I recently came across a blog where a financial planner disclosed they received 3.5% up front for single premium investments. They were less committal on their on-going fee but I suspect this was in region of 1% a year.

I also read an interesting piece claiming that a percentage fee was fairer for the client than a fixed fee based on the amount of work done.

In this blog I am not going to say what is right or wrong but I want to set a challenge on what is fair for the client.

If we consider accountants and solicitors the work they do is normally specific, so you have an accountant and you go back to them each year (or more frequently) and engage them to do specific tasks and pay an hourly rate for those tasks, or an agreed fixed fee. A solicitor will operate in the same way.

There is a strong argument that all financial planners will move to this model but herein lies the challenge, I have indicated (possible controversially) that financial planners should control all aspects of the financial planning model (or certainly be seen to be). The “be seen to be” is for example outsourcing the compliance to a network and outsourcing para planning but the key aspects i.e. the financial planning and investment strategy are controlled by the adviser firm.

This is important because the financial planning aspect is very much about a point in time, so for example it will be at the start of the journey and then through the cycle. It is difficult to put a time on things but say initial work is 20 hours and the financial planner charges £100 an hour that would be £2,000 up front. If the client pays a percentage as an annual retainer on say £100,000 that is £1,000 a year. So what do they get for that, this is the service for the financial planner to articulate; in reality this works out at 10 hour’s work a year……..

When considering it this way the percentage fee actually seems fairly cheap if the proposition is articulated correctly. But what is that proposition?  It is effectively reviewing the plan perhaps twice a year and making recommendations on the basis of those reviews. It may actually be hard to argue that it is worth 1% a year.

So how can valued be added? I believe that where the financial planner owns the investment strategy then they can add value, and the hourly rate doesn’t work because there is so much unseen work.

This is where a percentage fee works well but the financial planner needs to articulate what that proposition is. So this is, for example, how often the portfolios are re-balanced, how they manage those portfolios and what information they share with their clients. If financial planners are going to charge for it they must be prepared to share what they are doing otherwise there will be no recognition of what they do.

So what is right an hourly fee or percentage?

  1. It depends on the proposition and what work goes on behind the scenes that perhaps the client might take for granted
  2. If financial planners don’t own all aspects of the proposition then it may be harder to articulate the value in paying a percentage fee
  3. If they do own all aspects of the proposition then they must be prepared to share what they do with their clients so that they can understand it, and truly value the proposition

The debate will go on but ultimately I hope that the regulatory bodies don’t force us down one route because the right route depends on a number of factors and cannot be boxed into one corner…….

NOTE: This is written in a personal capacity and reflects the view of the author. It does not necessarily reflect the view of LWM Consultants. The post has been checked and approved to ensure that it is both accurate and not misleading. However, this is a blog and the reader should accept that by its very nature many of the points are subjective and opinions of the author. This is not a recommendation to buy any product or service including any share or fund mentioned. Individuals wishing to buy any product or service as a result of this blog must seek advice or carry out their own research before making any decision, the author will not be held liable for decisions made as a result of this blog (particularly where no advice has been sought). Investors should also note that past performance is not a guide to future performance and investments can fall as well as rise.