Are you being overcharged?

on your pension and investment plans?

The overcharging Rhino

So, are you being overcharged by this sort of character on your pension or investment plans?

He (or she) is a Rhino you see …

… a thick-skinned salesperson who charges a lot 😊

And you might be shocked when you see how their charges add up!

The truth is, that most people suspect that they might get overcharged for buying financial products.

Annoyed by being overcharged

But very few people really have any idea what they’re paying for ongoing financial advice – and, sadly, even those that do, seldom do anything about it.

I opened the lid on this can of worms here  and in this Insight I want to help you to work this out.

But it’s only 1% … what’s the big issue?

Well, yes, it is quite often just 1% p.a. and you wouldn’t think that it’d make much difference to your money, would you?

But take a look at this chart.

Extra charges on savings plan

What this shows is the cumulative effect of a 1% ‘extra’ charge on an investment savings plan (pension or ISA for example) over various periods of time.

Notice how you could suffer ‘unnecessary’ charges of more than £60,000 over 30 years … if you’re overcharged by just 1% pa.

Now, bear in mind that I’ve adjusted these charges for inflation – to show you what they mean in today’s money terms.

The charges in nominal terms – would normally be a lot higher.

But what if you save larger (or smaller) amounts?

Well, you can still use the chart.

Simply scale the answers up (or down) according to the amount you’re saving.

So, if you’re saving £100 per month (one-fifth of the example above) then 1% overcharging would cost you around £12,000 at the 30-year point

Now here’s the picture for lump sum investments

1% p.a. extra charges on lump sum

And this shows how extra charges can really savage into your money over time on a lump sum of money…

… whether it’s an ISA or Pension or any other investment product.

An unnecessary extra charge of just 1% p.a. could mount up to c. £40,000 over 20 years ☹

And, as before, you can use this chart to work out the effect of overcharging on larger (or smaller) investment holdings. Just scale the results up (or down)

So, on an investment of £500,000 (five times the example above) an unnecessary extra charge of 1% p.a. would mount up to £200,000 (5 times £40,000) over 20 years.

OK. But what is a fair price for financial advice?

Well, that really depends on the type and quality of services you get.

In an ideal world, fees for financial advice should be a bit like dealing with your dentist.

You wouldn’t pay much for a simple check-up but you might pay a lot to have all your front teeth capped by a highly acclaimed dental surgeon.

Likewise, if you’re taking specialist financial advice, you should be prepared for some high fees.

An hourly charging fee-based adviser specializing in, say, the complex financial needs of business owners and high net worth individuals, might charge over £200 per hour for their advice.

Yes, it’s expensive, but then good advice in any industry costs good money.

On the other hand, if your finances are relatively straightforward, you should be able to arrange a review and implement some basic savings products for much less than this with a more ‘generalist’ financial adviser.

And if you won’t need regular ongoing help  – you really shouldn’t be paying for it.

You should be able to agree on a fee basis for help when you need it with your adviser.

What’s more, if you do some of your own homework . . . you might even save on ‘initial’ adviser fees as well as these ongoing fees.

Here’s how

Learn to start your own financial life plan

If you learn to draw up a plan – which clearly sets out your financial situation and your financial life goals – you could get a better deal from a regulated financial adviser if you need to buy any investment or pension products.

After all, you’ll have done a lot of the leg work already.

A lot of advisers I speak to are very happy to work with people on this ‘better prepared’ basis – because it makes their life easier too.

And if you want some help in thinking through and mapping out an initial financial life plan – ask me for some financial life coaching help.

But whatever you do, don’t just accept the services of the first adviser you speak to – regardless of their fees.

This could, as we’ve seen, cost you a fortune in the long run.

There’s no guarantee of great quality advice and service just because you’re paying high fees.

Indeed, a while back, I heard one adviser boasting about how he tells his clients that he’s ‘reassuringly expensive’ … 

… but I can assure you there’s nothing reassuring about being overcharged.

That said, it’s sometimes true that we get what we pay for in life.

And if an adviser is very cheap (and desperate for business), it ‘might’ tell you something about the quality of their offering!

The truth is that many advisers overcharge

Now, I’m not sure if we’ve got this kind of detailed data on adviser charges in the UK but, as ever, in the USA – things are a tad more transparent 🙂

So, here we have an excellent chart from a Michael Kitces recent post.

And it’s based on data from Bob Veres

Adviser Charges range USA

What does that table show?

Well, it shows, for example, is that if you have $2 million to invest with an adviser in the USA – there’s a reasonable chance that you’ll suffer 0.5% p.a. charges for advice on your money – or perhaps even less.

However, it also shows that you’re equally likely, to suffer a charge of 1% p.a. for what is, presumably, similar work.

That’s an EXTRA charge of 0.5% – each and every year being taken from YOUR funds.

And whilst that might not sound like much – especially if you say it quickly 😉  . . .

… that will cost the investor about $460,000 in EXTRA charges (in today’s money terms) over the next 20 years.

As I said above, if you have more or less to invest, just scale these numbers up or down.

And convert them to your currency – the issue is precisely the same in £ as in $ of course. 

Now, if you really think that your adviser is worth that sort of EXTRA fee- then fine.

If not then you might want to negotiate with them  – to keep a lid on these costs.

OK, but how do advisers get away with this?

Well, I think it’s because most people are poor at number crunching.

And let’s be honest – it really is confusing when charges are expressed as a tiny percentage of your “funds under advice” (This is known as the FUA charging model)

Either that or investors can’t be bothered to dig into the detail around charges …

… and that’s certainly an issue for some people.

So, my advice to you is simple … 

… be bothered and take a close look at what’s coming out of your investment or pension in FEES

And if you have a lot of money invested – ask how much you’re paying (in £ or $) each year for advice charges.

That’s the only way to judge the value of the advice you’re getting for yourself 🙂

And do this now  – before those charges get out of control.

Don’t get me wrong …

… there are some really good advisers out there who can provide you with solid advice at a fair price.

But you may need to shop around to find one.

Hope that helps

And take good care out there

Paul

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