I'm a wealth planning expert: Here's why you must always ask your financial adviser for the 'all-in fee'

Charlotte Ransom is the co-founder and chief executive of wealth manager Netwealth.

Did you know that you have the right to ask exactly what 'all-in fee' is being charged by your financial adviser, planner or wealth manager.

If you are a longstanding client, you might well be unaware of the total amount you are now paying, and will never find out unless you ask because advisers do not typically issue an annual invoice.

Instead, fees are taken directly out of your investments, Isas or pension fund, so you might not notice the big inroads they are making into your overall returns over time.

The fees advisers levy in this way include not just their own, but those for any third party services they use on behalf of your account, such as platform or custodian charges.

Your right to be told about every individual item or service you are paying for, plus the most important 'all-in fee', is a rule set by the Financial Conduct Authority.

But too few clients who come to my door are aware that advisers MUST provide this information - not only when you first sign up for their services, but on your request at any point in your business relationship with them.

Getting a full fee breakdown, plus the 'all-in fee', from your adviser is important for the following reasons.

First, once you know the total fee, you will be armed with key information when you look around for the best deal to fit your needs and circumstances.

Second, the size of the fees has a significant and compounding impact on your investment returns – this can get lost when investment markets are strong, but they make a huge difference to the money that ends up in your pocket.

Let's look at what you should ask your adviser in terms of fees, and then how to make the best use of the details you receive from them.

Ask for a full breakdown of fees and the total 'all-in'. If you are not given a satisfactory answer or don't understand the answer, do not be put off! Ask again!

If an adviser fobs you off or the fees they provide aren't clear, that's a red flag and may breach FCA rules. (It should go without saying that you should only use an adviser registered with the FCA - check here.)

If you detect any uncertainty or reluctance on the part of an adviser to be completely transparent on any fees, steer clear.

If you don't understand any of the terms used, don't hesitate to ask for an explanation. But here is what you can expect in a full breakdown that the all-in fee will consist of.

The fee list you are given will broadly cover the following areas.

- Upfront fee for initial planning

- Ongoing investment management and advice fees

- Platform and fund fees

- Other third party fees and tax

Regarding ongoing fees, you should receive regular updates on charges, and advisers must prove they're delivering value for the service you are receiving, for example during annual reviews.

Here's a more detailed list, explaining some of the jargon you will come across.

1. Annual management charge (AMC) - A percentage fee for managing your investments, often between 0.5 and 1.0 per cent per year.

2. Platform or custody fee - Charged for holding and administering your investments. This can be a flat fee or a percentage of your assets.

3. Fund fees (ongoing charges) - Additional costs from the funds used in your portfolio. These fees are on top of the AMC and taken at source by the funds themselves.

On passive funds, those that track market indices, you can expect these to come in between 0.1 and 0.4 per cent. For active funds, run by a professional manager, they will usually be between 0.6 and 0.9 per cent.

4. Trading or execution costs - Charged when buying or selling investments. These are often not shown since they are estimates, but should be understood since they may add another 0.10 to 0.25 per cent in costs to your portfolio per year.

5. Financial planning fees - These will be charged on top of the AMC for financial planning related to topics such as Isa or pension contributions, retirement planning, tax optimisation, gifting and so on.

Advice and financial planning fees are often 0.5 per cent to 0.75 per cent per year.

6. Upfront/initial fee - Most advice firms charge an upfront fee for an initial report on your assets and overall circumstances.

They may also charge an upfront fee every time you add to your account, for example for an annual Isa contribution.

This fee is often between 1 and 3 per cent and is charged in addition to the ongoing financial planning fees.

7. Exit penalties - These are now rare but it is worth checking to be sure.

8. Tax reporting fees - Annual tax packs (for capital gains tax and income tax) may be included but it is worth checking.

9. VAT - Not all quoted fees include VAT, so check if it applies or whether it's added on top.

10. All-in fee - The FCA reviewed financial adviser charges in 2020 and found clients were typically paying 2.4 per cent upfront and 1.9 per cent in total ongoing charges per year.

If you combine the two figures that works out as 2.14 per cent a year over 10 years.

Investment performance matters of course but fees are the key aspect that you can control when it comes to having your money managed.

It is the 'net-of-fee' return which will most impact your financial future.

If you shop around, you should be able to beat the typical 2.14 per cent a year over 10 years quoted above and cut it by 1 percentage point.

An annual fee saving of 1 percentage point on a £250,000 investment portfolio or pension fund is worth £2,500 every year, and over 10 years is a saving of £34,000 based on 5 per cent growth.

Here is what that saving in annual fees represents based on annual returns of 3, 5 and 7 per cent on investment or pension pots worth £100,000, £250,000 and £500,000.

In order to find an adviser, for the first time or if you decide you want to move on from your current firm, be clear on what you need.

There are a wide range of service providers from smaller independent advisers to large wealth managers, as well as hybrid propositions which provide both investment management and financial planning advice enhanced by modern technology.

Investment managers will run discretionary portfolios on behalf of clients – their job is to invest in globally diversified equities and bonds to provide a range of investment returns to meet clients' goals.

Financial planning services will tend to cover the same important areas such as planning for retirement and optimising tax efficiency.

The key difference is most likely to be in charging structures, and once you know a firm's full set of costs and charges it will be easier to compare to other providers.

Remember that it is never too late to change adviser or wealth manager, regardless of what fees have already been paid.

Investment and retirement horizons last a very long time and now – equipped with more information – it's important to ensure that your money is working as hard as possible for you, not for someone else.