IFA Fees. Is this too much or about average?

Cammie50

I’m in the process of finding an IFA with a view to investing a lump sum of circa £250K. The IFA whom I have had an initial meeting with has quoted a set up fee of £7,500 plus annual costs of 1.8% which would include his fees and fees to two other companies which he uses, namely Square Mile and AJ Bell. This seems rather a lot to me but as I’m a novice, I have no experience of what to expect. Also, what part in the process do Square Mile and AJ Bell actually play? 

dunstonh

The IFA whom I have had an initial meeting with has quoted a set up fee of £7,500 plus annual costs of 1.8% which would include his fees and fees to two other companies which he uses, namely Square Mile and AJ Bell. 

£7,500 for cash investing is very expensive.   a third of that would be the target ballpark.
1.8% ongoing is expensive although not to the same degree.   (platform charge on £250k around 0.15-0.25%,  adviser charge around 0.5-0.75%,  Fund funds around 0.2-0.5%.  

Like any profession, you will find those that are expensive and those that are not.

Also, what part in the process do Square Mile and AJ Bell actually play? 

A J Bell is the platform.   You would expect a platform for all investments regardless of method.     Square Mile do research but in this context, it is probably their discretionary management service.  Effectively they do the IFAs job but charge you for doing it.   Note that I am not a fan of DFMs and consider it more suited as a niche option for certain needs (e.g. if you want an ESG investment portfolio then they can add value or you are notoriously difficult to contact and go missing for extremely long periods meaning discretionary investing could be more suitable than advisory investing - advisory investing puts all the work with the IFA and is usually cheaper)

Cammie50

Thank you dunstonh. I understand that I will need a platform (such as AJ Bell for example) which of course would incur an ongoing annual percentage fee. What I don’t understand is why I need a third party involvement in the form of a Discretionary Management Service. Is it normal procedure for IFAs to do this? 

Rollinghome

A J Bell is a platform, aka a fund supermarket who hold your investments, and Square Mille provide support services for financial advisors.

On the face of it, 3% initial and 1.8% of on-going fees is a huge chunk and the question would be how much of the likely returns would remain for the normal market risks you will be taking with your capital.  What will the advisor add for that level of charges?

The ad-valorem platform charge for retail customers of A J Bell is 0.25% up to £250k. You would need to ask exactly what it is that would be provided by Square Mile that you are being asked to pay for and is it something you need.  Do the quoted fees include the fees of the fund managers too.  Typically, active funds will cost 0.40% to 1.00%, and passive funds 0.10% to 0.20%.

Costs are very important in investment and there's no point in paying high fees to make you wealthier if they make you poorer.  But by speaking to that company you've learnt something.  If you use an advisor, it needs to be a good one and one you can trust.

So now you need to take the time to speak to other advisors until you feel you know enough to select one, or to take the other route, and learn to invest yourself. (Which is the route I decided to take 40+ years ago after speaking to many stock-brokers and financial advisors before deciding no-one would look after my money better than I would myself. Self-investing is far easier today than it was in the past, particularly since the availability of passive index funds, and a hugely valuable life-skill.)

Albermarle

Some IFA's delegate the investment part of their service to a DFM service . So the IFA will give you general advice on personal finance , tax planning , pensions vs other investments etc but the investing of your funds is carried out by the DFM.
Another difference is that if an IFA is controlling the portfolio, they will run any proposed changes past you , but a DFM will not .

In theory using a DFM service should decrease the amount the IFA charges, but that does not always seem to be the case.

Overall the charges look high , especially the initial charge , so if I was you I would broaden my search for a more competitive offer. 

Cammie50

All very good advice, and many thanks for your input. As mentioned in my first post on this site, I am new to investing but feel it is something I must now consider as my lump sum can only reduce in value with inflation if I keep it where it is currently…in the bank and NS&I. I’m finding the process quite stressful due to my lack of knowledge and experience. That said, I shall continue to find out more and shop around. 

dunstonh

What I don’t understand is why I need a third party involvement in the form of a Discretionary Management Service. Is it normal procedure for IFAs to do this? 

It is more common with Wealth management advisory firms than general practitioner advice firms.     Lots use DFMs.  Lots do not.  It's a different type of business model.    
In over 25 years of giving advice, I have only used DFMs 3 or 4 times and that was because of specific objectives where it made sense.   I am not a fan personally unless it first a specific need.

Basically, the term IFA covers a number of different business models.  In theory, you should be able to say whether you want a DFM to be used or not.  A true IFA would not refuse that but a Wealth Manager may (many of them are more FA than IFA in reality).   However, at those charges, I would be calling around for alternatives

Cammie50

Thanks dunstonh. This is where my lack of experience and knowledge of the industry puts me at such a disadvantage as I have no idea about the differences in types of Advisers. All I want is to put my lump sum away in a medium risk plan…nothing complex, which will hopefully see a steady growth over 5-10 years. Don’t need an income from it as I have good pensions but looking ahead to providing security for my daughter and granddaughter in the most tax efficient way. I asked the aforementioned IFA about something I read about “gifting money out of unused income” being IHT exempt. He knew nothing about it so that didn’t give me much confidence in his overall knowledge. 

Rollinghome

Cammie50 said:

All very good advice, and many thanks for your input. As mentioned in my first post on this site, I am new to investing but feel it is something I must now consider as my lump sum can only reduce in value with inflation if I keep it where it is currently…in the bank and NS&I. I’m finding the process quite stressful due to my lack of knowledge and experience. That said, I shall continue to find out more and shop around. 

It's very understandable that you should be stressed.  Governments are using "financial repression" with ultra-low interest rates as a way out of record levels of debt.  As a result many people who would have been content with keeping their savings in cash at a reasonable rate of interest, feel forced into risk assets that they aren't familiar or comfortable with.

It's much easier to begin when you're young and fearless, and with less money to lose; more difficult when you're older with a far larger sum to worry about.

That said, the outlook for remaining in cash isn't good, even if inflation begins to slow.  The important thing is to take your time and try to avoid the pressure to act more quickly than you are comfortable with.  All investors suffer from FOMO. Stock markets could continue upwards or could begin to fall back.  The safer investments, which might be more suitable for you, will only continue to move more slowly both up and down.

Cammie50

Thank you Rollinghome. You have understood my situation perfectly as I’m no longer “young and fearless”. That said, I do understand that keeping a large amount of money in cash, earning very little interest is not a good idea. I shall take my time on this and move forward at my own pace rather than rushing in and regretting later. 

JohnWinder

Recently you were looking for an IFA. The one you now describe seems not ideal. As feedback for us, could you say whether you found them via the https://www.evidenceinvestor.com/find-an-adviser/

site which was offered in your previous thread?