I read a column recently explaining that if I used a direct broker for my investments that I was losing out as they were effectively charging me but not giving advice. Is this correct?
I'll make this complicated subject as easy as possible. You can buy an investment product through an Independent Financial Adviser, a stockbroker, bank or through a discount broker direct.
Each makes some money for their troubles. Hargreaves Lansdowne were the first real discount broker of note and they typically allowed investors the opportunity to buy a product direct at a pretty good discount. Hargreaves would have used their clout to maximise the charging structure and put pressure on investment company's margins for the benefit of the investor.
Typically in a non discount world you may pay 5.25% for a unit trust/investment trust and anything between 1-2% for the ongoing annual management fee.
Most of the discount brokers have tried to match Hargreaves by reducing their fees and a price war ensues!
However there are some direct only broker's who offer no advice, yet still charge the full fee with no discount, and clearly this is not fair.
The fee/commission is normally used for an Independent Financial Adviser to build your portfolio of investments and continue to manage it on an annual basis. The adviser would explain risk to you, explain reward, and discuss all the potential plans you might be considering. They would then calculate the best solutions from a tax and risk/reward viewpoint to ensure you maximised the very best for your capital.
The Independent Financial Adviser then carries the risk for the investments and the advice and their professional indemnity (P.I.) insurance is there to protect the investor should the advice prove negligent. And so, the investor is clear what they have paid (5.25% and circa 2% ongoing) and what they will receive for it.
The financial adviser will typically be paid 3% from the 5.25% charge and 1% from the ongoing fee.
Some investors are happier to build their own investments and so can buy direct and realign their funds when they want. They will clearly have no protection for this advice in terms of negligence of the advice and will not be receiving annual research/advice either.
Many Independent Financial Advisers and banks do not have the research to fully assess all the potential issues within investment trusts/unit trusts and this research is very expensive indeed.
Without the research it is difficult to see how investors can really stress test what the investments may or may not do during volatile market conditions.
Some funds are highly complicated in their nature and others are less, but the potential for loss is not always that obvious.
Today's market however, is quite different, where the fee based Independent Financial Adviser simply uses a platform to access the funds at the cheapest possible price (normally close to zero for the initial charge and close to 0.75% ongoing). The adviser then separates the advice and charges for that. So, for example, instead of you paying 5.25% and the adviser receiving 3% commission, the adviser might just charge 3% and you save the 2.25%. There is also a potential discount that can be saved on the ongoing fee.
This way, investors can buy the product cheaply but still benefit from the quality and protection of the advice of the adviser.
Be careful however, in who you choose to manage your assets as not all advisers are specialists in this field. In fact, in my travels it is only a small percentage of the generalist financial advisers who have any real in depth research whereas the specialists have invested in such a resource to maximise your gain and minimise loss.
If you want to know more, ask your Independent Financial Adviser/bank if they have access to the new wrap account. Furthermore, investors who already have a portfolio of investments should consider transferring their capital and accessing funds in this way and in doing so will benefit from a much keener price.
If you would like a review of your investments call Peter on 0845 230 9876, e-mail firstname.lastname@example.org or take a look at our website.
The value of shares and investments can go down as well as up
Peter McGahan is an Independent Financial Adviser and the Managing Director of Worldwide Financial Planning Ltd who are authorised and regulated by the Financial Services Authority. 'The FSA does not regulate Credit Cards, Will Writing and some forms of mortgage and Inheritance Tax Planning.'