Don’t fritter away your cash on gratuitous advice fees
MANY a City worker spends her hours turning over millions for institutional or super-rich private clients as a matter of course. But when it comes to managing one’s personal wealth, the right strategy can seem far less clear.
The perceived security of an independent financial advisor (IFA) can seem appealing, but the fees of the service often more than cancel out the benefits. For a professional putting away £1,000 a month, for example, the normal minimum charge of around £2,000 a year is prohibitive.
Moreover, at this level of saving, the IFA’s top strategy is likely to simply involve putting the funds in an Individual Savings Account (Isa), which you can do yourself minus the hefty advice fee. Savers are permitted to put £10,200 into their Isas per tax year, only half of which can be held in cash – though with inflation pushing 3 per cent, it probably makes more sense to put it in stocks and shares.
Without professional advice it can be difficult to access extensive research on stocks and funds. Although a lot of information is available online through company accounts and on financial sites like MorningStar.com, many retail investors will not have the time to sift through it. Some firms offer access to research free of charge. Chelsea Financial Services, for example, produces ratings of funds for clients without a minimum investment requirement or a direct fee.
But nothing comes free – if you choose to invest in any of its funds, the firm receives a commission, making the fund’s management fee slightly higher than if you had found it yourself. The surplus charge is not huge, however – usually around 0.5 per cent on top of the 1 per cent fund charge – and is lower than the cost of a full-blown IFA. As for individual equities, often the only other solutions are to do the research yourself or make a bet on instinct.
For those with little time and a lot of money to save – approaching around £60,000 per year – and many complex financial needs (pensions, school fees, mortgages and so on), looking into financial advice begins to make sense. But it is still vital to do your research.
Using the private banking arm of your high street bank might seem simple, but they often have prohibitively high investment requirements (HSBC’s is relatively low at £150,000, while Barclays Wealth Management demands £500,000). Moreover, BestInvest’s Adrian Lowcock says: “You might pay 1 per cent for planning advice, 1 per cent for an investment manager and then you’ve got a unit trust manager at 1.5 per cent. You’ve paid 3.5 per cent before you know it.”
Instead, it makes sense to seek out a firm that gives advice to other investors on your scale – being a small fish for a big manager will get you less attention and engagement.
Most importantly, be sure to get comprehensive and transparent information about your IFA’s fees structure – and whether the firm is getting commission on your investment choices. With a clear set of questions to ask and good research, you should be able to avoid paying a complex hierarchy of fees that wipe out the benefits of your well-considered investment.