How much should I be paying for Financial Advice?

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Now, if you want to open a hornets’ nest, this is surely the subject to get the financial planning and advice community going. So I guess I should start out with the normal caveats: It depends on you/your circumstances, then on the adviser you engage, and finally on the type of advice you want/require. In order to fully answer the question, I will differentiate between two distinct life stages.

Stage 1 – You shouldn’t be paying for financial advice:

Like doing DIY at home, most of us have at some stage attempted to paint the living room wall with various levels of success. Whether out of necessity, love or desperation, it’s a normal stage of getting on the property ladder and nesting. The same goes for your finances: When you start out in life and possibly a bit later, too, if you enjoy dealing with money, you could quite easily manage your affairs with the help of the Internet and a few other resources. It is only when you encounter technically challenging issues that you would need the services of a professional, rather like using a plumber to install a new boiler or appointing an architect to design your dream home. I believe the DIY stage is an important development stage in the acquisition of a broader understanding of money, which will be essential later in life.

As you move through life there will come a stage where employing the services of a professional will be vital in ensuring you benefit to the maximum from the assets that you’re building up. This leads us to stage two.

Stage 2 – You have to pay for financial advice:

How much is reasonable? I have been a financial planner for 13 years and have given the question more than enough of my time, yet I am still no nearer to a clear answer; however, the following should help as a rule of thumb.

Implementation: If you only want a certain element dealt with, for example transferring a previous employer’s pension to a self-invested arrangement, you can shop around for the best deal and pay only for that piece of work. Referring to our previous analogy, installing a boiler, you’ll pay for the equipment and for the adviser’s time, plus some disbursements.

Ongoing guidance and advice: This is where financial planners should earn their keep and be adding value above the additional cost incurred by using them. Ongoing guidance is not about the management of your pension, ISA or investment portfolio, but rather involves doing detailed planning about your financial future.

The planning is done using sophisticated software and allowing for as many variables (income, expenditure, taxes, interest, inflation rates, etc.) as possible to create the most realistic projected future life scenario for you and your family. On the back of these results and the problems and opportunities that will be revealed, you could make the necessary changes today to avoid the problems of tomorrow. The idea is to know ‘Your Number’. This is the number individual to you. Achieving it will mean you and your family will be financially okay for the rest of your life. Your adviser should do the number crunching for you and regularly review your progress either in achieving it or spending it when you start depending on it in retirement.

The rule of thumb: Payment for this kind of advice will be ongoing.

Accumulating: While accumulating assets pre-retirement, you should expect to pay between 1% and 1.5% of your total pre-tax income per annum for a good adviser that acts as your coach and guide.

De-cumulating: In retirement, you should expect to pay approximately 1% of your total investable assets for a good adviser.

Good advice is a great investment.

I’ll end this difficult topic with a final caveat: There are a myriad of ways to calculate and pay your adviser, but in the end it depends on what they have done for you, their service levels, qualifications and — most importantly — the value that they bring to your life. Without exception, their value should never be in question. If it is, you are paying too much or receiving too little.

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