Right - let’s talk about fees baby, let’s talk about you and me. Let’s talk about all the good things and the bad things that may bring...ok, ok, I’ll stop now!
So, here it is, a blog about the contentious issue of fees, and it’s a veritable minefield!
What do I need to know about fees?
Financial advice fees have been in the press a lot more over recent times in light of the Woodford Fund fiasco with the questionable approach of some large wealth firms being highlighted.
Of course, it's never really about the fees it’s about the value that people receive, the price is what people pay, the value is what people perceive. That’s why when you have a coffee in Rome overlooking the plaza, it can be five times as much as somewhere around the corner with no view at all. It’s not just about the coffee, it’s about the experience and how it made you feel.
How does it all work?
Regarding fees within financial services, it is probably beneficial to give you some background. It used to be the case pre-2012 that most financial advisers would receive a commission from a product provider for setting up a pension or investment product for the work they did, leading clients to believe that financial advice was free. It wasn’t. People were paying for it; they didn’t realise it was all wrapped up in the charges for the product their financial adviser had selected for them. It was typically in the form of a percentage fee, often 7% sometimes even 10%! Advisers could get paid more with different product providers, so clients may not have been given the best advice as some advisers just followed the commission. The percentage would sometimes morph into a fairly standard implementation fee of 3% on any investment with 0.5% trail commission being paid, so if you paid £100,000 into an investment, the commission could be £3,000 and £500 p.a.
Eventually the FSA (now the Financial Conduct Authority), as part of the Retail Distribution Review (RDR), stopped advisers being able to be paid by commission for investments and pensions. This was introduced from 1st January 2013. This meant that an adviser had to charge an upfront fee for the work that they did, which could be facilitated by the provider from any existing investments or pensions rather than paid as a commission. The main benefit for clients was that they would pay the same fee regardless of which provider was used so there should be no product bias from advisers as they are going to get paid the same anyway. It is also now clear to the client how much they are paying up front and why, so it is much more transparent, for the initial fees anyway.
For richer, for poorer - fairer fees is the way forward
I think the hope was that firms would start charging a fixed fee for the work they did, and there were a handful of firms doing this pre RDR. However, what in effect has happened is firms continue to charge a percentage of around 3% upfront and 0.5/1% ongoing, so the more money you have, the more you pay. For example, someone paying 3% on a £50,000 pension transfer would pay £1,500, someone with £200,000 would pay £6,000. Was there more work involved? More value-added? Again this will depend on the firm but in a lot of cases I would argue that the answer is no. Some firms tier their charging structure for higher amounts to reduce the overall financial impact for the client, but again it is worth asking is this fair value for the work being done? Running a financial advice business is expensive with all the regulation, PI insurance and ever-increasing costs and a firm has a right to make a profit, but are clients being taken advantage of?
Is it profitable to charge a client with £50,000 a fee of £1,500? If not who is subsidising it, the answer is the client with more money. As one well-respected firm describes it, this seems like socialism for the client and capitalism for the adviser.
Now I hold my hands up here. I have worked and charged a % fee in previous firms and was paid more from some clients than others. And, sometimes, yes, there is more work involved when there are higher sums, particularly regarding lump sums of money that may need spreading across various investments and more planning required. It’s just never sat comfortably with me when you pay more for the same advice just because you have more money!
Value for money
I am also not opposed to percentage charging per se, especially not for initial fees. I can also see the benefits for clients. It is easy to understand and follow, and as long as they are getting value for money that is fine. But the question here is whether some clients are?
I also believe there is a bigger problem regarding the ongoing fees that some firms charge, often up to 1%. I don’t think clients have realised quite how much they are paying or the impact that this has on their money. As the fees are often taken directly from the pensions or investments, they are not noticed by clients, it just comes off any returns they receive. As most investments and pensions have been going up over the last few years (due to returns from the markets) they haven’t been bothered. Also, 1% doesn’t sound like much, does it? If I say we charge a 1% fee, you think great I get to keep 99% of my money. However, if you have a pension worth £500,000 and I say our fee is £5,000 a year and ask you to write me a cheque, I assume now you are thinking about this differently!
So is charging a % fee unfair?
Not in itself, but it depends on the service that you are getting and probably the amount of money invested. 1% to manage some funds or for an adviser to outsource it to an investment house seems excessive even on smaller investment amounts. However, if you are getting “real” financial planning alongside investment expertise then it may actually be very good value for money. Ultimately, you, as the client, are the judge of whether it is of value.
Fees are certainly starting to come under pressure with new EU regulations stating that all fees, including those from investment funds, must be disclosed to the client each year in monetary amounts. So you need to ask yourself what value are you receiving? A firm may charge you a fixed fee but ultimately if they are doing very little for it then you are being overcharged? If you are unsure on the value your adviser is providing, ask them what they see as being their value. They should be able to answer this. For me, if it comes down to them selecting some funds, or saying you pay for their expertise in picking fund managers, then I would be concerned.
Any suggestions that an adviser can pick the next top-performing funds should undoubtedly be taken with a pinch of salt. The markets will take care of the returns for you, and these returns can be taken advantage of most cost-effectively through passive/index funds.
My main issue with the percentage fee is the different amount people get charged for the same work. There is an argument that higher amounts have more risk and costs associated with them, which is true, but does this justify paying some of the fees involved? I have always felt that for most firms they might as well say to clients before any meeting “we will either massively overcharge or undercharge you for the work we do. We just won’t know until we see you.”
So what are the alternatives?
There seems to be a movement towards fixed fees from a number of advice firms, and this definitely has benefits for clients, as well as the firm. Some firms charge an hourly rate. Ultimately advisers need to run businesses that are profitable, and everyone has a right to charge what they believe is fair. For me, I wanted to remove any conflict of interest from my firm, to be paid a fixed fee for the work and value we provide to clients, not earn more just because someone has more money.
The starting point for you is to be clear how much you are paying the adviser, and what outcome they deliver for you? How much is the underlying investment fund charging, what about platform charges? What other costs are associated with it and how much is it all together in an actual monetary amount? It is probably quite eye-catching.
Then ask yourself what service are you being provided by your adviser? What value are they delivering? What are they doing for your money? If you are not sure, ask your adviser. A proper financial planner should have no issue answering these questions and will be confident in the value that he or she provides, which shouldn’t be picking funds or sending you quarterly valuations. I have clients say the fee is ok as I don’t have to pay for it directly, but make no mistake you are paying a fee, and it’s impacting the amount of money you will end up with. Trust me; you would feel quite differently if you were paying it directly from your current account each month!
Financial planning can add real value to you in a range of areas which I will touch on in further blogs. As a snapshot, they can save you tax, implement a suitable investment strategy, reduce costs to more intangible benefits like giving you peace of mind and take away stress, and prevent you from making big mistakes! There may be some years where you feel they add little value, but if your adviser can help you stay the course and manage your emotions in the year when the market plummets, they will likely earn all their fees and more in this one action.
I certainly believe financial advice is worth paying for. I don’t think people should be charged more based on the money that they have. For me and my conscience, it has to be fixed fees, but for clients it’s all about the value you get so just make sure you are getting it. Speaking of value I’m off to Starbucks, if only it were in Rome!
Ian Richards is a Chartered Financial Planner and Founder of Work to Live Financial Planning. He's on a mission to take the BS, jargon and complexity out of financial advice.
