AXA Wealth study: Millions plan to drop their financial adviser when upfront costs rocket next year

| October 9, 2012 | 0 Comments

By
Andrew Oxlade

07:05 EST, 9 October 2012


|

10:35 EST, 9 October 2012

Nearly half of those using a financial adviser to pick investments will cease to do so when the upfront costs rocket next year, a new study suggests.

A radical overhaul of the way consumers pay for investment advice, due to kick in at the end of the year, will help create an army of do-it-yourself investors.

The full impact is to be highlighted  in a study to be published tomorrow by investment firm AXA Wealth.

Limited role: More than half of investors who currently use an adviser would only seek their guidance for more complicated decisions

Limited role: More than half of investors who currently use an adviser would only seek their guidance for more complicated decisions

It found that 54 per cent of investors who currently use an adviser would only use them for more complex decisions, such as pensions. They would self-invest for other transactions.

Given that around seven million people use a financial adviser, there could be millions of Britons turning to DIY investing for the first time in 2013.

The changes, known in the industry as the Retail Distribution Review (RDR), will demand all advisers are explicit about charges. 

Most people presently pay nothing upfront for advice, leaving their Independent Financial Adviser (IFA) to make their money by collecting commission on the investments they sell. This creates the potential for them to favour products with the biggest commission.

Under the new system, IFAs will have to charge investors for the advice they give – this could cost £750 for a full rundown on how to invest £25,000, according to the IFA website unbiased.co.uk. They can also offer a commission option but must get the customer’s agreement.

AXA Wealth’s study points to a substantial interest among Britons to be DIY investors. It found 13 per cent would go it totally alone for all investments while 29 per cent are keen to take up the chance to learn more about investing.

Mike Kellard, chief executive officer, AXA Wealth, said: ‘Self-investing is not new, but with the abolition of commission on investment products, it is perhaps logical that some people may look to avoid paying a fee for financial advice for more simple transactions such as ISAs.’

While many DIY investors already exist in Britain – albeit a far lower proportion than in the US – there is a concern that an increase in self-investing could lead to a rise in risky punts being made with portfolios. Some industry analysts have suggested that ‘self-mis-selling’, due to the RDR changes, could be tomorrow’s financial scandal.

Going it alone: The study found 13 per cent of investors who currently have a financial adviser would ditch them completely when the upfront charges increase

Going it alone: The study found 13 per cent of investors who currently have a financial adviser would ditch them completely when the upfront charges increase

ISA fund investing: The cheapest options for DIY investors

A wave of new services is launching, aiming to tap into the expected explosion of DIY investors.
Most of these are also making themselves ‘RDR-proof’. That’s because the shake-up for IFAs is expected to be followed later in 2013 with an overhaul of the rules for investment platforms and fund supermarkets.

The existing big players, such as Fidelity’s FundsNetwork and Hargreaves Lansdown, make money by being paid commission in the background. This is effectively another charge on your ISA money each year on top of the fees paid to your fund manager.

For ‘simplicity’, this is all wrapped up and presented to you as an ‘annual management charge’, most typically 1.5 per cent a year.

What happens in reality is that 0.75 per cent goes to the fund management company for running your money and the other 0.75 per cent goes to the fund seller. The better players in the market, such as Hargreaves, will then rebate some of this charge as a ‘bonus’ but still keep the majority for themselves.

Alliance Trust Savings (ATS) has tried to shake up the market by being the first to rebate ALL commission. To make money, it charges you up to £12.50 each time you buy or sell a fund and levies a £12 quarterly ISA fee – or £48 a year.

IT’S NOT JUST THE PRICE

There’s also the issue of customer
service and the online experience.

Some investment platforms have far
better website tools and functionality than others.

Hargreaves Lansdown
has a strong reputation on both fronts. Fidelity FundsNetwork and
BestInvest also have very credible websites.

ATS’s web functionality is
weak but an upgrade is set to be rolled out.

The pay-off with ATS is that it is a cheaper way to invest.

On a £10,000 ISA invested in funds, Hargreaves will take between £25 and £50 year in commission, depending on the funds you hold compared to £48 with ATS, not including any dealing fees. But the figures are very different if you have £50,000. Hargreaves costs between £125 and £250 a year but ATS still costs £80, without dealing charges.

A halfway house between the two is discount broker Cavendish Online. It charges no fees and rebates considerably more than Hargreaves. Cavendish sets up its customers on the impressive Fidelity FundsNetwork website, where they can track their funds.

From the end of 2013, the Financial Services Authority intends to ban commission payments. In effect, it wants all websites to operate as ATS does now.

AXA Wealth, with an eye on the trends from its own research, has now launched its own AXA Self Investor service. Like ATS, it rebates all  commission but then charges 0.5 per cent of the value of your ISA money each year – plus a £4 a month ‘service charge’.

The cheapest way to invest £10,000

Consider the total cost of having £10,000 invested in one of Britain’s most popular funds, Invesco Perpetual Income, for one year. The fund has a total expense ratio – the top line cost of investing – of 1.68 per cent:

  • AXA Self Investor
    rebates all the commission – 0.75 per cent, taking the charge down to
    0.93 per cent, but then levies a 0.5 per cent fee on your portfolio. The
    total is 1.43 per cent or £143, plus £4 a month for the ISA (£48 a
    year) = £191 a year;
  • Interactive Investor rebates 0.75 per cent to 0.93 per cent plus charges £80 a year = £173 a year (not including £10 charge to buy);
  • Fidelity FundsNetwork and SFSInvestDirect keep all the annual commission but make no other charge = £168 a year
  • Sippdeal (which also offers ISAs) rebates 0.20 per cent, taking the charge down to 1.48 per cent = £148 a year;
  • Hargreaves Lansdown and Bestinvest both rebate 0.25 per cent as a ‘loyalty bonus’, taking the charge down to 1.43 per cent = £143 a year;
  • Alliance Trust Savings rebates 0.75 per cent to 0.93 per cent plus charges £48 a year for the ISA = £141 a year (not including £12.50 charge to buy);
  • Cavendish Online rebates 0.50 per cent reducing the charge to 1.18 per cent = £118 a year.

This makes Cavendish the clear winner. But on larger portfolios, Alliance Trust Savings is the lowest cost option – it begins to beat Cavendish on a portfolio of around £27,000.

But there’s an obvious pitfall for those deciding which provider to go with – the pricing of most of these services must change to meet the new rules. AXA and ATS are the only two to tick the regulator’s boxes but even they might change their pricing in reaction to others.

Although the FSA is still yet to set in stone the new platform rules – or even fix a firm date for their introduction – the industry is expected to start adjusting its pricing structure in the new year.

The picture will be far clearer and I will crunch the numbers to give you a fresh comparison.

Follow on Twitter: @andrew_oxlade

The comments below have not been moderated.

FOUND OUT A LONG TIME AGO BETTER RESULTS DIY, PEOPLE NEED TO WISE UP !

fusilier
,

derby, United Kingdom,
09/10/2012 16:19

Another beginners method is to simply research the Fund Fact Sheets sheets of the best performing funds for the area of your interest (most Funds list their top 10 investments) and ‘make a start’ in investing directly in individual stocks from there. Why do the research when the best professionals have done it for you.

I have a blend of mutual fiunds and direct investments and I am now at the stage where I will be moving to near 100% direct investments. Mutual funds have their place, and some have performed excellently for me over the years, however, most fail to beat their benchmark after charges are applied. Just go for it and open up an online DIY account and avoid Advisors at all costs.

Cheapster

Cheapster
,

Singapore, United Kingdom,
09/10/2012 15:56

Excellent news. For too long financial advisers have been influenced by commission to convince their clients to put money where it benefits the financial advisers more than their customers. If you want to invest in shares, just choose a few unit trusts with a good record: Google them to look at their sales bumf: see which are the main shares they buy: then buy those shares directly yourself reinvesting the dividends in the same companies. This way you’ll have no need to pay a financial adviser, no need to hand over 2% a year to a unit trust manager and no need to lose 5% of your money when you go into a unit trust and another 5% when you come out. Simple.
David Craig
Author: PILLAGED How they’re looting £413m a day from yor savings and pensions

David Craig
,

Bournemouth,
09/10/2012 14:19

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