Abraham Okusanya: The real impact of advice fees on sustainable withdrawal

Getting a withdrawal strategy wrong is bad news for your client and bad news for your business

You’ve heard this argument before: “If a client has £1m, and they want take £40,000 a year under the sustainable withdrawal rate framework, then 1 per cent advice fees translates to 25 per cent of the withdrawal from the portfolio.”

Or this “Oh, if the SWR is 4 per cent, once you account for total fees of 2 per cent (funds, platform and adviser), then the SWR becomes 2 per cent”.

It feels intuitive. But the maths is wrong.

One of the great misconceptions about the framework is how adviser fees affect withdrawals from a retirement portfolio. To be clear, fees impact the sustainability of withdrawals, and excessive fees are damaging.

People should be able to make informed decisions about this. That’s why it’s important to avoid misleading people, or to exaggerate the effects.

To demonstrate the impact of fees, I used Timeline software to run a withdrawal strategy for a UK investor. Here is the scenario:

  • Initial portfolio of £1m – 60 per cent world equities and 40 per cent global bonds. Rebalanced annually.
  • An initial withdrawal of £40,000 a year from the portfolio, adjusted for inflation each year over a 30-year retirement period.
  • We test the impact of 1 per cent per annum and 2 per cent per annum of the outstanding portfolio, deducted on a monthly basis, based on the outstanding balance of the portfolio at the start of each month.
  • Calculate total fee taken from the portfolio over the entire retirement period, and present this as a percentage of the cumulative income and the terminal balance (or legacy).
  • We use actual historical return of asset classes and the corresponding CPI for the UK. The dataset runs from January 1915 to December 2018, giving 888 scenarios each lasting 30 years.
  • Given the large dataset, we rank all the scenarios based on how quickly the portfolio was exhausted and/or the terminal balance at the end of the 30-year period. We then select five actual scenarios: the worst, the 25th percentile, median, 75th percentile and best scenarios (see table).

1 per cent pa gives around 6–12 per cent of the client’s overall income and capital, depending on the scenario. A total fee of 2 per cent per annum wipes out around 13–26 per cent of the overall fund, again, depending on the scenario.

Even in the median scenario, a 1 per cent fee translates into 10.2 per cent of the cumulative withdrawal and end balance over 30-year period.

High fees can be damaging to a drawdown investor. You could also think about the impact of fees in terms of how many years the portfolios would have lasted with lower fees. For a UK investor, a 2 per cent fee means the portfolio ran out of money around three years sooner than a 1 per cent fee in the worst and 25th percentile scenarios. In effect, the additional 1 per cent fee wipes out three years of income for the client. This ultimately creates a lose-lose situation for both clients and advisers — excessive fees risk depleting the portfolio too quickly so the client runs out of money and the fees invariably stop.

All this means that having a robust withdrawal strategy in place is not only an issue of client outcome, it also has a direct impact on the long-term profitability of the adviser’s business. It’s crucial to accept that having a robust withdrawal strategy that ensures the portfolio doesn’t run out of money is not only good for the client, it’s good for the adviser’s bottom line.

Abraham Okusanya is director of Finalytiq

Recommended

Exit sign

Interactive Investor scraps exit fees for ATS customers

Interactive Investor has removed exit fees for Alliance Trust Savings customers following the completion of the £40m acquisition on 1 July. The move brings ATS customers in line with the II platform and applies to all direct customers, IFA and partnerships. It comes ahead of the direct ATS investors’ migration onto the II platform, which is expected […]

5

Court rejects IFA’s plea to overturn FCA restriction

An adviser’s challenge over the FCA’s decision to suspend its regulatory permissions has been rejected by a court. Sussex Independent Financial Adviser has not been allowed to resume its core business or sell its assets after a judge sitting in the Upper Tribunal refused to lift regulatory restrictions. Judge Swami Raghavan said the company does […]

Newsletter

News and expert analysis straight to your inbox

Sign up

Comments

There are 2 comments at the moment, we would love to hear your opinion too.

  1. Desmond Fitzgerald 30th July 2019 at 1:20 pm

    That is of course assuming that the relationship with the Adviser is adding no financial value to the benchmark chosen; both in terms of investment returns and tax planning.

    So for this to be accurate an assumption would need to be factored in to value any added financial positives through the relationship with the Adviser, as opposed to just assuming this is a negative. If there were none and the OAC was an out and out drag financially, then there would be little point in the client having the relationship with the Adviser.

    So this will vary between various client/adviser relationships. In one relationship the money will run out sooner and in the other, later.

    • I agree with that Desmond. Carrying out some proper research on investment funds goes a long way. As do regular checks on the situation for each client.

Leave a comment

Close

Why register with Money Marketing ?

Providing trusted insight for professional advisers. Since 1985 Money Marketing has helped promote and analyse the financial adviser community in the UK and continues to be the trusted industry brand for independent insight and thought leadership.

News & analysis delivered directly to your inbox
Register today to receive our range of news alerts including daily and weekly briefings

Money Marketing Events
Be the first to hear about our industry leading conferences, awards, roundtables and more.

Research and insight
Take part in and see the results of Money Marketing's flagship investigations into industry trends.

Have your say
Only registered users can post comments. As the voice of the adviser community, our content generates robust debate. Sign up today and make your voice heard.

Register now

Having problems?

Contact us on +44 (0)20 7292 3712

Lines are open Monday to Friday 9:00am -5.00pm

Email: customerservices@moneymarketing.com