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Dennis Hall: We must review the 1% advice fee expectation

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the 4 per cent rule assumes a worst-case scenario over rolling 30-year periods, and for the past 30 years retirees have withdrawn more than 4 per cent per annum without running out of capital, but we do not know what the future holds, so we must proceed with caution until the situation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

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Comments

There are 19 comments at the moment, we would love to hear your opinion too.

  1. Peter Cranwell 16th May 2019 at 11:36 am

    A very good point, and well-made.
    I have never understood how we can apply a one-fee-fits-all scenario: I too tailor my fees to suit, often only a small retainer to maintain the connection with a negotiated fee as and when regular reviews really become a requirement.

  2. Ok Dennis, get your point but does MiFID ii not require us to do a full suitability assessment for each investment at least annually? This is not just a cursory look at the client’s investments but a full review and this takes a lot of time, resources and also regulatory responsibility. So if you are still receiving fees, I am not sure what the compliance situation is with your deep dive every 2 or 3 years? Possibly not complying with MiFID ii?

    • Colin, a valid point re MIFID 2 but surely our fees and the review needs to be proprtional. Just how ‘deep’ do we need to go the determine that our advice remains relevant?

      It could be a simple checklist along the lines – Has anything changed in the last 12 months? No. Has the investment recommendation I made changed significantly in the last 12 months? No. etc. If the answer is Yes then a closer look may be needed, but if the cost of the review makes my advice fail, then there’s something wrong with the rules.

      In the event, I’d prefer to have a discussion about the failings of MIFID 2 with the regulator, than have a discussion with my client about the failure of their retirement income.

  3. “There appears to be a universal law which states an adviser’s worth is 1 per cent per annum of a client’s AUM.”

    In whose physics textbook? 1% is the very top end of adviser ongoing fees. For advisers charging a % of AUA, 0.5% is still the mode average.

    There’s no universal law that a coffee machine costs £1,000+ because that’s what Harrods charge for a Jura.

    Very, very top end. If you are paying more than 1% you are being ripped off. The market consensus is that 1% is the maximum justifiable on the “because you’re / I’m worth it” basis.

    (If this sounds arbitrary it’s because it is. Humans have ten figures and count in base ten and therefore 1% is a round number where 0.98% isn’t.)

    Obviously for the purpose of this conversation we have to disregard clients paying 2%+ to St James Place (as that includes custody and their dog funds as well as advice).

    “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. ”

    It doesn’t though. What happens if the client says “I want to withdraw £250,000?” “No, that’s ring-fenced to pay my fees?” Of course not, charges just reduce to £7,500pa (if you are charging the top end of percentage rates).

    The impact of charges on the safe withdrawal rate absolutely shouldn’t be underestimated. However we shouldn’t fall into the trap of promoting misleading comparisons like “I draw 3% and my adviser gets 1% so the adviser gets 25% of my pension”. No. They get 1% a year (if you are paying top rate). That’s it. If you follow the “1% / 4%” logic, they’re providing ongoing advice on the 96% of your pension you aren’t drawing this year for free. And the advice would be much better value if you were burning through the pot at 20% per year (when the opposite is clearly true).

    If people want badly enough to believe that regulated advice is worthless then they can manipulate the numbers however they like.

    I am glad I don’t have to personally justify fees of 1% per year, but if these are the best grounds on which to attack them, those who do don’t have much to worry about.

  4. Patrick Schan 16th May 2019 at 3:29 pm

    It appears Dennis Hall has not noticed the introduction of MiFID 2. Let’s hope the FCA aren’t reading this.

    • Philip Castle 16th May 2019 at 7:11 pm

      I agree with you, but I did agree with Dennis. We used to have a different option for clients with a 3 yearly review model and an annual and more frequent for some clients.
      The smaller the portfolio and the more the needs are protection and mortgage related, the mroe relevant a 3 year review was as life chanegs tend to occur every 5 years, so a 3 yearly review caught them before a life change and as the client was paying for an ongoing service, we’d bring a meeting forward within the timescale if the client called with a problem so we could help before it became a disaster.
      We’re now trying to seperate planning from advising so we can just plan for 3 yearly reviews for those ffor whom an annual review is innapropriate and not cost effective for them and then re-engage investment/pension advice at the 3 yearly review, but it is a bit of a problem due to MIFID 2 as you say Patrick

    • Patrick I have noticed MIFID 2 and I hope the FCA are reading. If the solutions I am recommending to a client are failing because of my costs of reviewing them, then there’s something wrong with MIFID 2.

  5. Great topic Dennis and timely because Abraham Okusanya just released an article about the effect of fees in relation to a withdrawal strategy.

    Nick Murray makes some great points but they are not for everyone and that leads me to my point.

    As an industry, we all too often ask “What do you charge?” Instead create your own client service proposition, compliantly of course, and charge accordingly to what it will cost to run your proposition and practice profitably.

    • I don’t disagree with you Aaron, and I’ve just read Abraham’s article, though I don’t necessarily agree with his conclusion 100% (I do like his Timeline App though). It should be about individual busineses creating their own propositions etc, but rather tlike the fund management industry advisers tend to charge fairly similar amounts, regardless of location and service levels etc. I suspect there has been limited though into most charging structures and service levels

  6. Philip Castle 16th May 2019 at 7:07 pm

    Thwe problem with Dennis’ argument is using % when it should be £ being used.
    1% of 1 million is £10,000 per annum while 1% of £250k (which is probably our mean client portfolio) is £2,500.
    If we then put that in monetary terms, if I am charging 1% (we don’t use DFM’s for anything other than BPR Aim portfolios where we only charge 0.5%), then we are charging 1/4 of what some firms are chargingf ro the same work in monetary terms.
    Arguably, those advisers managing a £1m portfolio using Dennis’s argument should only be charging 0.25% plus a little extra for the increased risk, so let’s say 0.30%

    • I don’t disagree with you Philip, £ versus % should win the argument. Plus a good illustration about how a fee for the work done probably works better for clients compared to ad valorem fees.

  7. Why this obsession with what advisers charge, they charge what is required to make a profit, otherwise they go under, which ironically is the cause of the present savings gap. I do not know of any of my compatriots who have excessive profit margins, it is not in their interests to over charge their clients. I have been charging fees since 1998 and in my experience 1% is about right in this climate with the increasing pressures on advisers in relation to PI and mounting costs in relation to FSCS and FOS levies, not to mention the high cost of software required to remain compliant.etc, There is also the massive increase in time cost in having to carry out a comprehensive review each year for every client. So stop banging on about this, most of us are small private companies, we do have a monopoly nor run a cartel, the oil price is not capped is it.
    If clients think it’s too expensive they will go elsewhere, that is how the free market operates.

    • Why the obsession, because if we don’t obsess who will? And it’s not purely an obsession about fees, we should be obsessing about everything in our businesses (I’m a small business owner too). Failure to do so may result in us being left behind, serving our clients poorly, and probably gradually failing to the point we become unprofitable. It’s my belief that to stay relevant, meaningful and profitable we need to be thinking about everything, especially adviser fees. But that’s purely my belief, you are free to have your own views.

  8. As a fully paid-up member of the ‘Nick Murray Tribe / Murray’s Lot’ I would like to point out that he is actually agnostic on the issue of how much an adviser should charge their client. He openly states that he does not care how much you charge a client, or in what manner you make the charge. He merely states that, were he still advising clients himself, he would charge 1% of AUM.

    On a wider point, I really do wonder sometimes why there are advisers out there like Dennis who, rather than just getting on with running their businesses and advising their clients, feel the need to mount the pulpit and start delivering a sermon on how other advisers should work with their clients.

    Since MIFID 2, all advisers now have to, on an annual basis, put right under the nose of every client a total figure in pounds and pence of what they have paid in fees for the year. Presented with this information, in black and white, clients can then easily assess whether the fees they are paying seem reasonable. If any client has their doubts, they can then raise the matter with their adviser and if the outcome is unsatisfactory they can move to another adviser. What more is there left to say?

    • Hardly a sermon Ian, more an article to stimulate debate. Nor have I told anyone in this article how to run their business, and for the rcord I admitted to being as ‘guilty’ as the next person.

      The reason why some advisers, me included, give voice to our thoughts publicly is several fold, for my part it allows me to guage whether there are others who think the way I’m thinking, or whether I’ve simply lost the plot. Another reason is to add to the wider debate, in this case about fees, and hopefully providing some balance, counter arguments, and even some insights.

      I don’t pretend to be right, but I am curious. Thank you for your contribution, your point about MIFID 2 is an oft and well made point.

  9. I agree with the key point being made here, that fees for advice and support should be good value for money for the client. But they also need to be profitable for the advice firm. Profit isn’t just a question of time spent and business overhead, but also the significant regulatory and conduct risk taken on by firms with every client they serve. Ongoing advice fees are particularly justified for clients relying on their capital to fund their retirement because once the withdrawal strategy (asset allocation, withdrawal rate and tax optimisation) has been devised and agreed, it needs to be monitored continuously in the light of investment returns, so the adviser can ensure the client makes the necessary course corrections to their plan to ensure the portfolio isn’t exhausted. And this blog shows why one doesn’t need £250,000 ringfenced for advice fees as suggested in Dennis’s example. https://www.timelineapp.co/blog/how-aum-fees-affect-sustainable-withdrawal/

  10. I would have thought a client’s needs become more complex in decumulation, not less. Structuring income to make the best use of personal allowances, capital gains tax exemption and ISA withdrawals etc. Advice on using cash rather than investments during times of volatility. Ensuring more than ever they are invested appropriately for their risk tolerance and ability to withstand losses.

    If the 1% is inappropriate during decumulation, surely the compounding impact makes it even more so during accumulation?

    Are you suggesting a theoretical means testing of fees?

    • Cannot disagree with anything you’ve said there Ian. If it’s too expensive in decumulation (and that is the point for discussion) when the advice is arguably more complex, then it’s likely to be daylight robbery in accumulation!

      Re your last sentence – no.

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