Please note that tax, investment, pension and ISA rules can change and the information and any views contained in this article may now be inaccurate.
When is it worth paying for financial advice?
Entrusting your life savings to a financial adviser who charges hundreds or even thousands of pounds for the privilege is unlikely to result in DIY investors champing at the bit.
Excessive charges can be extremely detrimental to your overall returns so it seems counterintuitive to add yet another layer of fees.
An initial advice fee is typically £150 per hour or 1% to 3% of the value of your portfolio. Some advisers charge a fee for a specific piece of work instead, which could run into thousands of pounds.
If you decide to retain the adviser, you might also have to pay an ongoing fee of around 1% each year.
How much does it really cost?
According to adviser directory Unbiased.co.uk, advice at retirement on a £200,000 pension pot would cost £1,100 if you know what you wish to do and £2,500 if you require full advice.
Setting up a drawdown scheme on a £300,000 pension pot would set you back an average of £3,500. The fees can vary considerably according to where the adviser is based, their qualifications and the complexity of your situation.
Add in the mis-selling scandals that have rocked the financial advice market over the years and it’s not surprising that only 22% of people earning between £30,000 and £50,000 a year have taken retirement planning advice.
The figure rises to just 56% of peoplein the £50,000 to £60,000 income bracket, according to a survey by asset manager Octopus Investments.
Worth their weight
Unsurprisingly, those operating in the financial advice sphere are adamant that it is worth paying for advice.
Unbiased.co.uk claims that if you have £10,000 or more to invest, a financial adviser is likely to deliver net benefits.
Research from Morningstar backs this up. Analysis by the investment service found people receiving advice experienced outperformance of 1.59% a year.
Steve Lloyd, financial planning consultant at financial advice firm 1825, says the more wealth you have (approximately £200,000), the more financial planning can benefit you.
However, he points out that if your investment assets are lower in value, say £100,000, one wrong move could be more financially destructive.
‘The financial world today offers far more choices and responsibility over your money than ever before, so the choices you make are critical in determining your financial future. That’s a big responsibility, because your choice can have significant, long-term implications,’ Lloyd says.
‘This is where the value of taking financial advice comes into play. Unless you are exceptionally well-read, or have a financial advice qualification, who can truly say you are aware of all the choices available to you? Further, when you make that choice, what the impact might be on your financial plans, or, any other unintended consequences.’
Karen Barrett, chief executive of Unbiased, says small scale DIY investors who think it’s not worth paying for advice misunderstand the purpose of financial advice.
‘A financial adviser’s job isn’t to make you as much money as possible. It’s to enable you to use what money you do have in the best way for you. This is a crucial difference,’ she says.
Barrett describes financial advisers as life counsellors who encourage you to look at your life goals as much as your finances.
‘Your reasons for investing are every bit as significant as how you do it. A financial adviser will interrogate your circumstances and motivations, and you may be surprised at what you discover.
‘For instance, you might find your investments are very good ones – they’re just not the best option for you right now. Equally, you may learn that you’ve been playing too safe and need to spread your wings a bit,’ she explains.
Even if you’re happy being in control for the majority of your financial needs, there may be specific circumstances when advice can help. The most common time people seek advice is when they come up to retirement.
Mike Morrison, pensions expert at AJ Bell, says an investor might have been happy managing their investments within the growth phase of their pension planning, but need help deciding whether to buy an annuity or remain invested and draw an income from their portfolio each year.
‘Other life stages such as divorce, redundancy or receiving an inheritance could be triggers for seeking advice to deal with a specific set of circumstances, even for DIY investors who are normally comfortable managing their own affairs,’ he adds.
Choosing an adviser
If you decide you want financial advice it’s a good idea to compare the services offered by different advisers in your area.
If an adviser describes themselves as an ‘independent’ financial adviser, they will be able to offer a broad range of investment products and give unbiased advice based on an analysis of the market.
Some advisers are ‘restricted’, so they can only recommend certain types of products or sometimes products from a limited number of providers.
Simon Rogerson, chief executive of Octopus Investments, suggests finding an adviser with whom you feel comfortable and can trust. He says the adviser should be able to shape your portfolio and maximise tax benefits, and then refer you to a specialist to pick the underlying investments.