How Much Does it Cost to Work With a Financial Planner?
Financial planning is essential for individuals with complex financial situations. And for those who need advice around managing their assets to achieve the retirement they desire.
Understanding the costs associated with using a financial planner is crucial for making informed decisions about managing your finances effectively, because fees have a direct impact on the growth of your portfolio.
Understanding the Costs Associated with Financial Planning
When looking for a financial planner, you’ll notice that different firms offer different types of fee-charging structures. These include fixed-fees, hourly rates and asset-based fees. There is no one correct way of charging – each structure has its merits depending on what you are looking for and where you are in your financial planning journey. In this article we’ll explore each type of fee in detail.
How Hourly Rates Work
Hourly rate financial planners charge for the time spent on the work they do. From initial meetings to follow-up, to research and cashflow modelling, report-writing and even travelling time. According to the Money Advice Service, these rates typically range from £75 to £350 per hour depending on the experience of the financial planner and the complexity of their client’s needs. This option allows you to pay only for the services you receive, making it a good choice for someone with specific financial needs.
What to Expect from an Hourly Rate Service
Hourly rates allow planners to provide customised advice tailored to your financial situation. However, costs can add up quickly, especially for extensive financial planning needs. So it’s important your financial planner gives you an indication of the amount of work involved before you engage them. It is important to be clear about the work to be done because any additional work needed to consider different options will add to the time spent and the hours billed for.
Exploring Fixed Fee Financial Planning
Many financial planners charge a fixed amount for their financial planning service. The fee will be calculated on the amount of work required and the complexity of your financial situation and is fundamentally a time-based charge, but is fixed instead of being open-ended. If you have a straightforward pension arrangement, savings and simple expenditure, the fee will be lower than for someone with numerous pensions and an extensive range of assets in their portfolio. Or for those who might also be looking for help with estate planning or trust arrangements.
Your financial planner should discuss your requirements at the beginning of the relationship in order to give you a clear indication of the cost. This structure provides clarity and predictability when budgeting for your financial planning.
What are the Advantages of Fixed Fee Financial Planning?
Fixed fees work when individuals are seeking ‘big picture’ financial guidance and are especially beneficial for those with straightforward financial needs or who prefer a one-time service. This option is also useful when a financial plan can be created with recommendations which the client can move forward with themselves.
However, where a more complex financial plan is created, requiring ongoing monitoring and maintenance, the relationship might continue and a financial planner will charge an ongoing fee which is typically based on the assets under management.
Understanding Ongoing Financial Planning Fees
Ongoing fees for advice and portfolio management are typically calculated as a percentage of the total assets under management, typically ranging from 0.5% to 2% annually. This fee structure can align the planner’s interests with the client’s portfolio performance.
Many planners will charge a tiered fee with a higher percentage for the first portion of your portfolio which will then reduce over certain thresholds. For example 1% on the first £1m and 0.35% on the rest. Some planners will also cap their fees at a certain level of assets.
It is vitally important to understand how fees can impact your portfolio as it grows. It is essential that the services provided justify the fees charged and are completely transparent. It is impossible to negate fees entirely, they exist at all stages of investing, but paying too high a price without commensurate value in return can have a devastating long-term effect on your wealth.
Hidden Costs and Expenses
Beyond the financial planner’s fees, be aware of other costs such as platform fees, custody and administrative charges and other trading costs. Combined, these expenses can significantly impact investment returns over time. For example, £1,000 growing at 7% per year for 40 years will return nearly £15,000 if there were no charges ever applied. If the combined charges were just 1% yearly, that £15,000 would reduce to around £10,000. A 2% annual charge more than halves the return to around £7,000. Charges and fees matter.
Is it worth paying for a financial planner?
There have been several pieces of academic research to determine whether financial planners are worth paying for. For some people who don’t like making financial decisions, they are an absolute necessity, but what about everyone else?
The trade-offs can vary depending whether you are time poor, have complex problems, or perhaps nervous about investing. Financial planners provide help, whether it’s because you don’t have the time or financial acumen or you simply don’t want to deal with your finances.
A financial planner will always be valuable if you have complicated finances that would benefit from professional help. An experienced planner will also bring that experience to bear, helping you hold your nerve in difficult market conditions, or helping you reach the right decision sooner because they’ve experienced a particular issue previously. Financial planners are curators of other people’s financial experiences, which they can use to help your situation.
ABOUT YELLOWTAIL
Founded by Dennis Hall, Yellowtail are the trusted financial planners who advise individuals & families across the UK. Yellowtail’s experts provide the clarity, control and confidence to guide you through financial planning, estate planning, pension transfers and investment management directing your journey towards a prosperous retirement and financial peace of mind.