement plan, they are happy to pay for financial planning and advice on an ongoing basis.
Guidance vs. financial advice
Financial advice is generally considered a personal recommendation based on your specific circumstances and financial objectives. Guidance is a much broader term and is more about providing general information. Only firms 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 their life planning goals, iterating where required;
Create a suitable investment portfolio with sufficient diversification that balanced the risk (volatility) required to deliver the financial 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 that the investment portfolio would not be exhausted. Withdrawals would be adjusted 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, being objective enough to undertake your own financial planning exercise can be challenging. Indeed, many financial planners hire a financial planner for this very reason. Funds and platforms charge fees. The general public does not widely use cash flow and retirement planning tools, and many investors are subject to biases that impact 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. I examine the effect of fees on safe withdrawal rates in a blog series. There is no escaping the reality that costs, all else being equal, have an impact.
Only you can decide that the fees the financial adviser will charge are worth paying.
Comparisons are tricky
So, how do you go about comparing financial adviser offerings and fees? It is vital to ensure you compare apples with apples when comparing competing offerings. 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
Suppose you believe that stages one, two and four are essential(and after reading 'The five stages of planning for a successful retirement', we hope 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:
Initial fees
Ongoing fees
Exit fees
We will examine each of these 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:
Financial adviser fees: Charged by the financial adviser for providing financial planning (hopefully!) and advice
Fund management fees: Charged by the fund manager for looking after your invested money.
Fund management transaction costs: The fund's expenses when trading underlying holdings.
Discretionary investment management (DIM) fees: Discretionary Investment Management is a service investment managers offer. 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 beating 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 stiff competition in the marketplace.
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 a relatively simple financial situation pay twice as much as someone with £500,000 with more complex needs? Those financial advisers charging on a time and complexity basis try to cater for this. For example, using the example below, a client might have a moderately complex financial situation that would incur a financial planning fee of £4,000. In addition, they have two pensions and an ISA to review, costing 3x£500 = £1,500. This gives a total initial financial advice fee of £5,500.
3. On an hourly rate basis: For example, a financial adviser may estimate the retirement planning process will take 20 financial adviser hours, 10 paraplanner hours and 10 administrator hours and would therefore quote a total initial financial advice fee of £5,700 as shown below.
Unbiased estimate an initial financial advice fee of £3,000 on a retirement pot of £250,000 and £5,000 for a pot of £500,000. 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 in the region of £3,600.
One essential 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 maximise their ISA contributions each tax year, and the financial adviser charges an initial financial advice fee of 5%. This could mean an additional £2,000 in 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 are 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 dual-priced funds. 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 estimates total ongoing costs of 2.18% per annum, with a breakdown as follows:
In their financial advice business benchmark report 2023, NextWealth established that total ongoing costs averaged 1.75% per annum.
The FCA research does not mention whether fund management transaction costs are included in their total fee calculation, while the Lang Cat and NextWealth research appear 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 per annum. In addition, some may charge an additional performance fee if they outperform a predefined target by a certain amount. The Lang Cat research example uses 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 our experience, platform charging is most commonly undertaken on a tiered percentage basis. In the example below, an investor with £500,000 invested would pay £2,000 or 0.4% per year.
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, it's worth checking to see if exit fees could apply to you.
Real-world examples
Let's look at some examples - the spreadsheets are available from the 'Planning for Retirement: Your Guide to Financial Freedom' website.
Example One: £500,000 initial investment and £40,000 annual contributions
Our first imaginary client has a total of £500,000 to invest and, in addition, plans to contribute £40,000 per year (£20,000 each to a pension and ISA) over the next ten years.
Gross investment returns are assumed to be 5% per year.
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 balance grows. But again, for this example, I will assume they remain flat.
Abacus Financial Planning constructs its portfolios using low-cost, globally diversified passive funds, with fund management costs of around 0.2% per annum and fund management transaction costs of 0.1%.
They don't charge for regular additional client contributions or exit fees.
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.
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 groups their ongoing financial advice fee, fund management charges and platform fees together. These total 2% per annum, with the financial adviser receiving 0.5%. Their total ongoing fees are higher than Abacus Financial Planning, partly because their investment management approach is based on 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.
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 has 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.
Example Two: £1,000,000 initial investment and £80,000 annual investment
Let us briefly cover another scenario: a couple with an initial £1,000,000 to invest and a further £80,000 per annum between them (each contributing £20,000 to a pension and ISA). 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 investment size, 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, are reduced from 1.1% to 0.8%.
Teak’s fixed percentage fee structure means the initial financial advice fee for the ISA investment has doubled to £25,000, and the annual charge for ISA contributions also doubled to £2,000.
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 think the financial adviser adds ten times the value to the second client? Of course, the second client will likely 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. In this scenario, a financial adviser working under a contingent charging model would not get paid. 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%).
With Teak Wealth Management, 77% of the 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 part adds value.
Example Three: Taking both initial and ongoing fees into account
The screenshot below emphasises the need to consider initial and ongoing financial advice fees, not just the initial advice fee in isolation. Financial Advice firm One charge an initial financial advice fee of £600 and a total ongoing cost of 2%. Financial Advice Firm Two's initial financial advice fee is far higher at £3,000, but their total ongoing costs, at 1.1%, are 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.
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 the total fees for initial and ongoing financial advice in pounds and pence?
How much am I paying for each part of the chain, and how do you justify this?
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?
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:
You are struggling to understand what you are paying (or might pay) for financial advice.
You 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
The team at Pyrford Financial Planning are highly qualified 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 address is No 5 The Heights Weybridge KT13 0NY.
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.