Independent Financial Advice - Recommendations

dunstonh

Research from the FCA and other agencies has found time and again that consumer do not like hourly rates. They are unable to know the fee until the end. A percentage is popular but so is a fixed fee or caps/collars on a percentage (i.e. x% with a minimum of £z and a maximum of £y).

Malthusian

Most people who advocate hourly fees are those who would never buy financial advice at any price or pricing mechanism, because they don't value it.

If I don't like ham, the butcher can be as transparent as he can be as to how his prices break down into the meat itself, premises, staffing and profit, but I'm still not going to buy any ham. Someone who does like ham, by contrast, will just buy it if it's offered at a price they find reasonable; how that price breaks down makes no difference to them.

[Deleted User]

Malthusian wrote: »

Most people who advocate hourly fees are those who would never buy financial advice at any price or pricing mechanism, because they don't value it.

If I don't like ham, the butcher can be as transparent as he can be as to how his prices break down into the meat itself, premises, staffing and profit, but I'm still not going to buy any ham. Someone who does like ham, by contrast, will just buy it if it's offered at a price they find reasonable; how that price breaks down makes no difference to them.

You are correct in my case. I am unlikely to use an advisor for investment advice. My experience has been poor and I have learnt to trust myself and reference literature.

However I use an accountant. Every year. The same guy. He gives me a quote. It’s a rated quote with a limit on hours. I see his rate and total budget. He does most of the work by himself, then presents at the end. I don’t monitor his time, but I can see the result and if he is screwing me then I can see and act.

Transparent. Works great. He has a building. And staff. He is educated. Rates include overhead. And profit. Why exactly is this bad for people using IFAs? Could this be because they will see the total cost and the number of hours spent usefully?

dunstonh

Transparent. Works great. He has a building. And staff. He is educated. Rates include overhead. And profit. Why exactly is this bad for people using IFAs? Could this be because they will see the total cost and the number of hours spent usefully?

I cannot see how that differs from an IFA saying it will cost £x to do something. Except with the IFA you know exactly what it is at the start. Whereas with your accountant, you are left hanging until the end with just the knowledge there is a cap but could be anything up to that cap.

[Deleted User]

dunstonh wrote: »

I cannot see how that differs from an IFA saying it will cost £x to do something. Except with the IFA you know exactly what it is at the start. Whereas with your accountant, you are left hanging until the end with just the knowledge there is a cap but could be anything up to that cap.

I know it will be the maximum. Which is fine.

If an IFA quoted fixed price I have less of an issue than with those charging percentages. People seeking advice for investment tend to be less financially savvy. The rate of 0.5% or 1% per year seems like a small value. People don’t appreciate that the initial investment is charged over and over and over again and that the total payment over decades is easier to measure in Ferraris than pounds.

bowlhead99

Deleted_User wrote: »

If an IFA quoted fixed price I have less of an issue than with those charging percentages. People seeking advice for investment tend to be less financially savvy. The rate of 0.5% or 1% per year seems like a small value. People don’t appreciate that the initial investment is charged over and over and over again

Most times people talk about what they were quoted by an IFA (if quoted in percentages) it is x initial fee and y ongoing. The initial work is not charged over and over again. The ongoing work is charged every year because it is ongoing. If you don't want ongoing servicing, you just deal with the advisor on a transactional basis and don't sign up to pay the y per year.

Much as you pay your accountant every year. You don't say, "hey didn't you already charge me for accounting services in 2017 and 2018, why should I pay you for accounting services in 2019 and 2020 as well?!!" If you want the service, you pay for it.

How much is your accounting service going to cost in 2029? It probably depends on the complexity of your affairs and the person's charge out rates and fee cap at that time.

How much is the IFA's ongoing service going to cost in 2029? The advisor does not know how complex your affairs will be or how much money will be invested or disinvested at that point or what your specific servicing needs will be in that particular year, but is willing to quote 0.75% of your assets. When you actually get to 2029 and realise that your assets have grown to £200k from £120k, the fee is costing £1500 instead of £900. If that seems high in the context of the amount of assets and work performed, you could tell the advisor that you are not happy with the arrangement and don't want to continue it, or that you need to get his price down to the 0.5-0.6% range instead of 0.75% because you believe £1000-1200 is a fairer fee.

The IFA will either agree with you that £1000-1200 is fine in the context of what he is doing, or he will say no. Much as when you go to your accountant wanting a £1000-1200 fee instead of the £1500 capped fee that he's offering that year, he will agree or say no.

Whether you choose to shop around for accounting every year depends on whether he is doing something simple and commoditised that anyone else could do for you (e.g. a tax return when you provide him your income and expenses figures) or whether he is doing something where his pre-existing knowledge of your business is something that helps him in the task (planning, consulting etc) and forms an effective 'barrier to entry' to another accountant taking on the work because they would have to get to know you from scratch at £x per hour which is cost-inefficient when you already have somebody who knows you.

In the case of IFA servicing it is generally going to be a multi year relationship because there is that 'getting to know you and your needs and building a plan' and then there is 'executing and maintaining the plan' and if you wanted to move to another provider there would be another 'getting to know you and evaluating your plan' phase which would be inefficient to do every year with a new firm. So, perhaps unlike your accountant with whom you strike a new engagement letter each year, the IFA will offer a multi-year servicing relationship on a percentage-of-assets basis; because the amount of assets drives his insurance and regulatory costs and the potential complexity of what you need.

But percentage-of-assets is not the only way to charge, and percentage-of- assets does not mean it can never be renegotiated if you think the fees are getting out of hand, and ongoing servicing is not the only way to use an advisor.

You mention that people seeking investment services may not be financially savvy. If they don't understand maths and have not chosen to research their options available and ask the advisor for a quote and accept the quote, is not really the advisor's fault. Still, he tries to simplify the options by saying you can pay x% a year rather than saying come back to me every year and we will haggle over a price. Customers like that simple approach rather than him saying he will work on an hourly basis unmonitored and will send a bill at the end which might be £x or it might be £y.

You may feel the advisor morally owes something to un-savvy consumers to protect them from his charges of x% of assets. If you get into a taxi, the driver will say it will be £x per mile and £y per minute stuck in traffic, but what is his obligation to also tell you that it might be healthier for your heart and wallet to walk (with caveat that you would need to work out the route for yourself, and crossing or walking down a street can be annoying or downright dangerous if you don't know what precautions to take against risk of being hit by traffic, attacked by muggers, pestered by charity reps, stepping in dog poop etc).

and that the total payment over decades is easier to measure in Ferraris than pounds.

Ferraris are a poor way of measuring a payment because they are not as granular ; it's no easier to say 1.022061 Ferraris than £200k.

[Deleted User]

I take your point that if an individual is dumb enough to pay high fees and hand over his family’s financial security to poorly educated marketing people then he, perhaps, deserves it. Still, people who are asking a good question deserve a good answer. And the answer is that % charging IFAs’ interests are misaligned with yours. Here are consumers’ interests:

1. Cut down the costs. The one and only thing about investment that is guaranteed
2. Diversify. Thankfully today amazing diversification can be achieved with 1- 4 funds
3. Keep it simple. See 2.
4. Maximize long term return.
5. Understand behavioural finance and manage risk
6. Keep it steady, don’t try to time the market

Here are IFA’s interests (% charging system):
1. Cut down effort on investment management. You get paid your % regardless. You need these hours to win new business.
2. Maximize effort on marketing. Getting 1 naive punter = a new Porsche if he sticks around .
3. Keep it complex. Why would an investor stick with you if all he needs to manage is 1 multi-asset fund?
4. Minimize volatility. Short term big drops make investors jumpy.
5. Streamline the risk profile evaluation process to put a tick in the box and meet requirements
6. Time the market to try and reduce maximum drawdown. Same reason as 3 and 4.

[Deleted User]

And don’t get me wrong. IFAs have a role to play. I can see lots of scenarios where specific one-off, fee-based advice is a good thing. Talking to a pension expert to look at alternatives scenarios is one example.

Planning investments can be useful too. I accept that some people need hand holding and to be saved from doing dumb things. I just don’t accept that it makes sense for anyone to enter into a business relationship where the fee is supposed to escalate annually at the rate the investments grow. And has no linkage to the effort.

Linton

Some level of % charging is surely justified because increased size of pot implies increased liabilities. And also the more money you have your objectives are likely to be more complex.

Charging on hours is unsatisfactory as neither you nor your IFA know how complex the job is going to be until some work has been done. It also leads to undesirable perverse incentives such as you find with lawyers who charge on hours. You telephone them to find out why nothing seems to be happening and your bill goes up by £100. The more they delay the richer they get.

If charging by % was abolished it would result in even fewer small investors being able to get advice as it would be uneconomic for both the advisor and the customer. The benefit for the richest people would not be as high as might be expected because of the smaller customer base.

So my conclusion is that % charging ideally with a cap and a floor is in almost everyones best interests.

[Deleted User]

Hmmm... Charging by the hour seems to work for accountants. And, yes, lawyers. And for better IFAs in other countries.