Since the Retail Distribution review came into force on December 31st 2012, the number of Brits investing online that regularly take professional advice has dropped significantly. Before RDR, most IFAs (Independent Financial Advisors) made the bulk of their income through commissions paid by the providers of investment products their clients bought into. RDR halted this practice on the grounds that it created a conflict of interests: IFAs were incentivised to encourage their clients into products that paid them the best commission and not necessarily those which were always the optimal choice for them.
However, RDR changing this business model meant IFAs had to start charging their clients an upfront hourly rate for their investment advice. With charges starting north of £100 an hour, the majority of smaller retail investors now largely take their own investment decisions and do not consult a professional. As well as many considering the pricing of professional investment advice high, there are also trust issues around the industry. A seemingly constant stream of mis-selling scandals around the financial services industry hasn’t helped and many worry about the quality of advice they would receive, even if paid for.
A recent feature in The Sunday Times’ Money section attempted to take a fly-on-the-wall look at what IFAs really do for their clients in an attempt to going at least some way to answering the question if paying of investment advice is likely to provide ROI. Journalist Ruth Emery spent a day shadowing Chase de Vere IFA Tom Preece to see what he really does.
Preece’s first meeting is with a woman recently made redundant. He advises her on sacrificing cash in her pocket for funds in her pension in order to shelter her redundancy package from a higher tax hit. “Would you rather have 40p in your pocket or £1 in your pension”? Taking advantage of unused tax-incentivised pension allowance from previous years so the client can add more than the current year’s £20,000 allowance, Preece advises the following:
“So we put £65,000 into your pension, gross, but it’s doesn’t cost you £65,000. You actually write a cheque for £51,972 to Aviva and it’ll become £65,000 in your pension — but you then claim back extra relief worth £18,000 from the taxman. So actually the true cost to you is about £34,000.”
Preece also advises the client switch her Aviva pension product, that charges 0.6% annually and offers a choice of 12 investment funds for another Aviva product which charges a slightly lower 0.561% a year but has a range of 130 investment funds. And he draws her up a monthly budget to save her £500 a month, without her having to make any lifestyle concessions she is not comfortable with. For example, the client’s £160 monthly expense for a personal trainer remains part of her budget.
And what did the advice cost and will cost for an annual or bi-annual review? It added up to the equivalent of £100 a month or £1200 a year. Is that worth it? Well, it’s not cheap and there are cheaper IFA firms than DeVere who charge £250 an hour compared to a national average for IFAs of £150. The advice on how the client should optimise the tax hit on her redundancy payment by paying more into her pension is also information that is freely available on government advisory websites such as Pension Wise.
Like any other service, paying for investment advice is an expense which can potentially be avoided if you have the time, motivation and ability to do the job yourself. Unless you are a high net worth individual, most investment and savings decisions are relatively straightforward. The question is will you really do so and if you do is the amount of time you will spend on the process less valuable than what you would pay to an IFA? If the answer to one or both of these questions is ‘no’, paying for professional advice may well be a worthwhile investment.