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Case study: Adviser charge impacts on different products

The problem

A client has just received advice to be paid for through adviser charging and is now looking to identify the best way to pay for their fees.

The solution

It may seem that transferring your client from paying commission from their products to fees would be easy. Unfortunately, it is not that simple as there are many circumstances to consider, depending on the individual product and the client’s investment objectives, as the following examples show.

Isa client: The client has £100,000 Isa fund, growth rate 5.75 per cent per annum, TER 2 per cent pa, 1 per cent adviser fee pa, time period 10 years (no further Isa contributions made).

  Isa account value after 10 years Adviser fees taken over 10 years Net client effect
Adviser fees paid from client’s bank account £150,000 £12,300 £137,700
Adviser fees paid from ISA product £135,800 £11,700 £135,800
Difference (client benefit of paying fees from bank account)     £1,900

Taking adviser fees from an Isa reduces the amount held in a tax-advantaged environment. In the example above, taking fees from a client’s banks account means more funds are held in a tax-efficient wrapper; the compound effect of this means the client could be £1,900 better off over 10 years.

Pension client: The example is identical to that above, whereby the growth on the pension will be higher if fees are taken direct from a client’s bank account. However, with pensions, there is another consideration. Taking fees from within the pension could be more tax-efficient since tax relief on contributions reduces the net cost of payments.

For example, the cost for a basic-rate taxpayer of the £11,700 adviser servicing fees above would be £9,360 if taken from the pension account. For a higher-rate taxpayer, the net cost from taxed income would be £7,020.

However, there are points that must be considered:

  1. Fees taken from a pension must relate to services provided in respect of that pension, otherwise unauthorised payments will be created.

  2. Taking fees from crystallised funds immediately before a maximum income calculation will reduce the income available to the client.

  3. Taking fees prior to a crystallisation will reduce the client’s tax-free cash and ongoing income.

Collective investments client: Selling units to pay the adviser fee counts as a disposal for CGT purposes. If the client has not used their £10,600 annual CGT allowance, then taking fees from collectives could be a good option.

However, if they have used their annual allowance, taking fees from collectives should not be used as this will lead to CGT being levied. For a higher-rate taxpayer, the net result could mean adviser charges are up to 28 per cent higher due to the amount of CGT payable but if there are unused losses available this can be negated immediately.

Bond client: An adviser fee on a bond will count towards the annual withdrawal allowance.

If the adviser fee is 1 per cent a year on a £150,000 bond, the fee would use up £1,500 of the annual 5 per cent tax- deferred allowance, leaving just £3,500 as that year’s allowable tax-deferred income. The problem compounds as the bond value increases as the 1 per cent is based on the fund value whereas the 5 per cent tax-deferred amount is based on the original investment.

Adviser charging facilitated from a bond may not therefore be favourable for the client. Payment from the client’s bank account may be better.

It is clear that rolling all the fees up and taking from one wrapper may not create the desired result either.

In summary, there is not a one-size-fits-all approach when it comes to paying adviser charging fees as the client’s products and their individual requirements will need to be assessed before choosing the most appropriate option.

Phil Carroll is head of financial planning at Skandia

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