Are we still talking about this?

In this week’s Money Marketing, the Editor, Natalie Holt, wrote an interesting piece about fee transparency among the largest advice firms. It was a good article making an important point – simple requests for information about initial and ongoing advice fees were met with reluctance to divulge details. While I agree with the main thrust of the article, there would be one point I would add – the reluctance to be clear about charges is not restricted to the large firms. A simple trawl through adviser websites will offer up very little in terms of details regarding fees.

And this is not a new phenomenon. I wrote a small blog about fee transparency in February 2014. The point then, as now, is a request for fee information is almost always met with a bland, all-encompassing statement along the lines of “our fees range from 1% to 3% depending on the complexity of the situation”. Really? A “Cover Star” on a recent New Model Adviser edition stated their ongoing fees were between 0.5% to 3% per year – “It depends on how much work the client requires”. 3% per year? Under what conditions can you possibly justify charging 3% per year to look after someone’s investments? 

Anyway, I digress. The point is not the level of fees, but the unwillingness to spell them out at the start. As a potential client, I would want to know, preferably before I approach the firm but certainly before I spend time meeting advisers, how much my investment is going to cost. That doesn’t seem an unreasonable expectation, and any attempt to avoid answering that question must be met with suspicion. 

Advisers will say they need to be vague because everybody is different, so they don’t know up front how much time they will take up. But that is disingenuous. Any adviser who has been in business for any length of time knows how to fact find, collate existing policy information and formulate advice. We know how to risk profile, asset allocate and build portfolios (for those of us who actually do that, rather than outsource to a DFM – which would take even less time). So it doesn’t seem unreasonable to make an estimate of how much time MOST clients need, and then set fees on that basis. As with all businesses, some clients will take up less time and others will take up more. That is the nature of business and the purpose of setting your own fees.

Finally, but crucially, show those fees clearly on a website, or any other client-facing platform. That would allow the client, before they pick up the phone, to assess your service and decide what value for money you offer. They may even compare your fees with other adviser’s. Although given the high fees mentioned above, perhaps that is why there is still so little fee transparency.           

Pension Freedoms

From April 2015, your options at retirement changed. You are no longer forced to take an annuity. Now you have four main options and it is important you take time to consider what the right course of action is for you.

Option One: Leave it invested

There is no compulsion to make any decisions at age 65. If you don’t need your pension income, you might want to leave it invested. A good pension plan, well invested, is a tax efficient vehicle providing investment flexibility and potentially tax free benefits on death. 

    

Option Two: Partial Income

If you are ready to take income, you don’t need to cash in the plan. You can take income direct from the pension, either by making partial encashments or by using a flexible drawdown. Both options benefit from the tax efficiency of pensions, but you may still be exposed to fluctuations in fund values.  

Option Three: Annuity

The traditional annuity is still an option, providing a guaranteed income for life. You will have decisions to make, such as single or joint life income, escalating or level and whether or not you want your 25% tax free lump sum, but this route might still be the best option for you.

Option Four: Cash In

Finally, the new rules allow you to simply cash in your pension and have the fund paid to your bank account. The first 25% of your pension fund is tax free, but the remaining amount is taxed as income. Before you decide on this option, we would suggest you make sure you check how much you will receive AFTER tax. With even a modest pension pot, you may find the encashment triggers a higher tax rate than expected. 

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.