Question: I am investing some capital and was surprised to find some financial advisers quote an upfront fee and others not. All quoted an ongoing service fee. Why the difference?
Answer: Each financial adviser has their own financial model on which they run their business.
It’s an important point to remember: they are running a business and nobody works for free. So you need to dig a little deeper into the quotations.
If there is an upfront fee, it could be made up of an administration fee and/or an initial structuring (advice) fee for the investment. Sometimes an adviser will waive all or part of these initial fees.
In addition, they will charge ongoing fees made up of advice, product administration and asset manager fees. Usually these ongoing fees are paid directly to each party, but alternatively the adviser, administrator and asset managers could pool part of their fees.
Obviously, if an adviser is getting more out of the ongoing fees than just the advice fee, then it’s easier to waive the initial fees. It’s a seemingly more attractive pricing structure to the client.
FAIS regulations require full disclosure of fees to a potential investor.
To protect your interests, you need to weigh up the total fees in each quotation, to consider who in fact is offering the fairest overall fee structure to you.
You also need to take into account performance-based fees too, when considering your options. These are harder to quantify and vary from one asset manager to the next.
I think the last point to be made is for you to also understand what services are being offered for the fees being tendered. It may be that you are more comfortable paying a higher fee to receive a higher level of advice.
Remember that promises of service should be confirmed in writing in the form of a service level agreement. This agreement enables you to hold your financial adviser accountable for future service delivery.
- Chris Willis is the head of Alexander Forbes Financial Planning Consultants