This article is part of our Understanding Investments series written by Howard Goodship, Lonsdale Wealth Management Chartered Financial Planner and member of the Ringwood financial planning team. For more information read the other articles in the Understanding Investments series: Understanding your investment choices – What are investments? and Managing Risk & Tax to earn a higher return.
Fees, costs and value
January 2013! I repeat… January 2013!
In the investment and advice world, this was a monumental date and is ingrained in memory. I believe it should be for savers too.
In January 2013, the Retail Distribution Review (RDR) took effect. This was designed to empower the consumer by defining the type of financial advisor you might be working with and removing commission from investment products. In addition, it raised the bar on the qualifications required to deliver financial advice, leading to higher professional standards. It was a great day for consumers but appears to have gone under the radar for most.
So what does it mean for you - Independent or Restricted Financial Advice?
“Independent Financial Advisors” (IFAs) such as Lonsdale Wealth Management are able to consider all types of retail investment products from all providers across the market when offering you financial advice. “Restricted Advisors” can only recommend certain products or product providers. i.e they may restrict their offering to a single or limited range of providers or restrict the type of products they advise on.'
Fees vs Commission
Investment costs are now much more transparent for any new investments made since January 2013 and costs maybe lower. That journey is continuing in the right direction for consumers. Right now, it should be made clear what fee % you are paying your investment managers and what fee you are paying your advisors (these should be separated for transparency).
However, many older products recommended pre-RDR (that’s right; pre- January 2013!) are still charging commission and investors are paying this to the financial advisor who arranged the product. This is because the ban on commission introduced by RDR only applies to new business. It is entirely possible that a client who invested in a fund pre-January 2013 is paying substantially more every year than a client who invested in the same fund post-January 2013. Some fund groups are willing to switch without cost between these different units and this is something a financial advisor can review for a client.
Costs and Value
Are you charged for the financial advice you receive or the money you invest? Impartial financial advice is all about doing what is right for the client. If that results in a recommendation to continue doing exactly what you have been doing and make no changes to your investments or strategy, then that is the financial advice which should be delivered. Unfortunately, if a financial advisor only gets paid when you make changes or invest new money, it creates an unhealthy conflict of interest.
To avoid this conflict, you could consider working with a financial advisor who is willing to separate out fees for financial advice from fees to implement that advice. In conclusion, paying for the right advice may save clients significant costs, especially as many of these costs are recurring year in, year out. I don’t know anyone who enjoys paying professional fees to an accountant, solicitor or financial advisor, but with the choice of investment solutions being wider than ever, the need for high quality investment advice is greater than ever. As Warren Buffet once said, “price is what you pay, value is what you get."
For more information read the Lonsdale Wealth Management A Beginner's Guide to Investing.
The value of an investment and the income from it could go down as well as up. The return at the end of the investment period is not guaranteed and you may get back less than you originally invested. The contents of this article are for information purposes only and do not constitute individual advice.
For more information read other articles in the Understanding Investments series. Howard Goodship, chartered financial planner, CFP, Ringwood - Understanding your investment choices,
Understanding Investments - Managing Risk and tax to earn a higher return,
Understanding Investments - Tax Efficient Investment income