How much are you charged by your financial adviser? It seems a very simple question, doesn’t it? However, it is often avoided, dodged or circumvented by financial advisers.

Fees should be simple. There are three main ways of charging as a financial adviser; charge a fixed fee per annum, charge an hourly rate, or charge a percentage of the client funds under management. Charging a percentage of funds under management (FUM) is the most common charging method in the UK.

So what is your fee? Clients are often told the adviser fee, for example, 1% of FUM. So if you invest £1m, you will pay a fee of £10,000. Very straightforward.

So your fee is 1%? No. Fees actually have three components.

1. Adviser fee
2. Platform / custodian fee
3. Fund management fee

These three components make up the Total Expense Ratio (or T.E.R.) which is the minimum fee you will be charged for investing. Your adviser should provide a breakdown of all fees as standard.

So what impact do fees have on your portfolio? Consider the effect of an investor with £1m being charged a T.E.R. of 1.8%, 2.3% or 2.8% over thirty years, with the portfolio growing at 5% after inflation.

After ten years, the impact of charges creates a portfolio difference of £65,000 between 1.8% and 2.3%, and £130,000 between 1.8% and 2.8%.

After twenty years, the impact of charges creates a portfolio difference of £170,000 between 1.8% and 2.3%, and £330,000 between 1.8% and 2.8%.

After thirty years, the impact of charges creates a portfolio difference of £350,000 between 1.8% and 2.3%, and £650,000 between 1.8% and 2.8%.

(It should be noted, some advisers may include entry and exit charges which do not have to be included in the T.E.R. Typically, entry/exit fees across the UK range between 2% and 5%, again impacting your portfolio.)

Noting the impact of charges, you may think, ‘Oh, I’ll just do this myself’. Even with the time and relevant knowledge, research suggests this would be a bad idea. Vanguard place a conservative estimate of a DIY investor underperforming by 3% compared to using a financial adviser (taking account of all fees). There are many reasons for this, including limited access to funds, lack of rebalancing, inadequate knowledge of tax-efficient products, poor diversification, and inefficient methods of drawing accumulated wealth.[1]

The Financial Conduct Authority insists all fees must be disclosed in full. Given the impact of higher charges on your portfolio, a simple fee disclosure request sent to your adviser may in the long-term save you a significant sum.

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[1] Vanguard Webinar June 2021

Duncan R Glassey
Managing Director – WealthFlow
duncan.glassey@wealthflow.com

This article is distributed for educational purposes and should not be considered investment advice or an offer of any product for sale. This article contains the opinions of the author but not necessarily the Firm and does not represent a recommendation of any particular security, strategy or investment product. Information contained herein has been obtained from sources believed to be reliable but is not guaranteed. Past performance is not indicative of future results and no representation is made that the stated results will be replicated. Errors and omissions excepted.

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To contact the Financial Ombudsman Service, please visit www.financial-ombudsman.org.uk.

WealthFlow Group Ltd. Registered in Scotland No SC635011. Registered Office: 10 Charlotte Square, Edinburgh EH2 4DR.

Head Office & Consulting Rooms: 10 Charlotte Square, Edinburgh EH2 4DR.

Mail correspondence to our Central Scotland Admin Hub: WealthFlow Group Limited, PO Box 14947, Grangemouth FK3 3AU.

WealthFlow Group Ltd is authorised and regulated by the Financial Conduct Authority.

The guidance/advice contained in this website is subject to the UK regulatory regime and is therefore restricted to consumers based in the UK.

For your protection, unresolved complaints can be referred to the Financial Ombudsman Service.

To contact the Financial Ombudsman Service, please visit www.financial-ombudsman.org.uk.

WealthFlow Group Ltd. Registered in Scotland No SC635011. Registered Office: 10 Charlotte Square, Edinburgh EH2 4DR.