Many savers are likely to ask themselves whether they should consult a financial adviser at some stage during their life. Unfortunately, there isn’t always a straight-forward answer to this question; much will depend on the individual’s circumstances, their knowledge and experience and whether they are happy to pay the fees (given the value of financial advice is not always quantifiable). This article answers the key questions that anyone faced with this dilemma might ask.
When do you need financial advice?
There is a common misconception that financial advice is the preserve of the wealthy. This isn’t necessarily the case. These days, many individuals accrue significant savings across their individual savings accounts (ISAs) and pension pots during their working life, as well as regular income and capital gains from property investments.
There are scores of savers out there who could benefit from allowing an adviser to review their finances. The benefits include making sure you are maximising tax allowances and tax wrappers, such as ISAs and self-invested personal pensions (SIPPs), as well as having a viable plan in place for retirement.
Demand for financial advice has grown since the ‘pension freedoms’ were introduced in April 2015. This has given retirees greater flexibility to invest and spend their pension pots as they wish. While this should be viewed as a positive, it places more of an onus on the individual to make important financial decisions, which will ultimately determine how much money they have during retirement.
It could make sense to consider consulting a financial adviser if you have experienced any of the following or they are on the horizon:
- You have inherited money
- You are planning for your kids’ future
- You are planning to pass on money to family and/or friends
- You are going through a divorce
- A spouse or loved one has passed away
- You are planning to invest your pension
- You are considering whether to consolidate your pension pots
- You are deciding whether to transfer your pension from one scheme to another
- You wish to consolidate legacy ISAs
Many individuals are likely to consider whether they need a financial adviser as they approach or reach any of the milestones listed above. However, like anything in life - it makes sense to think ahead as much as possible. As the saying goes, ‘the time to repair your roof is when the sun is shining’.
Think about whether your situation requires professional advice. Do you need to take action? And if so, do you feel comfortable approaching it yourself?
If you have little in the way of savings and no private pension, then it potentially won’t make sense to seek professional financial advice, particularly when you consider the fees involved (there will be more on this later). Nevertheless, that isn’t to say that a person in this situation does not require advice regarding their financial situation.
What are the alternatives to face-to-face financial advice?
a) Free websites and services
The good news is there are a number of alternatives to face-to-face financial advice out there. These will be relevant for anyone whose situation is relatively straight forward (for example, if they wish to set up an ISA) or for those who can’t afford a financial adviser’s fees.
There are plenty of free websites and services available to consumers. Many of these have been set up by the government and are designed to help individuals to take control of their money. They include:
- The Money Advice Service – This website provides information on a range of topics, including debt, mortgages, savings, retirement and insurance. There are helpful tools and calculators to help you to manage your debt, plan a budget or to stay on top of your mortgage.
- Pension Wise – This website is aimed at those aged 50 plus, who are looking for guidance on personal or workplace pensions. It is possible to book a telephone or face-to-face appointment with Pension Wise to discuss retirement options.
- The Pensions Advisory Service– You can field any answers you might have about your pension to The Pension Advisory Service through Webchat, an online enquiry form or on the phone. The website includes useful resources and frequently asked questions.
- Citizens Advice Bureau – This charity provides free information and advice to help people with their money, legal and consumer problems.
For those who are unwilling or unable to pay financial advice fees, so-called ‘robo-advisers’ could represent a solution. For someone who is looking for help with their investments, there are a number of online investment managers, such as Wealthify, Nutmeg, Moneyfarm and Wealthsimple which use computer models, known as algorithms, to manage portfolios.
Their services are lower cost than traditional wealth managers but involve little to no human interaction with their customers. While many manage ISAs and savings accounts, Wealthify, Nutmeg, Moneyfarm and evestor also cover Sipps.
If you go down the robo-advice route, you will be asked to fill in a questionnaire online. This is designed to find out more about your attitude to risk, investment time horizon and personal circumstances. Once this is completed, the robo-adviser will suggest a risk profile – but usually, it is up to you to select a portfolio from their range which you think best suits your objectives and risk appetite.
Portfolios typically comprise of index funds and ETFs, which helps to keep costs down. For example, Nutmeg offers 10 risk-rated ‘fully managed’ as well as 10 risk-rated ‘socially responsible' portfolios with exposure to equities, cash and bonds via ETFs. Although they comprise of passive funds, they are actively managed by their investment team – guided by their asset allocation views.
For this service, Nutmeg charges a fee of 0.75% up to £100,000 and 0.35% thereafter. This does not include the underlying charges for the ETFs, which are estimated to be between 0.19% and 0.32%. There is a minimum initial investment of £500 but if you invest less than £5,000 there is a minimum recurring monthly contribution of £100 until you reach £5,000.
Alternatively, the robo-adviser offers ‘fixed allocation’ portfolios, where there is no active intervention by the investment team. Here, Nutmeg charges a fee of 0.45% up to £100,000 invested, which then falls to 0.25%. Again, this does not include the underlying charges for the ETFs, which are estimated around 0.19%.
Moneyfarm also uses ETFs to gain exposure to different markets, including equities, bonds and commodities. The number of funds held in the underlying portfolio depends on how much is invested. For example, if you invest up to £50,000 your portfolio will contain up to seven funds. Whereas, a portfolio with assets of £50,000 plus can have up to 14 underlying funds. The portfolios are monitored on an ongoing basis. Moneyfarm charges a 0.75% fee on the first £10,000, 0.60% on £10,001-£50,000, 0.50% on £50,001-£100,000 and 0.35% on £100,001+. It estimates that the average cost of an ETF in the portfolio is 0.20%. There is a minimum investment of £100 a month via direct debit or a lump sum of £1,500. For more information read our full Moneyfarm review.
What are the benefits of independent financial advice?
Financial advisers can provide assistance in the following areas:
a) Tax planning
Understanding how to make the most of your tax allowances and utilise tax breaks can result in significant savings over time. If you require tax planning advice, make sure your adviser has specialist knowledge and expertise in this area.
b) Pensions/retirement planning
Navigating the complex world of pensions is no easy feat. Consumers typically require professional pensions advice for a number of reasons. These include:
- Setting up and/or investing your pension
- Monitoring your pension on an ongoing basis
- You require clarity on how much money you need to comfortably retire on and how to achieve this goal
- Understanding how to use your pension allowance and what pension tax relief you could be entitled to
- Ensuring you have enough money for retirement
- Budgeting and modelling your cash flow ahead of and during retirement
- Deciding whether to buy an annuity, which means exchanging your pension for a secure income for life, or drawing down your pension instead (this involves keeping some of your pot invested)
- Deciding when to make withdrawals from your pension and understanding the tax implications
- Understanding how to manage a pension portfolio when you are in drawdown. There are numerous ways to do this and expertise is crucial, as you want to ensure you don’t outlive your money!
A good financial adviser will typically come into their own when it comes to retirement planning. Having enough money to retire on is key, so make sure any financial adviser you speak to has experience in this space and can clearly explain the implications of any decisions you face.
c) Estate planning
It is important to think in advance about passing on your wealth to loved ones. A financial adviser can help you to think about the options that are available to you and then create a plan to put your wishes in action in the most tax-efficient way. In order to do this, they will typically work closely with an accountant and/or a lawyer to make sure your wishes are met. Here are a few areas where financial advisers can help:
- Making sure you have a will set up
- Understanding how much money you need for retirement and how much you can potentially give away
- Setting up and managing trusts on an ongoing basis
- Inheritance tax (IHT) planning
- Gifting – how much to gift and when to do it
It is no bad thing to seek advice on how to invest. Some financial advisers manage investments in-house, which involves doing their own fund selection and asset allocation research, while others appoint a dedicated third-party investment manager to manage the portfolio on their behalf.
One approach is not necessarily better than the other and much will come down to your preferences, how much you are willing to spend, as well as the expertise of the firm and whether they have a well-resourced investment team.
If you are considering appointing a financial adviser to manage your investments, we suggest checking the following:
- Can they show you one, three, five and 10-year performance numbers? How do these stack up to competitors?
- What are the total charges associated with the investments and can the adviser demonstrate how much of a drag this could have on returns?
- Can they clearly articulate their investment process?
- How well-resourced is the team – and how much experience do they have?
- Does the company have an investment committee that holds the investment team accountable?
e) Financial health check
If you are approaching an important juncture in your life, it could make sense to consult a financial adviser to review your financial situation. They will take a holistic view of your savings, outgoings, objectives, future plans and risk profile. Think of it as a financial health check, which could prove insightful – even if you don’t choose to engage the financial adviser on an ongoing basis.
A specialist mortgage adviser can help you to find the right mortgage deal, which could be particularly helpful if you are self-employed or looking for an interest-only mortgage. A mortgage adviser with in-depth knowledge can do the research on your behalf and help you to find the most appropriate interest rate and loan, according to your circumstances. This could result in significant savings over the years.
How much better off will I be after getting independent financial advice?
The value you derive from a financial adviser will largely depend on their expertise and the complexity of your personal circumstances. Nevertheless, the bottom line is they must provide you with value for money – otherwise, there is no point in paying their fees.
In some cases, the value is not immediately quantifiable, but hopefully, over time the benefits should become clear. It could be that they save you money on your tax bill by structuring your finances in a tax-efficient way, grow your pension pot over time or consolidate your ISAs to make sure that your money is generating higher returns.
It is important to stay on track when saving for retirement – and the earlier you start to think about this, the better. A financial adviser can play a key role in this process.
Research produced by Vanguard, which is best known for index-tracking funds, found that financial advisers can boost investors’ returns by up to 3% per year.
Meanwhile, a report from the International Longevity Centre, a think tank, in conjunction with Royal London found that consumers who received financial advice between 2001 and 2007 were on average £40,000 better off than their unadvised counterparts by 2012-14.
How much will a financial adviser charge for pension advice?
The average cost of an initial review stands at £500, according to research produced by Unbiased. Meanwhile, for a £100,000 pension pot there was an average at-retirement advice fee of £1,000. The average hourly rate for a UK adviser is £150, according to The Money Advice Service. However, some advisers charge as much as £350 per hour.
If you are exploring your options, charges are likely to vary from firm to firm. Before proceeding, ask the adviser to provide an estimate of the overall charges (not just the headline fees), as well as when they expect you to pay them. Also, find out if there is a fee for an initial consultation.
Some advisers apply a charge based on the assets under advice, known as an ad valorem fee, while others charge a flat fee or monthly retainer.
When it comes to mortgage advice, charges are a different kettle of fish. Those who advise on mortgages are often referred to as brokers. They typically earn commission when they recommend a product or they may receive their remuneration as a combination of fee and commission.
It is worth noting that financial advisers are not allowed to earn commission when they advise on investments and pensions. The exceptions are mortgages, equity release and general insurance policies.
How to find a reputable financial adviser near you
When it comes to choosing a financial adviser, it may feel like you are faced with an information overload. However, fear not – there are a number of services out there which are designed to help consumers to find a reputable adviser who can meet their requirements. These include VouchedFor*, Unbiased*, Financiable or the Chartered Institute for Securities & Investment’s WayFinder.
Also, check out this useful piece we penned, offering tips on “How to find a good financial adviser you can trust”.
Here’s a checklist of things to look out for when selecting a financial adviser:
- What is the advice fee or structure?
- Total charges & costs – for example, platform charges, trading costs and underlying fund charges
- Recommendations – do you know anyone who has used them? What do online reviews tell you?
- How does their investment process work? Is it easy to understand?
- How well-resourced is the business?
- Do they have relevant experience?
If a link has an * beside it this means that it is an affiliated link. If you go via the link, Money to the Masses may receive a small fee which helps keep Money to the Masses free to use. The following link can be used if you do not wish to help Money to the Masses or take advantage of any exclusive offers – Unbiased, Vouchedfor