Online Financial Advice - Transparency

I was doing some research yesterday, looking at online financial advice. The good news is there are more sites cropping up offering access to online financial advice. While I obviously believe that is a good thing, I was struck by the lack of transparency about fees.

It still seems incredibly difficult to get a clear, concise quote as so how much advice will cost. Most sites either don’t link to their fee information at all, or suggest the fee can vary depending on your personal circumstances. There is logic to this – without knowing your personal situation, tax position, risk profile, previous investment experience, etc, etc, it is difficult to judge how much time an adviser will need to put in to provide the advice required and therefore what to charge. 

I put this problem to an accountant friend of mine who charges set fees for drawing up client’s end-of-year accounts. Without knowing how complicated the accounts will be, how can he know what to charge? The answer was simple: He has been drawing up accounts for 30 years. He has enough experience to know how much work is needed for the average set of accounts. He then adds in a suitable margin, and that’s the set fee. Sure, there will be some that take longer and eat into his profit, but there will also be those that are much quicker, reinstating the profit average.

Any decent financial adviser will know how much time the average investment takes, and therefore should be able to set a fee. So, if you’re looking for online financial advice and wondering how to judge one firm from another, I would suggest a good first step would be how transparent they are about fees.

Going Direct

There was a good article in last weekend’s money section of the Telegraph. It was by Kyle Caldwell, and the theme was investors who are trying to keep their costs low by investing direct with fund managers rather than use an adviser.

In finance, as in life, one would expect to see reduced fees if one was to cut out the middleman. Sadly, fees and charges in finance are not always clear and the normal rules don’t always apply. As the article pointed out, there are two charges to consider – the ongoing charge and the front-end charge. The ongoing cost of investing as measured by the annual management charge - AMC - has long been 1.5%, which includes 0.5% commission paid to the broker. You would think by cutting out the broker, this charge would reduce to 1%, but that’s not the case. All that happens is the fund manager keeps the extra 0.5%, while you don’t have a broker to call and get updates from.

Now, the investment world has changed and it is easier to see the 0.5% the Broker is earning, but the principle remains the same – if you go direct, you will pay the full AMC – including the broker commission.

While that all sounds rather unpalatable, the front-end charge is worse. Traditionally, that has been 5% of the amount you are investing. So if you’re investing £10,000, that’s a fee at the outset of £500. From that, the Broker traditionally kept 3% and the fund manager kept 2%. With the new rules recently introduced banning commission, fund management groups have launched funds with no front end charge, leaving the broker to charge their fee direct. This is great as it means you can see who is earning what from your investment, although in many cases the broker is costing you significantly more than the previous 3%.

More importantly, however, is if you decide you don’t need the broker and go direct, the fund manager will only give you access to the old-style funds – which still carry a 5% charge upfront.

The basic principle here is don’t assume the fund management group, or indeed the adviser, will pass on to you any cost savings from the new rules. In the world of personal finance, profit is king and the fund managers will run with old-style funds and high fees for as long as they can get away with it.

So what’s the answer? If you want to go direct, use a platform or fund supermarket. They act as bulk-buyers and most have secured clean funds with no front-end fees, and usually don’t charge you anything to invest. If you’re not sure what funds to buy, use a broker – at www.reckitthouse.com we provide fund advice online, so maybe we can help.