How to spot the hidden costs of financial advice

Three in four financial advisers fail to spell out their charges to clients

Tax schemes, tax scams – it’s all ridiculous and short-termist. The only thing that makes sense is a flat tax.

Advisers are required to tell you, in writing at the start of the advice process, exactly how much they charge in cash terms. Photo: Alamy

Financial advisers have ignored instructions from the City watchdog to disclose their charges more clearly, leaving customers facing unexpected costs and unable to compare services.

Three in four investment advisers failed to provide the required information about their charges, the Financial Conduct Authority found. The regulator’s study, published last week, coincided with figures showing financial advice firms grew profits by 14pc in 2013.

It said “widespread” failings on disclosure of costs were most prevalent among wealth managers and private banks. The FCA warned that some investors could have been misled.

The regulator has repeatedly asked financial advisers to provide greater transparency to clients. Rules introduced at the start of 2013 required investment advisers to charge a fee for their services, rather than taking commission from providers.

This change, part of the Retail Distribution Review (RDR), was supposed to eliminate the risk of advisers showing bias towards more lucrative products.

The FCA set out clear guidelines on how and when these fees should be disclosed. In July last year it issued a reminder document (see image, below) detailing its expectations. The regulator will continue to put pressure on firms to act transparently.

The finding should act as a prompt to customers of financial advisers to ask searching questions. Here, we run through the challenges you should levy at each stage of the process – and point out common traps and tricks.

The first meeting

Advisers are required to tell you, in writing at the start of the advice process, exactly how they charge in an “initial disclosure document”.

This should include information about whether they charge a fixed fee, a percentage of the amount invested, an hourly rate or a combination of these.

If a firm charges a percentage it should include examples of amounts invested and the cash fees. If the percentage charge is tiered according to how much is invested, the adviser should demonstrate how to calculate the charge.

Firms that charge by the hour should give an indication of the number of hours various services are likely to take so customers can calculate a rough cost for the work.

The initial disclosure document should cover both the cost of initial advice and any ongoing charges that might apply.

The FCA said nearly three in five firms were still not providing all these details to prospective clients.

Some firms that use a percentage-based charging structure are not providing cash examples, while others that charge by the hour do not detail how long various services typically take.

Other advisers that offer a number of different charging methods are not clearly setting out what type of charges will be used in various situations.

Your specific charges

Advisers must tell you in writing how much you will be charged for a service at the end of the first meeting or shortly afterwards, and before you commit to paying any fees. The costs must be expressed in cash terms and advisers must state at what stage of the advice process charges begin to accrue.

Half of all advisers are falling short of these requirements. Most are failing to present their fees in cash terms, and some are taking too long to provide the information. A good adviser will give you a letter of engagement or something similar setting out what services it will provide to you and at what cost.

Charges vary between firms. As a guide, the average cost of an initial financial review and report was £500 in 2013, according to research by the adviser search website It found firms typically charged £300 to set up a £10,000 stocks and shares Isa and provide investment advice and £1,350 to advise on converting a £100,000 pension fund into an income. The average hourly rate charged by advisers was £175.

Ongoing services

Most firms offer ongoing services such as an annual review of your finances. Advisers must detail in the initial disclosure document exactly what the ongoing services will include and how much they will cost. They must also make it clear these services are optional and can be cancelled at any time.

Four in 10 firms that use a percentage-based charging structure for their ongoing service are not making it clear that the fee will increase as your investment grows. Others are not detailing what service you will receive in return for the ongoing fee or making it clear that you can cancel.

If you think you’ve been misled

Review your adviser’s initial disclosure document and consider whether it set out all costs clearly. If you feel you have been misled and are worse off as a result, lodge a formal complaint with the firm. If you are still not happy you can refer your complaint to the financial ombudsman, which offers a free complaint resolution service. It has the power to force firms to pay compensation if you have been financially disadvantaged.