This is going to sound a bit like the pot calling the kettle black because I am as guilty as everyone else, but hear me out. If the starting point for a sustainable withdrawal rate in retirement is around 4 per cent, excluding charges and taxes, we really need to consider the impact of fees more carefully.
Yes, the 4 per cent rule assumes a worst-case scenario over rolling 30-year periods, and for the past 30 years retirees have withdrawn more than 4 per cent per annum without running out of capital, but we do not know what the future holds, so we must proceed with caution until the situation says otherwise.
Accepting 4 per cent as the starting point, how is it possible to justify charging 1 per cent per annum of a client’s assets under management?
Financial adviser coach Nick Murray and his tribe probably do it by starting every day chanting “because I’m worth it” into the bathroom mirror before looking their clients in the eye and saying, “because you’re worth it”.
But it is not only Murray’s lot. There appears to be a universal law which states an adviser’s worth is 1 per cent per annum of a client’s AUM.
And because 1 per cent sounds small, hardly anyone questions whether it really is worth it – least of all the client.
In fact, there is an army of coaches and consultants who will convince you that 1 per cent is appropriate and help you build a service proposition to prove it.
You can frame it so it looks like a no-brainer by saying things like, “by the end of 2018, the FTSE All Share Index was down 10.2 per cent and, if the client had bailed, they would have missed out on the 13.5 per cent recovery in the first four months of 2019. That is what I am paid for”.
But cherry-picking data that way is something we scold fund managers for. If we do our job right, clients will ride the peaks and troughs of the markets without calling you every time it dips.
Instead of charging a fee as a percentage of AUM or a fixed cash amount, what if we showed it as an amount of the portfolio set aside to service it?
For example, if the portfolio is £1m with a fee of £10,000 per annum, a 4 per cent safe withdrawal rate needs a sum of £250,000 ring-fenced purely for the provision of advice fees.
Put like that, I believe most clients would seriously question whether they want it.
Shouldn’t our job be to convince clients to use our services less, not more? That way, they would keep more of their wealth and stand a better chance of living the life they want to, even during dark economic times.
Do people really need an annually-updated cashflow, or even an annual review? I don’t think so.
I have some clients where it became silly for them to continue paying me our minimum fee for the full annual review experience.
They did not want to lose the connection, so instead of casting them adrift we reduced fees to an affordable level and undertake a deep dive every two or three years.
In the interim, we use processes to deal with the annual needs like Isa subscriptions. It works, and everyone wins.
Dennis Hall is managing director of Yellowtail Financial Planning