There are many ways to pay for financial advice, with advisers quoting fees based on an hourly rate, a fixed fee or a percentage of funds under management. A number of advisers will also add transaction fees on top of their annual management charges. It can be difficult for an investor to know where to find the best value for money. The Retail Distribution Review (RDR) was introduced just over a year ago. The RDR intended, amongst other objectives, to make the cost of financial advice clearer to understand.
One major step in achieving this aim was to ban advisers from receiving commission. Just over one year on, it is a good chance to have a look at what we have learned and how you may be affected.
Firstly, what is the impact of charges?
Let’s consider an example. You’re investing £500 per month and will continue to do so for 20 years. Assuming you achieve growth of 6% per annum, you would end up with a lump sum of £227,800 in 20 years. Let’s assume, however, that you are paying total investment charges of 1.5% per annum. This would reduce the 6% annual return to just 4.5%. In turn, this would reduce the lump sum available to you in 20 years by £35,000, to around £192,800.
To look at it another way, how much would you have to invest as a lump sum now if you wished to have £100,000 20 years from now. Well, if you were achieving 6% growth per annum, the answer would be around £31,300. By contrast, if charges of 1.5% per annum reduced the projected return to 4.5% per annum, you would need to put aside £10,000 more, around £41,500.
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You can see from this example that the charges imposed on an investment portfolio can have a significant impact on the value of your investments over time. Some investment advisers, particularly stockbrokers, will also add additional fees when transactions are carried out within a portfolio. These additional charges further reduce the net return for you as an investor.
What has been the impact of the RDR?
The introduction of the RDR has led to some clients realising exactly how much they are paying for investment advice on an annual basis. Indeed, a number of investors have been surprised to hear exactly how much they were paying for financial advice from their adviser. A number of financial advice firms have had to review their charging structures in order to retain clients.
So, what should you do now?
It would be worth finding out exactly what charging structure you are currently subject to with your existing financial adviser or stockbroker. You should consider any initial charges, ongoing adviser charges, transaction charges and ongoing fund charges. Take the time to raise the query, as any professional advice firm should be able to provide you with a comprehensive answer. Then consider whether or not you feel that the service being provided is worth the charge, and whether or not the same service could be provided more cost effectively elsewhere.