What Does Financial Advice Cost?

In this article Investor Weekly looks at the cost of advice in three areas:

• Investment and pension advice
• Mortgage advice
• Insurance advice

Financial Advice: Investments and pensions

The FCA allows mortgage and insurance protection ‘advisers’ are allowed to be paid in commission by providers, so their advice can be free to the end consumer.

However financial advisors are NOT allowed to be paid in commission. But that doesn’t mean that all advisers are impartial.

There are two types of adviser:

• Restricted
• Independent

Restricted or tied advisors can only ‘advise’ you to take out products from the company they work for. Yet because of the FCA rules they still charge you for this ‘advice’

Many experts are critical of this, including BBC leading money journalist Paul Lewis, “Never ever use an adviser who is restricted by products. If you ask 'do you offer independent financial advice' and the answer is anything but a clear 'yes' then reject them. Many work for a bank or insurance company and of course only recommend you buy their products. That is just sales masquerading as advice.”

Regardless of whether an advisor is tied or independent, they have these ways to charge:

• Fee for time spent (charged hourly or agreed in advance)
• Percentage of funds under management

Most UK advisors charge 3% of funds under management in year one, to include all the advice and set up work, and then 1% each year for the ongoing management work.

By charging a percentage fee for ongoing management, the advisor has a strong reason to be focussed on making good decisions and monitoring providers and platforms closely; the more they grow your funds, the better they do. So ongoing fees based on a reasonably low percentage make sense.

Some have a sliding scale for larger investment sums, that reduce their percentage, as the workload doesn’t increase in line with the sums invested; the work to manage £100,000 is similar (but not identical) to managing £1,000,000.

Conversely, the upfront planning work, movement and setting up of funds, can often be done for less than 3%, so this publication advocates asking for planning and set up work prior to managing the funds to be based on a fixed fee. This forces the advisor to set out the work they will do and explain the value of that work.

Mortgages

Whenever you are moving, or if you have any complexity in your life, then a mortgage broker can often help you secure a mortgage when high street banks turn your down or they can find a better rate you can.

The commission will be built into your premiums however, and you can see this for example in mortgage documents, like this example:

Most mortgages, while for 20 years on average, have fixed rates for 2-5 years.

Once you are happy with the mortgage you have, if you are not moving and nothing major has changed in your life, you don’t need to renew through the broker every time a fixed rate deal comes to an end.

You can renew directly with the lender when your existing rate comes to an end, to their replacement tariff. You can check online if that new deal is reasonable in the market. If it is, you can save a fortune.

Over 20 years, if you remortgage 10 times and pay £1,000 in commission each time, you have increased your mortgage cost by £10,000, for what was a “free to access” service.

Insurance

Insurance brokers can also help people get cover when high street insurers have turned them down due to such things as health problems or dangerous hobbies or travel.

Although it’s unusual for them to be able to beat the cheapest premiums found online, a good broker can also advise on the quality of the cover which makes all the difference when you claim.

Their advice is also “free at use” but their commission is built into their premiums, and if you look close enough you will see this mentioned in the documents:

This commission is money well spent if you have any complexity in your life that makes getting the right insurance difficult.

It is also worthwhile if the broker continues to monitor the market and switch you if circumstances change.

Good brokers know which insurers take their commitment to customer service and product delivery seriously, as opposed to those trying to cut the cover and service levels in order to sell online at a cheap price.

Investor Weekly strongly advocates focussing on quality when it comes to insurance, rather than price. This is the only way to have peace of mind that it will work when called upon in a claim.

Because insurance quality can be difficult for consumers to work out, a quality broker can be worth their commission many times over.