Should you pay for financial advice?

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If you’re thinking about working with a financial coach, planner or adviser, or you already receive such a service and you’re concerned about the price, this Insight is for you.

This is a 10 to 20-minute read, depending on your speed.

Yes, that’s quite a long read, but we believe everyone needs to understand the (various) answers to this question. After all, if you make a bad decision on this, it could mean:

You pay fees for essential money guidance when there’s no need to pay anything at all.
You fail to take investment advice when you need to and lose thousands on expensive or bad investments or scams.
Over the coming years, you pay thousands (or tens of thousands) in excessive fees for wealth management.

And we don’t want you to fall into any of those traps.

Let’s start with a short answer.

Yes, we believe it is worth paying for a financial coaching, planning or advice service, but only if that service delivers more value than it costs.

Of course, a good coach, planner or adviser will deliver that. Your challenge is to find the right one.

That said, some no (and low) cost guidance services are available, and one of these may provide you with the help you need for now.

So, before we explore the value of broad-based financial coaching or planning, let’s look at these FREE and low-cost services.

When might you use the FREE money guidance services?

The good news is that free (professional) help is available if you’re unsure whether you’re currently receiving all of the state benefits you’re entitled to.

And it may surprise you that this situation applies to a great many people.

It’s estimated that around twenty billion pounds of benefits go unclaimed each year, either because people don’t want to claim those benefits or because they don’t realise that some benefits are available to those on average or higher incomes, especially if they look after children.

So, if you’re unsure about your entitlements, check them using any of these FREE and Government recommended services:

These organisations should be able to answer your questions about Income-related benefits, tax credits, contribution-based benefits, Council Tax Reduction, Carer’s Allowance, and Universal Credit.

And they can point you to explanations of how these benefits are calculated and affected if you start work or change your working hours.

You should not need to seek advice about UK state benefits from any other organisation, and we urge you to report any firm or person you suspect is operating fraudulently or misleading anyone. Sadly, there are such firms taking advantage of people in vulnerable financial situations.

Good quality FREE advice and support is also available if you are struggling to pay your priority bills (mortgage, rent, utilities, for example) or make payments on credit cards, personal loans or other debts.

In these situations, you could contact either Step Change or National Debtline.

Or, on any personal money issue, you could start by contacting your local Citizens Advice office. And they will point you towards the right sources of help.

Finally, if you’re over the age of 50, you also qualify for the government’s free Pension Wise service, where you can obtain an appointment of up to an hour to obtain general information on your pension questions.

Just be aware that the Pension Wise service won’t recommend any financial product providers or tell you how to use your pension pot or invest your money.

One hour is not enough time to develop a financial life plan, but the appointment may answer some basic questions about your pensions. And the answers may inform your decision on whether you need advice.

What about low-cost Robo Advisers?

Are your financial foundations already firmly in place?

Have you paid off any credit/store cards or other expensive debts?

Have you insured your life (and health) and that of your partner, if you have one?

And do you have a solid financial plan in place to:

Provide enough money for any financial dependents in the event of your death, and equip those dependents to deal with your assets (and any debts) after you’re gone.
Provide enough money for yourself or your carers if you’re unable to work (or look after your family or home) due to a serious accident or illness.
Provide enough money in accessible savings to pay for emergencies, like expensive repairs to your car or home or a loss of income from work.
Build up your entitlement to a good State Pension.
Optimise any FREE employer contributions to your pension (or other workplace-based) savings schemes.
Repay your mortgage (if you have one) by the time you retire, or to cope with a mortgage in retirement?

If you can say yes to all of these questions, you may be in a position to invest some of any other money you have for the medium to long term. And a low-cost ‘robo’ advice service (or DIY investment platform, if you fully understand investing) may be worth considering – particularly when you’re starting out on your (personal) investing journey.

We’ll not assess all the low-cost investment options in this post; you can find plenty of detailed comparison tables elsewhere.

In short, however, Robo Advice is a widely used term in Financial Services (though seldom by the providers) to describe an online system that enables simple and low-cost investment advice.

And the low costs are achieved through online automation of the Investment fund selection process.

What does that mean?

You do a lot of the work by gathering all your financial details, entering them into the Robo Adviser system, and completing their ‘Attitude to Risk’ questionnaire online.

As far as we can tell (and we’re open to correction), most Robo advice systems require you to decide which financial product is most suitable for your circumstances.

And that may not be easy to do, as was proven by one (famous) money expert, who mistakenly gave out poor (product selection) advice to millions of self-employed viewers on Television quite recently.

So, you may want to seek qualified and personal guidance on the right financial products before buying them through a Robo Adviser or other online system.

Assuming you know which financial product is right for you, the robo-advice system will suggest a suitable investment portfolio (or fund) from its limited range for you to invest in. And it provides you with an online platform (and often a mobile app) from which to invest in those products and funds and monitor and manage your accounts.

If you’re genuinely capable of making good investment choices on your own, then you could save money* by foregoing the Robo Advice element and buying your investments without any advice on one of the leading DIY investment platforms.

* The amount you’d save by not taking Robo advice varies according to which providers you compare. Broadly speaking, however, we estimate that by taking a DIY approach, you may save between 0.3% and 0.6% each year on the value of the monies you hold on the platform.

Of course, this Insight is about the value of advice – assuming you need some. So, we’ll not dive deeper into DIY investment platforms here.

Do we like Robo Advice systems?

A good Robo Advice system can potentially help people who:

Know the best financial product for their particular financial life goals.
Have financial needs that can be met by the financial products and funds offered.
Are uncomfortable making investment decisions on their own.
Don’t feel they need for a full advice service from a human adviser.

However, as stated above, Robo Advisers offer limited (or no) planning or product selection advice and generally offer a limited product and fund range.

In general terms, we prefer an approach which gives you access to a full financial planning service, a wide range of products and funds and real conversations with qualified human advisers.

You can always put the (say, 0.45% p.a.) savings you’ll make by foregoing Robo Advice to a full financial planning service if that’s right for you.

The additional cost of dealing with humans is typically not that great, but the additional value is.

Features of Robo advice services to check

If you still wish to explore taking Robo Advice, be sure to check the provider you’re considering is regulated by the Financial Conduct Authority (FCA).

Being regulated should mean that any complaint you make about service is taken seriously by the Financial Ombudsman Service. It also means you can claim compensation (up to the Financial Services Compensation Scheme limit) if you lose money due to failings by the provider.

Note: The compensation scheme does not protect you from investment losses on a Robo Advice platform (or full advice service) if those losses arise from market-wide asset value falls.

So, it’s vital that you invest in funds which both match your attitude to risk and your capacity to take investment risks on each of your goals. And we have concerns about how Robo Advice services deal with that second (capacity) question.

In any event, we urge you to search the FCA’s online register of providers to ensure your chosen provider is registered. And double check that the site you’re looking at is not a scam copy of the site you want to use.

Beyond that, we suggest you check that the Robo adviser you’re considering:

Offers a sufficiently wide range of financial products (tax wrappers), so you can place your money into the most suitable product for your circumstances.
Offers enough investment funds (and securities if you need that) for you to invest in what’s right for you – including any ‘sustainable’ investments if those are important to you.
Applies a robust process for checking your attitude to risk and for adjusting that result to take account of your capacity for risk – on each of your financial life goals.
Offers a big enough cost saving to make it worthwhile to forego access to a qualified human adviser.

And consider, very carefully, what other investment opportunities you have, particularly if FREE money (or investment discounts) are available, as they typically are with a pension or share save scheme at your place of work, for example.

To be clear, we do see a need to streamline the financial planning process with online solutions that add value and keep costs down. And the best financial advisers use systems that deliver these improvements to you.

We’re just saying that the scope of advice from these Robo systems is very limited. So, we urge you to consider the benefits carefully.

Could financial coaching be right for you?

Working with a financial coach may be right for you if you want a genuine conversation with a human instead of automated chats with a robot… although there’s no reason you could not combine the two.

Human involvement is important if you want an in-depth exploration of your personal financial situation.
And for designing plans that connect your money to your hopes for the future.

There is enormous value in having an experienced and qualified person listen, understand and react appropriately to what you say (and feel) about money matters.

Despite recent advances in artificial intelligence, we’re unaware that machines have yet cracked the code for doing that!

A good financial coach will do more listening than talking and act as a sounding board (and offer a quiet space) for you to talk about your financial concerns and ambitions.

If the coach is well-trained, they should be able to:

Help you think through and focus on the areas of your money management that need attention. And challenge you to attend to those areas.
Point you to relevant and valuable information on various financial matters.
Help you explore (and understand) the main financial products – and help you avoid the big pitfalls – especially around Scams.
Support and encourage you to take more control of your money.

Good financial coaches can also mentor you on financial matters while providing (generic) guidance and resources to help you make your own financial decisions.

Just be aware that unless the coaching is offered as part of a regulated financial advice service, the coach cannot offer you specific investment recommendations.

That said, as a result of the ‘advice restriction’, you’ll generally find that financial coaches charge somewhat less than regulated financial advisers.

And working with a financial coach to get your money tasks (and your money mind) organised can be a useful introduction to the world of financial planning.

Could financial planning and advice be right for you?

The benefits of a full (and regulated) financial advice service are that:

You’ll be given specific recommendations on:
- What financial products (Insurance, Investment or Pension) to set up or invest new (or transfer existing) funds into.
- Which investment funds to hold within the investment and pension products – on which you’re taking advice.
The financial products and investment funds recommended to you should be suitable to your needs and good value for money.
- Good product and fund choices can save you from significant ongoing product costs when compared to buying those products yourself.
- For example, on life and health insurance alone, you might save several hundred pounds (over the life of the policy) by arranging your insurance through an adviser.
The financial product recommendations will be tailored to your personal financial needs and ambitions. And based on your circumstances and your attitude to (and capacity for) investment risk.
You’ll have access to a complaints process – and compensation if it’s found you’ve been given bad advice. And while you’d hope there’d be no need to complain, these are comforts you don’t have if you advise yourself.

Some advisers also offer financial education and coaching sessions, but this varies. So, ask your adviser about these services if you value them.

Finding the right advice – at a fair price

There are no simple, golden-rule answers to the question of what’s a fair price for advice.

A fair price for advice depends on the level of expertise you need and the effort required from the person (or people) who help you understand your current financial situation – and help you design and implement a good plan for the future.

For example, an hourly charging fee-based adviser specializing in the complex financial needs of business owners or high net-worth individuals might charge between £250 and £350 per hour for their advice.

If that sounds expensive, bear in mind it’s in line with fee levels for legal advice, and we’d suggest you don’t want poor-quality advice in either of these areas.

Of course, if your finances are straightforward, you might be able to arrange a financial review and set up any strategies or financial products you need for around £150-£200 per hour, which, research shows, is the typical range for general financial advice.

Just be aware that fee-charging structures can vary quite a lot.

Some advisers charge by the hour, some for the project of work you agree upon, while many charge a small percentage of the amounts you place under their advice – with a smaller percentage fee if you agree to their ongoing service.

Some firms also advise in specialist areas that others can’t advise you on. And some firms state that you must have a minimum investment amount (including your pension funds) before you can access their services.

So, finding a suitable adviser for your needs can be confusing.

That said, you can get an idea about the advice areas covered by the adviser you’re considering (and any minimum limits) by searching one of the adviser search engines listed here:

The Money Helper retirement adviser directory
The Personal Finance Society
Unbiased
Vouched for
Society of Later Life Advisers for an accredited later-life adviser.

Then, with a short list of possible advisers, you can usually arrange an initial meeting free of charge to learn more about their services and how they charge fees.

Focus on value – and avoid excessive fees.

What’s clear, however, is that ‘advice’ is the most valuable service offered by advisers and planners – because the ‘advice’ gives you a plan that’s personalised to your circumstances, needs, and ambitions.

So, be aware that financial advice fees are separate from those for administering your financial products and managing your investments inside those products.

Of course, a good adviser will ensure you receive good value advice and service in each of those areas. And, perhaps of greatest value, a good adviser will find investment funds to match your attitude *and* your capacity for investment risk – on each of your goals.

Does it matter if you pay (a bit) too much?

The point about fees is to pay a fair amount for the services you receive, and the amount and complexity of that advice will vary according to your needs.

That said, you need to know about the potentially drastic effect of apparently small (say, 1%) excessive charges on your money over time.

Why 1%?

Because such (extra) fees are not uncommon – and that’s what more expensive wealth managers charge when compared to better value advisers.

Our question to you is this.

If you can obtain good quality financial planning and wealth management for a total fee of 2% p.a. (of your funds under advice), should you be concerned about paying, say, 3% p.a. for a similar service?

We think you should be – and these charts illustrate why.

This first chart shows what an unnecessary 1% extra charge would cost you over time on a £500 per month investment savings plan (pension or ISA, for example) over various periods of time.

Note how those unnecessary charges add up to around £10,000 on a 15-year (regular) investment plan or £60,000 over 30 years.

(these figures are adjusted for inflation, so that’s £60,000 in today’s money terms.)

You can still use this chart if you save larger (or smaller) amounts: simply scale the answers up (or down) according to your savings.

For example, if you’re saving £100 per month (one-fifth of the £500 in the example above), then 1% overcharging would cost you around £12,000 (one-fifth of £60,000) in today’s money terms over 30 years.

What’s the picture for lump sum investments?

This second chart shows how a simple 1% excessive charge would eat into the value of a lump-sum investment over time.

Note that an unnecessary extra charge of just 1% p.a. adds up to c. £40,000 over 20 years – on a £100,000 initial investment.

And the same applies regardless of whether that Investment product is a Stocks and Shares ISA, Personal Pension, Mutual Fund/Unit Trust or any other type of investment product.

As before, you can use this chart to work out the effect of overcharging on larger (or smaller) investment holdings. So, for example, on an investment of £1 million (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.

Whether it’s £40,000 or £400,000, we see that as your money, and we’re sure you have better things to do with it than waste it on excessive charges.

Don’t underestimate the work in planning your money effectively.
What’s your conclusion so far?

Perhaps you’re thinking:

‘to hell with any of these charges,
I’ll sort my finances out myself’

And that might be just fine.

However, if your finances are even mildly complicated (and not yet well organised), you may have a considerable amount of work to do.

You’ll need a good picture of what you have now, and you’ll want to design a plan to deal efficiently (without wasting money on other charges and taxes) with the many money challenges you might face over time.

This picture will give you a sense of those challenges.

Thankfully, you’ll not have to deal with all those things at the same time, but it’s still hard work to deal (effectively) with each challenge as it comes along.

And, if you don’t have an adviser nudging you to save and invest early enough, it can quickly become too late to save what you want for your goals.

So, like the last-minute savers in this picture (who want to catch up with those who started early on the steady path) you might then be tempted to take more investment risks with your money – a common reaction and exactly the wrong thing to do.

Of course, you may be extremely capable – and know how to sort out everything in the map above:

Without overpaying for the financial products.
Without overpaying for advice.
Without paying unnecessary taxes.
Without taking excessive investment risks.

However, most people with surplus income, capital (or pension funds) to invest (or other financial planning needs) find professional help enormously valuable.

Interestingly, many financial experts employ financial planners, too. And there are two reasons for this.

First, it’s extremely difficult to be completely objective about our financial situation or protect ourselves from our behavioural biases.

(And we’ll cover behavioural biases in more detail in future.)

Second, if you have a life partner with little or no expertise in personal finance, you may want to ensure they have someone trustworthy to turn to for advice – for that (unknowable) time when you face long-term illness or your days are done.

So, regardless of your expertise, if your circumstances suggest that you (or your partner) could benefit from professional advice, we urge you to find a good adviser to work with.

You’ll feel better when you’re clear about the financial tasks that need sorting and you’ve started to sort them.

I hope that’s helpful.

Thanks for dropping in

Paul

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