Every now and then I read something that really takes my breath away.
Here’s one: “Charges for financial advice are increasing as a result of the Retail Distribution Review, leaving high-quality advice much harder to come by – except for the relatively wealthy. Adviser fees will rise to between £150 to £400 per hour, with the bill for a financial health check typically reaching about £1,500.”
That is just the start!
According to unbiased.co.uk, an organisation that “helps consumers find advisers”, “when upfront fees come in, savers can expect to pay £350 to set up a stocks and shares ISA, £600 for retirement planning advice and £750 for investing a lump sum of £25,000, for example.”
Gulp! Can this really be true?
Is anybody really going to agree to pay £1,500 for a financial health check and then hundreds of pounds on top of that?
That is what independent financial advisers (IFAs) are certainly hoping. Dream on!
An end to sneaky backhand charges
The background to this is that, from the start of next year, IFAs will no longer be able to accept ‘trail commissions’. That means that they cannot put their customers into funds in return for a commission paid to them over time by the fund manager.
That was a way of hiding their charges from their customers. But from 1 January 2013, this cannot happen. Next year, financial advisers have to come clean. They have to charge their customers up front, in a clear and accurate manner, rather than take sneaky back-handers in the years that follow.
Many customers have no idea of how much they have been charged by this back door method. But now they will know, all too clearly, the cost of this financial advice – and they won’t like it.
Consider what might happen. Somebody with savings of, say £30,000, does not know what he should do with the money. He decides to consult an adviser, who states that his charge will be £1,500. At that point the customer may very well walk away and decide to make do without any professional advice, in which case all sorts of perils await.
But if he agrees to pay this £1,500 – that is 5% of his savings – what will he expect? A friend of mine once paid about £200 for a golf coaching clinic. He was rather disappointed to be told that all he needed to do was place slightly more of his weight on his right foot. He had an uneasy feeling that he had not got his money’s worth.
‘Only the very best service to the better off’
Similarly, suppose the financial adviser, having reviewed the customer’s affairs, says “that’s all fine. My advice is to do nothing.” Then I think the customer will have rather the same reaction as my golfing friend. But financial advisers being what they are, my guess is that ‘do nothing’ will not be common advice. Much more likely to be “do this and do that and do the other”.
But again, there is a problem. How will the customer know whether this advice is any good?
Although the Financial Services Authority, in its infinite wisdom, is trying to prescribe the right advice for everybody it is not that simple. No two people are the same; the range of investment choices is overwhelmingly complicated; and all financial advice is to an extent dependent upon how the future unfolds – and nobody has a crystal ball.
Returning to the article that temporarily deprived me of breath, Patrick Connolly of financial advisers AWD Chase de Vere said that “many firms, like us, are segmenting their customer base and offering only the very best service to the better off”, – implying that the rest will have to put up with something inferior.
And Stephen Ford of fund manager Brewin Dolphin explained his firm’s decision to increase its annual fee for discretionary management from £500 to £1,000 with a comment worthy of a politician: “it is not about them going up, it is about them being more transparent”. Pardon my scepticism!
Good news for DIY investors
The bottom line is this: if you want somebody else to advise you on your financial affairs or look after your saving, you will pay through the nose. You always have, but now it is going to be much more obvious. But there is an alternative!
It has never been easier for you to manage your own money. The internet has delivered unprecedented information and access to dealing sites. Compared to trusting the professionals a DIY approach is almost guaranteed to save you a fortune.
And by the way, DIY investing is what smart folk are doing already.