I'm changing my financial advisor. His charges are 0.5% in total. Am I right to think these charges are excessive?
29 July 2021
Question by Michael
I've got a pension pot of £550,000 in the Pru. I'm changing my financial advisor and he's recommending using Brewin Dolphin and AJ Bell. His charges are 0.5%.In total including all fund charges, the annual charge is nearly £12000 for an estimated growth of £15000. My risk level is 5/10. Am I right to think these charges are excessive. I'm looking at lower cost sipps with Vanguard, H and L and AJ Bell and not having a financial adviser. Thoughts please.
Answered by Boring Money
That is a really good question and one that isn’t simple to answer.
One of my favourite sayings that springs to mind is from the famous firefighter Red Adair “If you think hiring a professional is expensive, wait until you hire an amateur”.
You mention that the charges are £12,000 on a portfolio of £550,000. That is a charge of 2.18% and whilst this is at the very top end it’s not the most expensive, that I’ve seen.
Within that cost I would expect there to be four different charges and you will need to decide if each one represents good value for money.
The first will be the charge that AJ Bell levy to administer your pension, all providers charge an annual management fee and you are unlikely to be able to make much of a saving here. Besides, the cheapest is rarely the best. I have heard many horror stories about errors providers have made.
The next layer of costs will be the underlying investments, as you have been recommended to use a discretionary investment manager (DIM), your portfolio might contain individual stocks or collective investments e.g. unit trusts and OEICs or a mix of both. Broadly, there are two types of collective investments, active fund management, where a team use their skills to try and outperform the market and passive or index tracking funds, where the fund aims to replicate the market returns on which they are based. Passive funds have a much lower cost than their active counterparts, but offer no opportunity for outperformance, one of the best-known examples of passive fund management is Vanguard who you mention.
Then there is the cost for Brewin Dolphin, whether a DIM is right for you depends on your individual needs, whether you are looking for a high touch service or if you’re happy to let the markets do their job. One size never fits all.
The final cost is that of the financial adviser, the question is what do they bring to the table? In my opinion of all those costs 0.5% for a good financial planner represents the best value.
Firstly, they will help you understand what you’re trying to achieve, what is the pension for and how much is enough. If you’re planning to retire soon, they’ll make sure you never run out of money. From that information they will create a financial plan using cash flow forecasting software to help turn that plan into reality. They will meet you at least annually to ensure your plan is on course and if it is not, make a plan to get it back on track. However, by far and away the biggest value is behavioural coaching, that is a posh way of saying they will stop you doing something silly during periods of volatility. Last year a client called me at the beginning of lockdown asking if we should do anything, my advice, as always during periods of market volatility, was to do nothing and be patient. If they hadn’t taken that advice and disinvested, they would have been thousands of pounds worse off. That single piece of advice has paid our fees for a decade.
If after all that you still do not feel that those costs represent value for money, shop around. Using an adviser that advocates passive investing and has an in house investment proposition instead of a discretionary investment manager could see those costs come down to closer to 1%.