Duncan Glassey

Fees should be simple. There are three main ways of charging as a financial adviser: charge a fixed fee per annum, charge an hourly rate, or charge a percentage of the client funds under management. Charging a percentage of funds under management (FUM) is the most common charging method in the UK.

So what is your fee? Clients are often told the adviser fee, for example, 1 per cent of FUM. So if you invest £1m, you will pay a fee of £10,000. Very straightforward.

So your fee is 1 per cent? No. Fees actually have three components.

• Adviser fee
• Platform / custodian fee
• Fund management fee

These three components make up the Total Expense Ratio (or T.E.R.) which is the minimum fee you will be charged for investing. Your adviser should provide a breakdown of all fees as standard.

So what impact do fees have on your portfolio? Consider the effect of an investor with £1m being charged a T.E.R. of 1.8 per cent, 2.3 per cent or 2.8 per cent over thirty years, with the portfolio growing at 5 per cent after inflation.

Fee Impact

After ten years, the impact of charges creates a portfolio difference of £65,000 between 1.8 per cent and 2.3 per cent, and £130,000 between 1.8 per cent and 2.8 per cent.

After twenty years, the impact of charges creates a portfolio difference of £170,000 between 1.8 per cent and 2.3 per cent, and £330,000 between 1.8 per cent and 2.8 per cent.

After thirty years, the impact of charges creates a portfolio difference of £350,000 between 1.8 per cent and 2.3 per cent, and £650,000 between 1.8 per cent and 2.8 per cent.

(It should be noted, some advisers may include entry and exit charges which do not have to be included in the T.E.R. Typically, entry/exit fees across the UK range between 2 per cent and 5 per cent, again impacting your portfolio.)

Noting the impact of charges, you may think, ‘Oh, I’ll just do this myself’. Even with the time and relevant knowledge, research suggests this would be a bad idea. Vanguard place a conservative estimate of a DIY investor underperforming by 3 per cent compared to using a financial adviser (taking account of all fees). There are many reasons for this, including limited access to funds, lack of rebalancing, inadequate knowledge of tax-efficient products, poor diversification, and inefficient methods of drawing accumulated wealth.

The Financial Conduct Authority insists all fees must be disclosed in full. Given the impact of higher charges on your portfolio, a simple fee disclosure request sent to your adviser may in the long-term save you a significant sum.

Duncan Glassey is the founder of Wealthflow