Should I really pay for retirement financial advice? - Gareth Shaw

I have spoken with an independent financial adviser, who would charge an initial fee of 1.25% plus 0.5% a year, on top of the platform fees. I’ve looked at ‘robo-advisors’, too. I found a fund from Vanguard which was broadly similar to the adviser’s recommendation, but charged just 0.42% a year.

I can't envisage the Vanguard option under-performing the advised option sufficiently to cancel out the additional cost, never mind the extra profits or otherwise that could possibly be achieved by the extra £4,000 or £5,000 that would be available to invest. So, should I choose my own investments?

Paul Wilson, Stockport

Gareth says…

Planning your retirement and figuring out how to generate an income that will last you through the potentially three or four decades without work is not an easy task. I’d say it’s likely to be the most complex financial decision you’ll have to make in your life.

So, I take my hat off to you for getting on the front foot and researching your options and having a clear understanding of what you could do. But it’s not just one decision – there’s a huge amount for you to consider: how much income will you need?; will you be financially supporting a partner or dependants in retirement?; what impact will getting a private pension and a state pension have on your tax affairs?; have you thought about how to pay for care in later life, or what you might want to pass on to loved ones?

This is where the case for investing in professional financial advice becomes compelling. Developing a long-term, ongoing relationship with a financial adviser can ensure that you get a holistic view of your finances, that your needs and aspirations for both the immediate and the future are considered, and you have a professional steering your savings to make sure you stay on track. They can choose investments on your behalf and select a strategy that meets your attitude to risk and, most importantly, your capacity for loss.

Crucially, paying for regulated financial advice gives you a whole host of protections. If you’re unhappy with the advice you get, you can escalate your complaint to the Financial Ombudsman Service, which mediates disputes between regulated firms and consumers. And, in the very worst cases, if you received negligent advice and your adviser is no longer operating, you’ll be able to claim some of your money back from the Financial Services Compensation Scheme.

As you mention, of course, financial advice can be expensive. The costs you flag are typical for a financial adviser, and while professional advice may be incredibly useful to you, with a pot your size you will pay just over £4,300 initially and more than £1,000 each year for annual reviews.

There’s a strong argument that this investment is worth much more than the charges for the reasons I’ve outlined above. But you’re right, it is another layer of costs that will chip away at your retirement savings at a time when you no longer have the capacity to earn and save more. Not only will you pay the adviser’s fees, you’ll pay a ‘platform’ charge (a website that your adviser uses to manage your pension and investments), and the charges for your investment funds as well. This could add another 0.5% to 1% on top of the advice charges. I can understand your desire to look at the alternative options.

What you’re talking about is an ‘execution-only’ approach – effectively going it alone to choose a portfolio of investment products and managing it yourself, cutting out the financial advice fees.

The advantages of this, as you have identified, is that you can select low-cost investments and save on costs. Vanguard, the company you mention, is a provider of ‘index’ funds – made up of shares, bonds and other assets – that are designed to track the performance of a particular market (such as the FTSE 100). These funds are typically cheaper to run, as you don’t have a professional manager choosing investments, but that means that when a stock market falls, your investments fall with it (and, obviously, rises in line with the markets).

If your ambitions are such that you need a higher return than the market, index funds may not be right – and you may want to consider a fund manager that aims to outperform the market (although there is no guarantee they’ll achieve this). You will need to still pay a fee to a platform, but the likes of Vanguard and AJ Bell (both Which? Recommended Providers) charge annual fees of 0.15% and 0.25% annually.

I guess what this comes down to is confidence – do you feel that you know enough about investing, managing investments and long-term financial planning to do it yourself? And recognise that by doing it yourself, you forgo those important consumer protections? That could help steer the decision about whether to pay for advice or not.

Perhaps the answer is a blend. Some execution-only platforms also offer financial advice, which you may consider using initially before managing your own investments after some initial help. Vanguard, for example, has just launched a financial advice service, offering one-to-one financial advice for people with a minimum of £50,000, priced at 0.79% including platform, advice and fund fees. Charles Stanley, Hargreaves Lansdown and Bestinvest also offer advisory services.

Gareth Shaw is the Head of Money at which.co.uk.

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