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Investment Fees are 'Unsustainable' and Will Fall

The catalogue of fees paid by investors who use financial advisers is too high, says one asset manager, who calculates post-regulation transparency costs 2.4% a year

Emma Wall 26 November, 2013 | 2:08PM

Investors who use financial advisers are being hit with a catalogue of fees, eating into profits and leading to underperformance. Some investors are losing as much as 2.4% a year in fees, thanks to regulation which requires advisers to be up-front about their charging structure.

Most IFAs now charge an annual fee as well as an hourly rate for advice. Dependent on the size of the investor's portfolio, a typical annual charge could be made up of 0.75% of the value of the client's assets to pay for the advice, 0.35% for portfolio management, a further 0.25% in platform fees and then an average fund management charge of 1.05%. In total this means a shocking 2.4% in annual fees.

Schroder's head of UK intermediary Robin Stoakley said that this was unsustainable.

"Very few asset classes can outperform fees at this level - investors will end up with negative real returns, post fees and inflation," he said. "Charges of 2.4% a year are unsustainable; fund managers and platforms will be the ones who have to reduce charges."

The Schroder Adviser Survey revealed that a third advisers were charging as much as 1% a year - or more - for advice, but keeping the end cost for the client low thanks to passive funds. 

While passive funds are a sensible choice for highly transparent stock markets such as the S&P 500, or commodity investing, there are considerable risks in adopting passive funds as a blanket approach. Sixty percent of financial advisers currently use passives for clients' portfolios with the majority holding between 10-25% in passive instruments.

The Survey also revealed that advisers are increasingly outsourcing portfolio management to multi-manager funds, wealth managers and discretionary managers accessed through platforms - adding another layer of charges for the investor.

Worryingly, the Survey confirmed that the "advice gap" is a problem for the investment industry. Six in 10 advisers said they had segmented their clients based on the size of their portfolio - with 14% admitting they had asked investors with less than £50,000 to leave.

"Regulation has made financial advisers more efficient," said Stoakley. "The advice gap is an unintended consequence but does exist."

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About Author Emma Wall

Emma Wall  is Web Editor for Morningstar.co.uk.