What’s the most cost-efficient way to get your financial planning – Planner or Adviser?

At my Town Hall on Friday, an IFA told us maybe you are better off getting your financial planning from a financial adviser and paying from your one per cent – because there’s no VAT!

Here is my question for today. What’s the most cost-efficient way to pay for financial planning? From a financial planner or a financial adviser?

Many financial advisers justify taking financial planning costs from tax-efficient or tax-deferred products; it saves on VAT and other taxes. They tell you this is why they feel comfortable charging one per cent of assets under management (aum). But how true is it that facilitated deduction from products is the most cost-efficient way for the client to buy financial planning?

Our first consideration is how much financial planning you get from a financial adviser.

The average cost for a financial adviser is £150 per hour, although it can vary from £75 to £350 per hour, according to Money Helper.

Imagine that both the financial planner and the financial adviser spend fifteen hours on the client’s case, charging £150 per hour. Total cost £2,250 (or £2,700 including VAT). The “intending to implement an investment” chain is VAT-exempt. The winner is the financial adviser.

If the financial planner is an advice-only financial planner, 100% of the time is spent on financial planning. For the financial adviser, how much time is spent on financial planning and how much on financial advice? The two services are not like for like.

Does the financial adviser have enough time in their week to deliver financial planning, given the pressure for new aum to meet network sales targets and the 100 plus suitability reviews required to justify one per cent?

According to Mark Cussen, a financial writer for Investopedia, “Some advisors say that they spend an aggregate average of one day per week dealing solely with compliance issues. Others say that a significant portion of their expenses is allocated for adequate compliance management.”

According to a study by tech platform Advicefront, financial advisers spend just 5 hours and 30 minutes per week on financial planning. That’s not even one day. The rest of the time is spent on fact-finding, suitability report writing, associated research, CPD and paperwork.

Let’s look at this on a cost basis. Direct compliance costs are around ten per cent of turnover, for example, compliance officer fees. This direct cost is said to have risen 60% in the past ten years. But how much of the four days a week doing paperwork relates to the suitability of recommendations, and how much to prepare the financial plan?

Add to this FCA levies, Professional Indemnity insurance premiums, and the costs of rectifying compliance failures.

Would it be fair to say that the FCA tax could far exceed the VAT rate of 20%?

If I break down the direct costs and add the time a financial adviser spends doing the suitability justification piece, could “FCA tax” be more than 50%? If so, then the financial planner is the winner.

When comparing the advice-only financial planning model plus client self-implementation on a D2C platform to the all-in-regulated financial adviser offering financial planning, who then offers the better all-around deal?

How might I choose an investment platform if I don’t ask an adviser to recommend one?

I can buy an independent publicly available survey, Which Money, which costs £1 per week.

According to Which Money, the reader’s best buy for small investments is Vanguard.

“It takes 15 seconds to do what it might take an adviser 15 hours,” – Sean Hagerty, Vanguard. Cost? Nil initial 0.35% per annum average on going all in.

Fifteen seconds to use your ISA allowance!

No time at all, no money at all!

How do I find out about these things?

Why not join a financial planning group – like “DIY Workshop“, and sign up for an advice-only financial planning group which supplies your own “lifetime cash flow planning app”, an extensive library of financial education courses, a Facebook group, monthly meetups, and unlimited Q&A service. For just £19 per month.

Because advice is generic, it can be delivered to groups, unlike regulated advice related to an individual regarding the suitability of a particular investment.

What if the financial planner was not VAT registered because turnover was less than £85,000 for 2022/23? No VAT!

What if the client was a business owner? If VAT is levied on the financial planner’s plan fee because the plan includes business assets, it could be considered a business expense, and the VAT could be reclaimed.

What about the other tax savings? The facilitated deduction offered by the FCA-regulated financial adviser may look more tax efficient, apparently with a 40% discount due to the tax rebate on the pension contribution. But, then, HMRC takes tax on the drawdown at the client’s highest marginal rate. Higher rates on faster drawdown, like taking the whole lot in one go. Plus, potential LTA penalties. The initial saving could be wiped.

Taking the fee from the pension pot can avoid LTA tax. But wasn’t it “suitable advice” that created that LTA liability in the first place?

And the other one is the kids are paying for it from the inherited SIPP. Does that make it free?

All I’m saying is. It is more complicated than saying that clients save 20% VAT by buying their financial planning from a regulated financial adviser.

Maybe like my IFA, you thought that too.

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