Questions to ask a financial adviser
Here we have collaborated with Boring Money to explain the key differences between independent and restricted financial advisers, helping you choose the right option. We also break down financial adviser fees, to help you understand the costs involved.
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In the UK, financial advisers fall into two main categories: Independent Financial Advisers and Restricted Financial Advisers.
SO WHAT'S THE DIFFERENCE?
Independent Financial Advisers will likely consider products and solutions across the entire market, to meet the differing needs and objectives of their clients.
Restricted Financial Advisers will offer a limited range of products and often these are in-house solutions. For example, a retail bank might recommend its own pension product or investment solution only.
When considering working with a financial adviser, it’s crucial to ask whether they operate within an independent or restricted framework.
While you can receive sound advice via a restricted structure, In our view, assuming all factors are equal, independent advice typically leads to better outcomes. This is because an independent adviser has greater autonomy, allowing them to explore a wider range of products and solutions. Moreover, as financial advisers advance in their careers, those who seek to offer deeper and more comprehensive services often gravitate towards independent models that provide more flexibility.
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Understanding the various fee structures for financial advice can be confusing, especially since many advisers hesitate to disclose their fees publicly.
From our experience, most financial advisers in the UK charge an initial fee based on a percentage of the assets being advised on. If ongoing support is needed, this typically comes with an additional annual fee, again calculated as a percentage of those assets.
You might be wondering: what does "assets being advised on" actually mean? Let’s break it down with an example.
Imagine someone seeks advice about their pension, and they have several pension pots across different providers, totalling £250,000. After reviewing the situation, the adviser and client might decide to consolidate these into a better pension plan. In this case, the "assets being advised on" are valued at £250,000.
Typically, initial fees range from 1% to 6% of the assets, with 1% to 3% being more common, and 6% being on the higher side. So, if the adviser charges 1%, the fee would be £2,500 in this example.
If the case is more complex, the adviser and client may agree on a higher fee. Conversely, a straightforward case might result in a lower charge.
For ongoing support, most UK advisers charge between 0.5% and 1% annually based on the assets under management.
Some advisers also add fixed fees for specific services like cash flow planning, while others might only charge a flat fee. In certain cases, charging by the hour may be more appropriate.
It's important to note that some advisers may not charge an initial fee at all. If this happens, it’s essential to understand how they’re compensated. They might not charge upfront, but their ongoing fees could be higher than average. In some cases, they could be receiving a commission or other compensation from their firm that’s not immediately clear to the client. In such situations, be cautious, as transparency might be lacking, making it harder to understand the true cost of advice.
To sum up, understanding a financial adviser's fee structure is crucial. In our experience, most UK advisers use a percentage-based model, with initial fees typically ranging from 1% to 3%, and ongoing fees between 0.5% and 1%.
