Do you know how much you’re being charged for financial advice and investing?
Legally, financial advisers and providers must give you a breakdown of their costs in advance. Yet many medics can find this detail far from clear! So which charges should you really be concerned about?
When it comes to the cost of financial advice and investing, there are three broad areas of charges: the adviser’s charge, the provider’s fee, and the fund’s charge.
The Adviser’s charge
The cost of financial advice typically falls into two categories: implementation and ongoing review.
The implementation cost is your adviser’s charge for carrying out their initial research and outlining their recommendations. This would normally include a meeting with you and your adviser so that he/she can understand your position and what you are trying to achieve.
The subsequent research would hopefully lead to the implementation of the recommendations, for which most firms (including ourselves) charge up to 3% of the initial investment.
The ongoing review process is where you and your adviser agree to meet at least annually to:
- Review your investments
- Make sure your investments continue to be in line with your requirements
- Note any changes to your personal circumstances
The ‘cost’ of the ongoing review is normally a percentage of the managed funds, paid from the investment.
Independent vs Restricted Adviser
Independent financial advisers – such as ourselves – research the whole of the market and typically charge up to 1% for their ongoing review service.
Restricted financial advisers, by definition, do not offer whole of market services and, as such, often charge a lower ongoing review fee.
At Legal & Medical Investments, we call the ongoing review process our wealth management service for which we normally charge 1%. It is important that you are involved in this process to ensure that your investments remain aligned to your objectives and changing circumstances.
It also gives you an opportunity to make the most of the other benefits your adviser offers. Our advisers are, for example, specialists in the NHS Pension Scheme which constitutes the foundations of most doctors and dentists’ retirement planning. Using experts in this field can often be imperative.
Whatever service we provide you, we will always explain the costs involved before you make a decision and incur any fees. A copy of our Services & Costs document is available on request.
The Provider’s fees
For many investments such as ISAs, pensions and general investment accounts, we typically use an investment platform, sometimes known as a wrap. These platforms provide the IT capabilities to invest across thousands of funds, as well as the required legal infrastructure.
They will typically charge a percentage of the funds and can be as low as 0.1% rising to 0.5%, depending on the provider and how much is invested. Platforms will vary. Some have most of the charges included within this percentage charge; others will charge extra for carrying out fund switches, and may even charge an additional flat fee on top of the percentage.
There are numerous platforms to choose from. Legal & Medical Investments has an Investment Committee which carries out due diligence on a selection of ‘best of breed’ platforms. Our specialist advisers then choose the most appropriate for their clients’ needs and requirements.
Do we always use the cheapest platform?
Of course not! As with many things in life, price is not always the sole consideration. Some platforms may not offer a comprehensive fund selection, their service levels may be slow or inefficient, their analytics and reports may be too basic, and so on. We select what we believe to be the best platform for the individual client.
The Fund’s charges
Where exactly you invest your money is one of the variables that is within your control. It can therefore have an influence on the cost.
For those who are extremely cost conscious, you can elect to use trackers (also known as passives). These funds simply aim to follow a particular index, such as the FTSE 100, and can have charges as low as 0.1%.
On the other hand, you may prefer to use active fund managers who try to outperform the index, for which you pay higher charges. It will come as no surprise that if a fund manager consistently outperforms the index – which a relatively small percentage do – this is also likely to be reflected in their price.
There are other variables too that can influence the cost of a fund. For example, investing further afield geographically is likely to incur higher charges.
There is a constant argument, particularly in the media, about passive versus active fund management, as if you must wholly sit in one camp or another.
There are pros and cons to both and, at Legal & Medical, we often use a blend of the two. In some situations, we prefer passive management because the active managers add no or little value. There are equally scenarios where we believe active management can offer significant value and is well worth paying the extra fees for.
We do of course continually review our position as situations and markets change.
Is financial advice and investing worth the cost?
Knowing what charges you are going to incur is certainly important for no other reason than they can cause a drag on growth. But, they do also need to be put in context.
I’ll use a car analogy to explain. You probably use a car to get to and from work, and to ferry your loved ones around. I expect though that this car is not the absolutely cheapest option on the market. The cheapest option may break down more often or, more importantly, the safety features are of poor quality, if they exist at all!
With a more expensive car you may be a bit safer but you’ll probably incur higher running costs. Ultimately, you want to use a car that satisfies all your requirements. Cost is a consideration but seldom the only one, and it’s the same in financial services.
You work extremely hard for your money. Costs should certainly be a consideration but entrusting your money to the cheapest bidder seems foolhardy.
How much is the right amount to pay?
Recent legislation means that funds and advisers are now required to be even more transparent in disclosing their fees, including all advice, platform and fund related charges. If your total ongoing adviser, platform, and fund costs are under 1.5%, I think that’s very competitive.
Some financial advisers charge an annual management charge. We try and avoid this as it often doesn’t reflect all the charges incurred. Instead, we prefer to use a total expense ratio or, as it is now called, ongoing charges and fees (OCF).
It is difficult to say what a reasonable total ongoing charge is but, if you’re looking to put in place a fully diversified portfolio, you could comfortably pay in the region of 2% OCF.
I would consider over 2.5% OCF to be quite high but there are, of course, circumstances where this will happen. If you start moving into more esoteric contracts such as venture capital trusts, or it’s appropriate to use the services of a Discretionary Fund Manager (DFM), then you should start to expect higher charges.
The advice and investment charges that you will pay, and the options you have to pay them, have to be given to you at the point of advice as well as, for some, annually during the lifespan of your investment plan.
Even though this is a legal requirement, we at Legal & Medical also firmly believe that, by giving you this detail, you are more informed of the costs and associated benefits involved which, ultimately, helps you make the right decision(s) for you.