Are you being overcharged?

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

The Rhino is a thick-skinned salesperson who charges a lot 😊 and you might be shocked to see how their charges add up!

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

However, 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.

Here I’ll help you work out how much an unnecessary extra 1% charge might be costing you.

For the wider issues around financial advice charges, read this other Insight.

It’s only 1%, what’s the big issue?

I often hear people say that, and ongoing advice charges are, very often just 1% p.a. which you wouldn’t think would make much difference to your money, would you?

Well, take a look at this chart.

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 nearly £60,000 over 30 years if you’re overcharged by just 1% pa.

And, 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.

What if you save larger (or smaller) amounts?

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

What’s the picture for lump sum investments?

Your question is my command!

This second chart shows how extra charges can savage into your lump-sum investment over time… whether it’s an ISA or Pension or any other investment product.

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

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)

For example, on an investment of £1,000,000 (ten times the example above) an unnecessary extra charge of 1% p.a. would mount up to £400,000 (10 times £40,000) in today’s money terms over 20 years.

I think most people would agree that this would be a lot of money to throw away unless you were getting extraordinarily valuable services for it.

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 receiving highly 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 c. £300 per hour for their advice.

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

Lawyers aren’t free, are they?

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. The average fee for investment advice is currently £150 per hour in the UK.

A key point to note is that if you don’t need ongoing help from a financial adviser, you shouldn’t be paying for it with an ongoing charge. Just 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 delighted to work with people on this better-prepared basis because it makes their life easier too. So, if you want some help in thinking through and mapping out an initial financial life plan talk to a good financial life coach about that.

Look around

Just be sure you don’t accept the services of the first adviser or coach you speak to – regardless of their fees.

This could cost you a fortune in the long run – and please be aware, 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’

Frankly, I think he’d been watching too many French beer adverts!

I can assure you there’s nothing reassuring about being overcharged!

That said, it is sometimes true that we get what we pay for in life. So, 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 some advisers overcharge

Just take a look at this detailed data on US adviser charges from a Michael Kitces post, using data from Bob Veres

(if anyone knows of similar UK based data – please let me know. As ever, it seems, things are a tad more transparent in the USA 🙂

What the table shows

Taking the example of having $2 million to invest with an adviser in the USA, the table shows 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.

So, that’s an extra charge of 0.5% being taken from your funds – each and every year.

Again, that might not sound like much, especially if you say it quickly. However, it works out at a cost to the investor c. $460,000 in extra charges, in today’s money terms, over the next 20 years.

If you have more or less to invest, 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 and cut out any unnecessary costs.

OK, but how do advisers get away with this?

Do you want an honest answer?

It’s either because most people can’t be bothered to check these numbers OR they’re no good at number crunching and wrongly assume that charges expressed as a small percentage of your FUA (funds under advice) don’t matter.

Well, they do matter, and sometimes they matter a lot.

So, my guidance to you is simple 

Be bothered about this…

Take a close look at what’s coming out of your investment or pension as charges for:

1. Financial planning and advice
2. Your pension or investment platform
3. Your fund management.
4. Anything else

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

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

Check this now, today, before those charges get out of (or even more out of) control.

Should you just give up on advice?

No, good advice is worth paying for and I’m a big fan of great quality financial planning advice.

What’s more, there are some great financial planners and advisors out there who can provide you with this – at a fair price.

You just need to know how to shop around to find one.

Thanks for dropping in

Paul

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