IFAs and clear pricing?(11 Posts)
Anyone want to join me for a rant about IFAs (or point me to some good links)? I've got a reasonable sum of money to get some advice on. Why should I pay a percentage of the total rather than a fixed fee for some investment advice? They all (or the 3 I have met) imply the fees can be "flexible" in "packages". I'm a lawyer and my fees aren't flexible, I have an hourly rate unless I agree a fixed price for a job. I don't understand how it takes 10 hours to open an ISA... Or fact find on the basis of a questionnaire I fill in.... AIBU? Is 4% of the sum invested really a going rate??
4% sounds expensive - half that or less would be more typical where I work (I'm an IFA) - though difficult to tell without knowing more about what you want to achieve.
A decent practice should be able to quote you a fixed fee and most will negotiate - bear in mind that this is the busier time of year so the better deals may be harder to come by.
It doesn't take 10 hours to put together an ISA recommendation. I could do it in nearer 3 including the applications. Most likely they are trying to cover regulatory costs.
Do you actually need advice? If you know you want an ISA could you DIY?
I can charge you an hourly fee but there are a number of reasons why, it isn't the go-to charging structure:
I feel that it is important clients feel able to contact me and ask questions or get clarification without fear of extra charges. Someone might try and hurry through the process to keep their costs down and end up not understanding the advice. Likewise, client and adviser should review the plan regularly to make sure it remains in line with expectations, attitude to risk and is making best use of tax allowances. Clients may be tempted to bypass this process to save money.
Conversely, for smaller sums an hourly rate could stack up to a point where the advice no longer represents good value to the client. A first time investor is likely to have the least amount of money to invest initially and will want to ask the most questions. I feel a percentage basis is better for cultivating a long term client relationship which is more beneficial to both parties.
Financial Advice can be exempt from VAT when it is part of 'intermediation' a percentage charge shows a direct link between the charge and the intermediary transaction. Hourly based work can still be VAT exempt but in certain circumstances VAT would need to be added on (probably not in the case you describe).
Everything else in finance is based on percentages so it is arguably easier to just add all the percentages up to work out total costs but that's a bit of a crap reason really.
Ultimately if you want an hourly fee I would suggest putting a cap on the billable hours - for an ISA probably 3 or 4 then a retainer of around 2 hours per year for reviews.
I'm not an advisor but I work with ISAs and similar products.
Regulations changed a few years ago so advisors have to be more upfront about fees, on the basis that many were giving free advice but were making recommendations based on which paid the best commission. Charging the clients directly does seem to have put some off seeking advice though.
You can have a look at ISAs yourself on company websites, especially if you know what sort of thing you're looking for. Key Investor Information Documents were introduced to make comparisons between companies and funds easier so look out for these.
I am sure most of the IFAs can offer to negotiate a bit on fees and also the options for payment including hourly rates. These should have been discussed at your initial meeting. I think you might be surprised at the hourly rates and how the work involved does stack up. I would say perhaps 3% is about average.
The trouble is, opening an ISA involves the same amount of work as a bigger investment. It could involve 1 or maybe 2 meetings plus research, report writing and administration. The same compliance process has to be followed regardless of the amount you have to invest. The IFA has to fact find, evidence that he understands your circumstances, determine your attitude to risk and determine whether this is the right advice for you. They will then have to produce a suitability report covering the above, research and recommend funds in accordance to your attitude to risk and give reasons for all of this. The IFA has to justify their advice and provide evidence as to why this is the best option for you.
Don't forget that IFAs are a lot more qualified than they used to be and I guess this is also reflected in their charges.
In my opinion where you are going wrong is in thinking it is necessary or even a good idea to use an IFA. Given you are a lawyer, spend a couple of hours reading one good investment book, and that should give you enough of a foundation to proceed without help.
If you don't mind one aimed at an American audience, "A Random Walk Down Wall Street" has been published and regularly revised and republished since the 1970's. (Obviously it won't tell you anything about UK tax-favoured accounts like ISAs and SIPPs, but that is low-level detail you can get from elsewhere. It will tell you about the wider topic of investing.)
Many other investing books will give similar advice, and probably someone will be along shortly to recommend a UK equivalent.
So what sort of fees or hourly rates would you expect to charge for a review, pension fund choices, and ISA choices? I have been quoted £900-£1300 for a review (which frankly seems steep - my financial affairs are not complex, no family trusts or offshore or family money etc) and 3-4% for the rest. It seems a high percentage to me and - comparing the sums we are talking about to my daily rate - an equivalent of c.3 days work. Comparative to the national average I am wealthy - but not by London standards. Grumbling.
To theoretician. I could, yes, but I generally work 65 plus hours a week, more when we are closing a deal. I have tried the self investment options but I dont have the time or inclination to do it properly. I choose a couple of weak funds and have not best used various options open to me. (Otherwise I would be a banker not a lawyer!). I am willing to pay for advice but find the market lacks transparency. Nor do I wish for insurance products to be pushed on me.
I am a little confused, they want to charge you for a review and then a percentage to add money? Would the review fee be every year? It seems like quite a high charge level
I am running together a couple of different companies. The review fee is a one-off initial charge and is offset against any other fees payable after I make any selections. The percentage is then of the fund invested ie, in that year, I assume but good question. Then there are (if I wish) ongoing managament fees at differing levels.
Do you need an IFA? Spend a little while on the Motley Fool website before you commit. It's quite entertaining.
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