How much does financial advice cost?
One of the first questions we are asked by prospective clients, is ‘how much does your advice cost?’. This is, of course, a perfectly reasonable question and the answer is: ‘It depends on what advice you need’. Although a simple enough response, it doesn’t give the person asking the question the answer they are looking for. In this article, we will look at the typical ways Financial Advisors charge their fees and the range of costs people may come across when shopping around for financial advice.
What is the normal fee for a Financial Advisor?
The truth is there is no such thing as a ‘normal’ fee in terms of amounts. But there are two main types of services that Financial Advisors (IFAs) will charge for:
Fees for one-off or initial advice; and
Fees for ongoing advice.
There are several different ways Financial Advisors will charge the fees for these services. We will start by looking at fees for one-off or initial advice. This is where you are looking for advice for an initial assessment (and possibly follow-up action) of your situation, whether that’s your pensions, investments, inheritance tax position, long term care needs, protection needs, business finances, auto enrolment, divorce finances or a combination of any of these areas.
Fees charged as a percentage – this will be based on the value of your overall assets / investment portfolio. This can really be any percentage but often is something like 1% to 3%. For example, on an investment portfolio worth £500,000 a 1% fee would be the equivalent of £5,000.
‘Fixed’ fees – this will be an amount which is typically calculated using an hourly rate. For example, if an IFA charges £250 per hour and estimates that their advice will take 15 hours to complete, they will calculate their initial advice fee as £3,750. This may or may not bear any relation to the value of your overall assets / investment portfolio. What the hourly rate is will depend on many factors, including what the Advisors’ running costs are, how experienced or qualified they are (i.e. if they are a specialist in any subjects) and how much profit they aim to make. The hourly rate can be any amount but expect to pay anything from £150 to £400 per hour.
In most cases, you can choose to pay advice fees directly from your bank account, or from a deduction from your pensions or investments. The latter option is not always available however, so be prepared to be able to cover the full costs of the advice you receive from your income or savings.
Why is financial advice more expensive on higher investment values?
You will often be charged more if you have more to invest, your pensions are worth a lot, or the value of your overall assets (i.e. your estate value) is particularly high.
The higher fees reflect the fact that larger sums of money require more complex considerations and solutions, depending on the area of advice being sought, such as:
Pension issues including annual allowance and lifetime allowance.
Higher and additional rate tax implications for income, dividends and capital gains tax.
Potential tax wrappers such as Venture Capital Trusts (VCTs) and Enterprise Investment Schemes (EISs).
Inheritance Tax (IHT) concerns and possible solutions such as Business Relief and AIM investments.
These are just some of the considerations and solutions that typically only apply to those with high-value assets.
At what point the higher fees apply will vary depending on your income as well as your assets, but in any event, these considerations will take a greater level of Advisor expertise, sometimes the need for specialist advice and certainly it will take more time for your Financial Advisor to provide the most appropriate advice. This all leads to a need for higher advice fees.
What percentage do most Financial Advisors charge?
There is no standard percentage that Financial Advisors or IFAs will charge.
Which? estimates that advice fees can range from 1% to 3% for the initial fees, but in reality, how much you are charged will vary from firm to firm.
What can affect an IFA’s fees?
There are several factors that could affect how much Financial Advisors charge. The Money Advice Service outlines a range of factors, including:
Location – some parts of the UK may be more expensive than others.
How the service is delivered – this may be by phone, online or face to face in an office. Remote services incur lower overheads for the Advisor, but if the firm offers a range of contact methods, including face to face, you may not see a significant difference in cost. Having a choice of how you engage with your Financial Advisor is a benefit to many people in this day and age, regardless of cost.
Who does the work – Financial Advisors often use Paraplanners to complete some of the groundwork for their advice, such as research and report writing. Paraplanners are like Paralegals to solicitors. Using a Paraplanner may lower the overall cost of the service versus an IFA who completes all the work themselves.
How qualified or specialist a Financial Advisor is – expect to pay more for Chartered Financial Planners, as they are the most highly qualified Financial Advisors and tend to be the ones offering specialist advice. You can find out more about what Chartered means in another recent article.
How complex your situation is – if there’s a lot of money involved, or there’s a lot of work to be completed, this can take time and however your IFA is charging (whether by percentage or by fixed fees) the longer the advice takes, the more expensive it will be.
How much should ongoing financial advice cost?
Ongoing advice is a different service to the advice provided for initially or as a one-off event. The specific service you receive will vary from firm to firm, but often includes the following:
Access to a dedicated Financial Advisor.
An annual (or other frequency) review of your finances.
An annual report detailing your current pensions and investments and their continuing suitability.
Market and taxation updates and other relevant communications.
Before agreeing to any ongoing advice services and fees, you should ensure you know exactly what you will receive on an ongoing basis, and how much it will cost you.
Costs for ongoing advice can again be either a percentage of the value of your overall assets/investment portfolio; or a fixed fee, paid either monthly, quarterly or annually. Typically costs are:
Percentage fees - expect to pay anything from 0.25% to 2% (or more) of the value of your overall assets/investment portfolio.
Fixed fees - expect to pay anything from £1,500 to £10,000 (or more) per year.
Some companies offer online advice which costs between £50 to £500 per year, however, it’s unlikely you will be able to meet with or speak with anyone during the year for this type of service.
Do financial advice fees include VAT?
The treatment of VAT for financial advice companies is complex and could be unique to each circumstance. What will determine the application of VAT is whether your Financial Advisor acts as an intermediary by bringing together you and another party (i.e. a product provider), which is a VAT-exempt financial service.
If the service being provided is not deemed VAT-exempt and the firm if VAT-registered, it is likely you will have to pay VAT on any advice fees you are charged.
What’s the difference between advice fees and commission?
Since 2013 Financial Advisors cannot be paid a commission if they give you advice about pensions or investments. Instead, they must charge you a fee for the advice.
A commission is paid by the product provider directly to the Financial Advisor, whereas advice fees are paid by you to the Financial Advisor, whether directly from your bank account or from deductions from your pensions or investments.
Commissions were banned for pensions and investments as it was deemed to not be transparent, leading consumers to not always understand what they were paying for.
The ban on commission does not apply to:
Life insurance products like investment bonds and with-profits bonds.
Insurance policies, such as for your car or home.
Protection products like critical illness.
Income protection.
Mortgages.
Equity release products.
If you received financial advice or used an intermediary to buy a pension or investment product before 31 December 2012, you may still be paying trail commission (which is allowed). You can learn more about this and how to stop it on the Financial Conduct Authority’s website.
How much does mortgage advice cost?
Mortgage advice can still legally be paid for by a commission. The benefit to you is that this means part of the cost of the IFA’s or Mortgage Adviser’s advice is covered and paid for by the mortgage lender (albeit it may be reflected in your mortgage interest rate).
However, it’s typical for mortgage advisers to charge a fixed fee to cover the costs they have incurred up to the application stage. This is likely to be higher for more complex cases, such as those involving buy-to-let mortgages.
This should always be explained by the IFA or Mortgage Adviser upfront – it should never come as a surprise to you after the advice has been given.
Should I pay more for a Chartered Financial Planner?
Chartered Financial Planners are the highest qualified practitioners of their profession. Chartered Financial Planning status must be earned and over 5,000 Financial Advisors have achieved Chartered Financial Planner status in the UK. However, this represents less than a quarter of all the registered Financial Advisors (IFAs) in the UK, meaning Chartered Financial Planners are a prestigious group at the forefront of the financial advice profession.
So, yes, expect to pay more for a Chartered Financial Planner.
Are Financial Advisors worth the money?
If you're ill, you go to the doctors.
If you're moving house or making a will, you use a solicitor.
If you run a business, you use an accountant.
Normally, we don’t question whether these professionals are worth the money – we seek out experts for important decisions because that’s their job; to have the knowledge that we don’t.
And yet when it comes to our money there seems to be nervousness or mistrust in getting advice from experts.
The main reason people seek financial advice is that they do not know how to do something themselves - whether that’s paying into or transferring a pension, investing some money, calculating and mitigating an inheritance tax (IHT) liability, arranging their finances at divorce and so on. Sometimes, even experienced investors will seek help from Financial Advisors, because they simply do not have the time to make the necessary decisions and act upon them themselves.
Either way, whether a Financial Advisor is ‘worth the money’ can’t always be measured in financial terms and in reality that is not the point of financial advice. A Financial Advisor’s value is in helping you to achieve your financial goals. If that seems a bit prosaic, there are many other benefits in using a Financial Advisor, including:
Helping you understand complex financial issues.
Creating a plan to utilise all appropriate and legal tax-efficient strategies.
Ensuring you do not inadvertently trigger any penal tax charges from your pensions, or where unavoidable, mitigate these if possible.
Giving you peace of mind over your finances in relation to your future, your family, and the impact ill-health or your death will have on those you leave behind.
Helping you avoid making costly mistakes, often in relation to investments when markets are not doing well and the temptation is to make decisions that can do more harm than good to your finances.
And finally, a Financial Advisor will turn thought into action. Like many big decisions in life, it’s easy to put them off or bury our heads in the sand. A Financial Advisor will make things happen with and for you.
Action is the foundational key to all success - Pablo Picasso.
Get in touch
If you would like to speak with one of our Chartered Independent Financial Advisors (IFAs) for a free initial consultation about your finances, please get in touch.
Please note this article offers information about financial planning and should not be taken as personal advice. The value of pensions and investments can go up and down in value, so you could get back less than you put in. Tax rules can change and the benefits depend on individual circumstances. Think carefully before securing debts against your home. Your home may be repossessed if you do not keep up repayments on your mortgage or any other debt secured on it.