IFA Charges

Phew, 8 grand sounds like lot to me :eek: but I suppose it depends on the amount of work you want the advisor to do and the type of investment products you're looking at.
Is the advisor an IFA or attached to a bank or Building Society?

Dunstonh who is an IFA and posts regularly on here says the FSA stats show the average commission taken by IFAs on investment products is, I think, [STRIKE]1.5%[/STRIKE]1.8% [corrected below] but that will obviously include lower figures where little or no advice is given and higher %'s where a lot of research or work is required.

Investment Funds normally pay a max of 3% to the advisor so on the face of it I would be wary.

If it's the proceeds from a house sale, how soon will you require the money? Investments are not normally recommended unless you're prepared to be in for a 5yr min time-scale?

Hello.

The typical maximum is 3% but it can be exceeded if the adviser agrees with the provider to indemnify the trail commission (the natural fund based commission paid annually). i.e. the annual management charge remains the same but the provider pays another 2% on top of the intial commission and keeps the trail for themselves.

Also, the typical maximum can be exceeded if the IFAs have negotiated better terms with the providers. NU for example pay 2.5% initial and 0.5% trail as default but most IFAs will have better than that. I can get 5% plus 0.5% trail. An IFA down the road from me can only get 4% plus 0.5% trail.

Its what you do with that extra commission though that matters. I rebate mine to stick with the 1% plus 0.5% trail to avoid any product/provider bias but some will pocket some of the difference. Some will keep the lot and not rebate a penny. If they exceed the typical 3% maximum, their menu should show a higher figure than 3% as a typical maximum. If they rebate it then then there is no problem.

So, you see the "typical" is important to note as it can be exceeded. However, if that IFA in question wants to exceed it, it has to be published in advance on their menu which is given to you right at the start.

Ian mentioned 1.5% as the average. It is actually 1.8% but he was trying to remember what I said so not a bad guess. The FSA monitor transactions across the providers and publish averages every 6 months which have to be disclosed on the menu. The average is 1.8% for collectives. So, 4% looks very very expensive and is above the typical maximum of 3% let alone nowhere near the average which is what you should be aiming for.

The more you have to invest, the lower the % will be. Although salesforce advisers and employee advisers may not have any choice and may not be able to rebate.

It is important not to mix up charges with commission. Some products pay commissions which are explicit. e.g. unit trusts. a 1% commission is a 1% fee against the fund. Some products pay commissions which are implicit. e.g. stakeholder pensions. The adviser may get a 3% commision up front which is paid for out of the annual management charge at a rate of 0.2% a year. It can take some products 10-15 years for the provider to recover the commission paid to the adviser.

What suggestions has the IFA made about investing the money? If we knew that, we would be able to judge if he was doing adequate work to earn his fee.

The commission route via AXA in Bonds comes in at £15K but the IFA has mentioned 'gifting' £7K back to us because of the amount of business we were putting their way

I did a cost analysis on a £220k investment into bonds just a few days ago and AXA came out third in charges when picking the same funds or closest match. Its a good choice but it is 3rd on my research at this point. That was on a medium risk spread. A cautious spread would see them drop back a little to around 5th. An adventurous spread would see them possibly come out 1st of 2nd as they have a good fund range at the higher end of the risk scale.

After feeling a bit unsure on this we asked for the up front fees cost and were quoted £100 per hour for research and presentation and a 4% transaction charge on the bond to cover processing admin and ongoing servicing. The IFA is not affiliated to any Bank or Building Society. Thanks once again for your help!!

Its a tad expensive but if you think the service is good and the fund spread is good then you may consider it money well spent. You would find quite a few IFAs willing to drop to 1%-2% commission though. At 1% that would put another £6000 into your investment.

Remember with investments like these commission is explicit. £6000 commission is £6000 that isnt going into your investment. At 1%, he still earns £2000 up front and 0.5% a year thereafter (£1000 ignoring growth).

EdInvestor, please cut out the crusade against investment bonds. The poster here is talking about a 200,000 investment and moving investments with a gain of just 5% since purchase will exceed their capital gains tax allowance if they are doing it outside a wrapper of some sort. That's completely avoidable if they do it inside an investment bond and you surely know that moving money between investments is necessary for reasons like changed manager or switching to a fund more suitable for the economic climate. I wouldn't be surprised to see half of the investments moved for good reasons like those in just one year.

Investment bonds are popular because they are very suitable investment wrappers for higher rate tax payers, those who might have an income of a little above 20,000 in retirement or those who may qualify for benefits in retirement.

Yet you've said they should not be used without even bothering to ask if any of those reasons apply to the poster, knowing that an IFA with a legal requirement to give best advice and who knows their circumstances has said that it is a suitable wrapper for their investment.

It's entirely possible that they could get a better deal if an investment bond is suitable but you could at least ask the basic question "what are your income tax rates" before criticising the advice to use an investment bond.