Do you know what fees you are paying?
Since IFAI established itself within Gibraltar’s financial services market, we have met many clients who have decided to take our advice rather than their existing local advisers.
Almost immediately, we started to recognise an alarming trend: hidden or excessive fees.
The Financial Services industry in Gibraltar is well known to have a closed door policy on allowing new companies to operate within its jurisdiction, and the reasons for this soon became clear.
A worrying number of the clients that decided to take advice from IFAI (from a wide cross-section of firms in Gib) would appear to have been treated as ‘cash cows’ by their existing advisers, where the advisers were not only charging clients fees, but were also taking commissions. The total costs to clients were therefore far in excess of what should be considered reasonable for the services provided.
Avoid Double Jeopardy
USA law dictates that it isn’t legal for a person to be tried for the same crime twice. It is considered unfair for the state to have ‘two bites of the cherry’, so they have the double jeopardy law. It is a shame, we think, that there isn’t such a rule when it comes to charging in financial services.
At IFAI, we offer clients the choice between paying a fee for our advice or for a commission to be taken from any policy that we recommend. Many clients decide that they would prefer to pay for the cost of the advice over the term of the contract and select commission, whilst others are happy to pay a fee and pay lower charges on their contracts throughout the time that they invest.
We think that this is fair, open and transparent, and of course the client’s choice. What we have seen is that some firms (not all, by any means) have been charging a fee and also taking a commission; essentially ‘double jeopardy’.
How Might This Work?
Investors might be charged a fee of 3% of their initial investment on the basis that they would receive a lower cost product (for example 0.5% per annum rather than 1% per annum charge). The investor in this situation would be better off after 4-6 years or so (depending on growth), but would have had to pay a lump sum as a fee at the start of the investment process.
According to advice from immediate edge, the investor might elect to not pay an initial fee, and be happy with an ongoing charge of 1% per annum. Again, many people are not keen to pay initial fees.
Both of these options are fair and transparent and the investor is able to decide what they want to do at the start of the process.
What we have seen though, is that firms are charging the initial fee and then not reducing the ongoing charge. So, a 3% fee is levied and the 1% per annum charge – effectively the worst of both worlds! We would really advise clients to avoid this like the plague.
When speaking to your regulated financial planner, ask to see the charging structure of investments with and without commission payable and what the corresponding fee would be if you decided to go nil-commission. You can then make up your own mind on which works best for you – it’s your money, you’ve worked for it – don’t let unscrupulous advisers take it!
Lump Sum – The IFAI Approach
At IFAI, we believe in transparency and openness re our fees. We also don’t believe in being paid twice for the same work; you wouldn’t pay twice for your groceries For lump sum investments such as pensions, the charges will usually be a fixed annual fee from the authorized pension provider and a percentage charge plus a fixed fee from a platform or investment bond (depending on what is most appropriate for our clients). All of this is explained and agreed in advance of any work going ahead.
We have seen that some of our competitors are insistent upon having two, if not three, bites of the cherry when it comes to earning from lump sum investments.
This could be an initial fee from the investor, a commission from the platform/investment bond, and a payment from the funds recommended. All of these fees add up and have a detrimental impact on growth, this is why we ensure that we provide a fair deal and are transparent.
We value long-term relationships, and because of this, will always pay your fees for you if we need to refer you to a UK adviser for Defined Benefit transfer advice.
Andy Caddick MD IFAI comments: “Gibraltar has been very kind to IFAI, it’s time to repay that kindness. IFAI will overview any Gibraltar resident who has a financial product and is looking for a second opinion – for free! It’s time to change Gibraltar’s financial services mindset.”
BY ANDY CADDICK
Managing Director at IFAI, Pensions and Investments Specialist