Why do we save and invest money today instead of spending all of it? For most people, it’s to provide for their future, their family’s security and to maintain a desired standard of living during their retirement years. It seems the right thing to do.
However, there is a problem! Most financial advisers/wealth managers charge a percentage of the money invested, which is typically around the 1%* level. This looks like a small number but the long term wealth damaging effect on this can be significant.
An investment of £1 million over a 30 year period could mean the investor ends up with £1 million less**, due to the effect of a percentage fee structure, when compared with an alternative flat fee model.
Over a lifetime of investing the percentage fee eats away at the investment portfolio but the real consequence is rarely seen or known by the investor. Many couples are now experiencing retirements of 30 years or more so percentage fees can create a very costly drag on returns.
Linking fees to a percentage of the money invested means the financial adviser will only be paid when money is invested and the more money invested the more they will be paid.
Furthermore, they may receive an immediate pay cut in their fee income if money is withdrawn from the investment portfolio. So typical lifestyle events such as making gifts to children, buying a property or other significant expenditure items may be met with resistance if funded from an investment portfolio. Also, alternatives such as paying off debt or creating a healthy cash buffer may be overlooked.
For these reasons, I believe the percentage model is unfair. It creates a conflict of interest and can prove to be very expensive over time. It is linked to the value of investments rather than the value that is received. The percentage fee surges when markets rise and plunges when markets fall. The need for an advice service does not rise and fall in line with the markets.
Fees charged for advice should be aligned to the required expertise of the adviser, the level of complexity and time taken to provide the advice, and importantly the value received. None of these are necessarily linked to the amount of money being managed.
My contention is that this outdated and broken model is not aligned to the long term interests of clients and the services delivered to them.
The flat fee model is a much fairer alternative. It is easy to understand, fully transparent and linked much more closely to the service being delivered.
*According to a survey by the consumer group Which on average the annual fee is 1% of the money invested, although rates will vary across firms.
**Using an annual growth rate of 7.6%. The annual percentage fee of 1% starts at £10,000 and moves in line with the portfolio value. The flat fee also starts at £10,000 and increases at the long term inflation target for the UK (2%), adjusted every three years.