Price or Value? Part 3
Ongoing Fees - What are you paying for?
In Part 1 I looked at the nature and value of financial advice and highlighted what a client should be paying for. In Part 2 I explored how advisers charge for their initial services and whether clients are getting good value for their money. In this final article in the series I will look at ongoing fees.
All savings and investments carry ongoing charges whether you can see them or not. The interest being paid on your Building Society account is lower than the interest rates that same Building Society is charging its mortgage borrowers. It needs to cover its overheads, pay its staff and make a profit. Investment funds have annual management charges for the same reasons. These will be higher for actively managed funds where greater research and management resources are required than for, say, passive funds which simply follow an index.
Advisers too have overheads but you should not be required to pay toward them unless your adviser is providing you with an ongoing service:
Investment management demands significant resources and will usually be charged as a percentage of funds being managed. Discretionary management will also be subject to VAT. Beware, however, of unnecessarily high charges – particularly on larger portfolios. A 1% per annum charge may be justifiable on modest portfolios but once a reasonable level of fixed costs has been covered, how much of your own profits are simply being diverted into your adviser’s pockets?
If you are paying additional charges to a third party Discretionary Fund Manager (DFM) then be very careful that you are not paying your adviser for the same thing. Either the DFM is managing your investments or the adviser – not both.
Ongoing planning and advice is certainly worth paying for but fees should largely reflect the time costs of your adviser rather than the size of your investment portfolio. Advisers may well bracket investment management and ongoing advice together in a single charge (as we do at HDA) but you should expect fees to taper down fairly quickly once a reasonable minimum level has been reached.
Other than management and advice what else are you getting for your money? Do you have online access to your portfolio and your adviser? How often are your investments reviewed? What is the format of those reviews? How proactive is your adviser? How do you measure performance?
As a rule of thumb you should start to be concerned if the total running costs of your investments (including all investment charges, product charges, management and advice charges) exceed 2% per annum for an actively managed portfolio or 1.5% for a passive portfolio (with ongoing advice). For portfolios of £1 million and above you should reduce these figures by at least 0.5%.
Remember that once the fixed costs of a firm offering you a service have been covered, anything extra is their profit. Nobody should object to a firm being successful and profitable but that firm should, in my opinion, balance the interests and needs of its customers with its own.
To discuss further or to arrange a face to face meeting please contact us.