Part of my uniqueness is in the fact that I believe in fixed fees. This isn’t just a gimmick for initial fees with a percentage fee being sneaked in for ongoing fees – I genuinely believe that all financial advice fees should be fixed if possible. This article is a discussion of why I believe that all good advisers should move to a fixed fee model.
What is Normal?
Before talking about what I do, it’s worth talking about what the wider industry charges. Typically both the initial advice and the ongoing review service are subject to percentage-based (or ad valorem) fees. These might be up to 3% of any value invested and up to 1% per year for annual reviews. This means that for a portfolio of £100,000, the fee would be up to £3,000 initially and £1,000 a year, while for a £1 million portfolio these fees would increase to a maximum of £30,000 up front and £10,000 a year for ongoing servicing.
This type of model is very much a blunt tool. Value is the only thing which changes the cost of the advice. There is no reference to complexity or the actual amount of work done. As a direct example, the portfolio of £1 million is certainly not ten times the complexity of the £100,000 portfolio, but the fees in that example mean that the investor is paying ten times as much.
This is often defended by some advisers who believe that a percentage based system is the only way to offer cross-subsidy, where the higher-value clients essentially pay for lower-value clients. However, this is often also included with a minimum threshold for taking advice, say £100,000 or £250,000. This wholly negates any defence that the percentage-based fee is necessary to look after the smallest investors.
In reality, the reason for the adherence to percentage-based charging is that we as a species are not very good at converting percentages into real terms on the fly. 1% can be framed as a negligible amount, even though in the example above of a £1 million portfolio, it represented £10,000. There is a requirement from the FCA to include pounds and pence charges alongside any percentage statements used in official documents, but any experienced adviser knows how little attention the average client pays to the charging section of the report or client agreement.
A Case for Fixed Fees
Fixed fees are pretty much the norm for every other professional service we encounter on a day to day basis. Our MOTs are fixed, our supermarket shops are based on buying a number of items at a fixed price, and if we want to draft a will or a Power of Attorney, those are also available as fixed fee projects.
As such, the real question should probably be “why not?”
My usual question is to ask people “how much did ou pay for financial advice last year?” The number of people who don’t know is really quite worrying.
I believe that fixed projects deserve fixed fees almost by definition. What you pay for financial advice should be based on the amount of work, which in turn should be based on the complexity of your affairs.
My own position was to look back over my career and to estimate how much work would actually be needed for certain projects, including annual reviews. I then went out to consider what would be a fair fee for each of those services, and I have summarised this on my Private Client page.