Financial Advisor--Eek!

binky571

Hello,

I hope that this is the correct forum for this post. I also apologise for the long post.

My wife recently became self-employed and mentioned to her accountant that she thought she might need eventually to set up a pension as part of her company. The accountant referred her to a financial advisor, who sent her what they called a "letter of introduction" inviting her for a consultation.

She went along to a consultation (I am unsure whether this was free although my wife feels that she was told by the accountant or the financial advisor that the consultation was free) where, in her words "basically they interviewed me", asking questions about her income, savings, assurance, pensions, etc. She asked some questions about what kinds of things they thought she might need, and how much those things might cost. The advisor told her that he'd investigate and run the numbers and get back to her, and they parted with the understanding they'd get back together again. They then mailed her an online risk-tolerance quiz, which she completed.

A second meeting was scheduled. Not having felt like she had learned much at the first meeting, she returned for a second meeting with a list of questions in order to get some idea of advice, budget, costs, etc. She was told that she might want to consider life assurance (and was given various options and prices), pensions (my wife's memory is that they told her that it's hard to figure out where to invest your pension, you can't get it out before age 60, all of the money goes in before tax. An example was shown of a kind of pension that might have a £2,500 fee, which my wife was confused about but she let it drop as she didn't think she was going to buy it), and various savings and investment options. She told them that she wasn't sure which assurance she needed and wasn't sold on the benefits of a pension versus ordinary savings given her future plans, and that she needed to think about it and would get back to them.

After being contacted via email 2 or 3 times, and having a couple of conversations with the advisor, my wife decided that she wanted the pension and sent an email telling them "I'm ready to make my order now" and that she was interested in a life assurance policy for to pay off the mortgage should she die, and that she wanted to put a certain sum of money into a pension. She closed the letter with "Can you get me the details on costs/structure/next steps?"

The next day, they had a phone call in which the advisor basically read her back her email and said "I'll send you the forms to sign." She was expecting to get an idea of what the fees were. The advisor repeatedly told her that because her birthday is coming up (it is in April, the conversation this week, in early January), it was very important that she get the papers back to him quickly.

What arrived in the post was an life assurance application to cover the mortgage in case she died, an application for the pension, and a fee agreement, with post-its in various places she was supposed to sign.

The fee agreement calls for an approximately £5,200 fee for setting up and maintaining a SIPP until she is of retirement age. During the second meeting, there was some offhand mention by the advisor that the fee for the pension could be as much as £2,500 (with my wife immediately thinking that she wouldn't buy it if it were that high).

I was somewhat skeptical of the whole financial advisor field, and have remained so. However, my wife now acknowledges that we should be managing these things ourselves. Accordingly she doesn't want to do business with these people.

The advisor got all the information she gave him by taking notes, and she filled out the online risk tolerance quiz. She hasn't signed anything and is not going to. She won't be able to have a conversation with the advisor until monday at which time she'll tell him she doesn't want to buy these products from him (the quote for the insurance is approximately double what she can get it for elsewhere, and the £5k to set up the pension is obscene).

Is it possible that she is already on the hook for something, or that she might have difficulty in exiting this relationship? Although it is obvious that she does not have to go through with the SIPP or the assurance, it is not obvious to me whether she was receiving free advice or paying for advice.

I feel that she clearly hasn't bought any products from the advisor, my worry is about whether the advisor has the right to bill her for the time he has spent trying to sell her things, and I would like some opinions about how she might handle this situation should the advisor say something along these lines.

dunstonh

I was somewhat skeptical of the whole financial advisor field, and have remained so.

Very nice of you to make judgements on people you have never met.

Is it possible that she is already on the hook for something

You can only be billed once the IFA (I assume its an IFA and not an FA) tells you that from that point you will incur a charge. That doesnt appear to have happened so there wouldnt be a fee.

However, are you possibly mixing up commission and fees? £5200 is a sensationally high fee. Typically they are closer to the £1000-£2000. Having them taken from the pension rather than cheque makes sense as you get tax relief on the fee. £5200 sounds more like a commission level than a fee.

That said there is a regional accountant near me charges £2500 just to do the factfind and generic report. They charge more on top of that. Which makes them damned expensive. However, as they are an accountantancy firm they seem to get away with it.

Another point is the amount sounds like it may not be up front but over the term of the contract (as it covers ongoing servicing). If it is fee and covers whole of the life of the contract and is not on commission basis, it could actually be cheaper than DIY.

You mention SIPP but it doesnt sound like you or your wife are really suited to a SIPP. If the subject is confusing to you then the last product you want is a SIPP. It is typically the most expensive option for funds but worth it if you utilise the features and options that a SIPP can offer. If you dont utilise them then you are paying for features and options that you are not using.

binky571

dunstonh wrote: »

Very nice of you to make judgements on people you have never met.

I'm not making personal judgments about people in the field. I'm sure the people in the field are good and bad people in about the same proportion as the rest of the population. I'm simply skeptical about the field itself as it relates to our financial life, and whether it is a good idea for people without huge incomes (obviously people who have more money than they can count have different problems) to hand over thought about their finances to a person whom (here comes the skepticism) may or may not have better opinions than that person could acquire with a bit of effort, particularly when you account for the fact that your investments will have to perform well enough to pay this person. On the other hand, most people don't cut their own hair or fill their own teeth, for example, so I recognise that there is a legitimate debate here. But I'm not automatically wrong for having doubts.

You can only be billed once the IFA (I assume its an IFA and not an FA) tells you that from that point you will incur a charge. That doesnt appear to have happened so there wouldnt be a fee.

However, are you possibly mixing up commission and fees? £5200 is a sensationally high fee. Typically they are closer to the £1000-£2000. Having them taken from the pension rather than cheque makes sense as you get tax relief on the fee. £5200 sounds more like a commission level than a fee.

No, it's listed on the contract they want her to sign as a fee for "pensions financial advice, research and provider investigations, product negotiation and report production, implementation of advice, general administration and case management, and ongoing advice and reporting".

Another point is the amount sounds like it may not be up front but over the term of the contract (as it covers ongoing servicing). If it is fee and covers whole of the life of the contract and is not on commission basis, it could actually be cheaper than DIY.

Yes, I think this might be true, but my opinion is if she's not totally sure that this is what she wants than she shouldn't be paying 30 years of fees up front.

You mention SIPP but it doesnt sound like you or your wife are really suited to a SIPP. If the subject is confusing to you then the last product you want is a SIPP. It is typically the most expensive option for funds but worth it if you utilise the features and options that a SIPP can offer. If you dont utilise them then you are paying for features and options that you are not using.

I'm not educated enough on this subject to have an opinion on this issue. Might you have any recommendations for independent sources where we might begin reading about it? I had thought she should at least investigate a stakeholder pension but it seems that this was the only thing she was offered. Again, I might be wrong, but my feeling was that she was steered in this direction because it had high fees for the advisor.

Thanks for your very helpful advice.

dunstonh

Yes, I think this might be true, but my opinion is if she's not totally sure that this is what she wants than she shouldn't be paying 30 years of fees up front.

I agree. One option, and its more popular, is to build it in to the contract on a annual basis. If the adviser then doesnt satisfy you in future, you can appoint a new adviser to that contract and the new adviser gets paid.

There are many different business models. The two main distinctions are transactional and servicing. Transactional is the type you see once and never again. Servicing is the type that will continue to provide advice. The FSA is being very hot on issuing fines, remedial work and forced reviews where advisers are taking explicit fees for providing servicing but not giving that servicing.

Might you have any recommendations for independent sources where we might begin reading about it?

Ironically, a decent IFA should be able to present the pros and cons of the options. That doesnt appear to have happened here. I dont think there are any real guides as a lot of the internet sites seem to have motives. Part of the problem as well is that if you took 100 people, some will be best with stakeholder, some best with personal pension and some best with SIPPs. There is no rule that says one is better than the other.

Probably the best way to think of it is that a stakeholder is the simple contract with a defined charging structure. It wont have a great fund range. It may not be the cheapest (but also could be) and it wont offer any bells and whistles generally (you cant do phased income or income drawdown with a stakeholder for example). Personal pensions tend to be the middle ground. They will have a variety of charging models. Some identical to stakeholder but with an increased range of external funds that may cost more. Allowing you to mix and match stakeholder funds and external funds. Some personal pensions can also be cheaper than stakeholder. Indeed, for those in their low 30s or younger, a personal pension with a £2000 fee can be cheaper than a nil commission stakeholder pension due to the way charges are structured. SIPPs are the experienced investor option or for those that use an investment adviser to do the management. They are typically the most expensive option but dont see that as bad necessarily. They will have access to investments that stakeholders and most personal pensions cannot.

I am a bit anti SIPP. So is the FSA. There is no justification for the majority of SIPP sales. However, a lot of these sales are because it was seen as the best product to have and it got positive media coverage. Some even retail SIPPs as a low cost option which is wrong. That said, if you are using an investment manager you may have to use a SIPP.

Again, I might be wrong, but my feeling was that she was steered in this direction because it had high fees for the advisor.

Could be right or could be wrong. SIPPs typically pay less initial commisson than a stakeholder. So, if initial commission greed was involved, you wouldnt expect a SIPP (unless its the rubbish Standard Life contract).

There is also a FSA rule called RU64 which states that any pension recommendation has to be for a stakeholder pension unless there are justifiable reasons for using another pension product. Lower charges on a personal pension is a valid reason. Accessing and using features that are not present on a stakeholder is another. The investor also have to be if sufficient knowledge and ability to understand what the adviser is doing. Putting this in a really blunt way, it should be simple things for simple people. Even if its not the best thing.

binky571

Thanks very much for all that. It has given us a good start. At the very least, we need to take more time and become educated about what the options are (not to mention investigate the issue of this £5,000 fee), and the advisor will just have to wait while we do.

Thanks once again. That the advisor probably won't consider her as on the hook for anything will provide some relief over the weekend.

Myrmidon_J

binky571 wrote: »

Thanks once again. That the advisor probably won't consider her as on the hook for anything will provide some relief over the weekend.

My two cents: any professional relationship is based on trust. If you feel that the IFA in this case is being pushy, or awkward, then walk away.

I think it's especially important with financial matters - that are by their nature long-term - to fully understand the consequences of any decisions that are made. This is integral to the process of offering advice: a good IFA will leave the client fully informed and confident about their future.

As an aside - and as a skeptic - I guess the (excessive) up-front fees in this instance may be the result of the hideous trading conditions experienced by financial services firms at the moment! Not that this is an excuse...

I believe that a good financial adviser can offer a great deal to a client and that 'DIY' options are not appropriate for the majority of people. But there are an awful lot of sharks out there!

dunstonh

As an aside - and as a skeptic - I guess the (excessive) up-front fees in this instance may be the result of the hideous trading conditions experienced by financial services firms at the moment! Not that this is an excuse...

Certain business models seem to be suffering whilst others are not. Those reliant on mortgage business are obviously suffering. Transactional advisers seem to be hit harder (as their income is based on you buying something). Servicing advisers are riding through this with no issues (their income comes from servicing rather than purchasing). Autumn and early winter things quietened on new money but December and January has seen investment business pick right up. (this is based on discussions I have had with other IFAs, all of whom seem to work with different models).

A "fee" of £5200 really doesnt sound like the sort of fee a servicing adviser would make. Thats a transactional adviser fee. Servicing advisers will typically take very little up front. Sometimes nothing if the value is good. The value to their business is in the ongoing servicing income (natural trail commission usually).

whiteflag_3

binky571 wrote: »

Thanks very much for all that. It has given us a good start. At the very least, we need to take more time and become educated about what the options are (not to mention investigate the issue of this £5,000 fee), and the advisor will just have to wait while we do.

Thanks once again. That the advisor probably won't consider her as on the hook for anything will provide some relief over the weekend.

Instead of keeping your adviser waiting, might I suggest youtell him where to go! If this is what the start of the relationship is like , probably best to end it now.

Blinky why werent you involved? any financial adviser worth their salt couldnt give a married couple accurate financial planning advice without involving both of you.

whiteflag_3

dunstonh wrote: »

However, are you possibly mixing up commission and fees? £5200 is a sensationally high fee.

So does that mean that £5200 commission isnt sensationally high ?

ps agree totally wioth your comments re SIPPS.

dunstonh

whiteflag wrote: »

So does that mean that £5200 commission isnt sensationally high ?

ps agree totally wioth your comments re SIPPS.

A commission of £5200 would not be uncommon for a transactional adviser. Especially employed advisers who may only get say 30% share of the commission for themselves. However, when an adviser has to get a fee agreement signed and the fee is £5200 then there is less chance a client would sign that. Fees are disclosed in advance and a transaction like this (which sounds quite straightfoward) it shouldnt be anywhere near that amount.

whiteflag_3

[quote=dunstonh;17798581

]A commission of £5200 would not be uncommon for a transactional adviser. Especially employed advisers who may only get say 30% share of the commission for themselves.

So an employed adviser says to a client " im sorry buit i have to take £5200 because I only get 30%" - what a load of rubbish -

Dh please tell me im getting the wrong end of the stick here and that you are not saying a fee of £5200 is "sensationally high" while a commission of £5200 is ok, as that is what it sounds like.

However, when an adviser has to get a fee agreement signed and the fee is £5200 then there is less chance a client would sign that. Fees are disclosed in advance and a transaction like this (which sounds quite straightfoward) it shouldnt be anywhere near that amount.

[/QUOTE]

WHen did the need to disclose commission in advance stop?