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Paul Lewis: Why aren’t advisers paid on results?

Paul Lewis

One per cent. It does not sound much does it? Every year an adviser takes 1 per cent of my money and for that small fee, manages it.

So I entrust my adviser with £100,000 and pay them £1,000 a year to invest my money and strike a balance between risk and reward. If at the end of the year my wealth has risen, the fee is a bit higher. If it falls I still pay a fee, just a slightly smaller one. But why should I pay at all if the adviser has failed in the job of making me money?

Many advisers tell me charging a percentage gives them a stake in their clients’ success. If the investment falls then so does their fee. They call it aligning their interests with those of the client.

But all it means is I pay a bit less when the adviser loses me money. Take my £100,000. The 1 per cent a year – £1,000 – pays the adviser to manage it (and to pay the staff, the rent, the FCA, the Financial Ombudsman Service, the Financial Services Compensation Scheme etc). Say at the end of the year my investment is worth only £90,000. Next year the charge is £900. I have lost £10,000 but I pay the adviser only £100 less. In no way is the adviser sharing the performance or the risk. If my money makes £10,000 then the fee rises to £1,100. The difference for me is huge – I lose £10,000, I gain £10,000. For the adviser it is the difference between a bad year and a good year. They have no real stake in my investment success because they still get paid for failure.

Let us forget about losses for a moment and assume in the long-term investments make money. Just how much does 1 per cent a year cost me? Time to wheel out the spreadsheet.

Say I have £100 a month to put into a pension. Let us assume it will grow by 5 per cent a year, the middle illustration for pensions set down by the FCA, and because this is a pension I will keep it from age 25 to age 65. Over those 40 years that 1 per cent a year costs me more than a third (36 per cent) of the growth in my fund. I pay in £48,000. It makes £104,000 in returns. Out of that £152,000 nearly £38,000 is taken in charges leaving me with £114,000. Some advisers of course charge more than 1 per cent – a small rise to 1.5 per cent means they take half the growth – more than £51,000.

Alternatively I could put it in a tracker and make, say, 3 per cent a year. Over 40 years with no  advice charges I would end up with £93,000. So the advice at 1 per cent has made me 5 per cent a year rather than 3 per cent. The adviser’s investment of my money has made an extra £59,000 (£152,000-£93,000) over a tracker. But of that extra performance the adviser keeps £38,000 and I get just £21,000.

On top of advice charges there may be platform charges, fund management charges, share spreads, and a hundred others small fees. Recent research by Grant Thornton for a client reported in the FT suggests 2.56 per cent is a fairer estimate of how much drains away from an investment pot through the myriad taps that are screwed into it. As we bung £1,200 a year into the top more than £30 drips out of the bottom. At that rate, after 40 years of 5 per cent returns 70 per cent of the growth has been taken by the industry. Even at 8 per cent returns 63 per cent of the growth would be snaffled.

So here is my plan.

I pay the adviser a percentage of the growth in my wealth. So if my £100,000 earns £4,000 in a year I pay, say, 12 per cent of that which is £480. If it stays flat I pay nothing. If my invested money falls by £2,000 the adviser pays me 12 per cent of that which is £240. The fee is calculated on total wealth at the start of the year, minus total wealth at the end (taking account of client withdrawals) and after all charges except the explicit adviser fee. That is equivalent to a fixed 0.5 per cent fee but gives the adviser a real stake in improving the investment return.

Of course, in some years markets fall, in others they rise. Why should the adviser be penalised for market falls or indeed rewarded for market rises? Should the adviser only be paid or penalised for above or below FTSE All Share tracker fund performance which can be bought without advice very cheaply?

Or should the adviser only be rewarded for the gain above cash? I could earn 1 per cent a year risk-free in the average one year deposit or in National Savings.

Those comparisons just complicate things. Much better to look at absolute performance – have I got more money or less money at the year end?

This simple symmetrical model would encourage positive behaviour. The adviser would have a direct stake in the costs of any investment so would tend to choose investments with the lowest charges. If they wanted to take a risk with a more expensive investment in the belief that gave a better chance of more growth then they would have a genuine stake in gaining or losing. And they would have a direct stake in getting the best return on my money.

Advisers I trust and respect tell me such a model is impossible under FCA rules. Others say it would distort behaviour, be against clients’ interests, and lead to some advisers going bust.

Maybe. But one reason investors mistrust advisers is they get paid much the same for managing our money whether they do it well or badly. My plan would genuinely align their interests with those of the client.

It is broke. It needs fixing. If this does not work, what does?

Paul Lewis is a freelance journalist and presenter of BBC Radio 4’s Money Box programmeYou can follow him on Twitter @paullewismoney

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Comments

There are 83 comments at the moment, we would love to hear your opinion too.

  1. Paul,

    Are you saying that advisers offer zero value in a falling market? I think many would argue otherwise?

  2. Interesting idea … Paul why don’t you got to the trouble of getting qualified, regulated and insured and give it a go. If you manage to survive long enough (by this I mean outlast at least one bear market) your idea might gain some traction. Sadly I couldn’t live on the model you describe and nor could FCA and FOS who I have to support.

    • Thank you Lindsay for some common sense.
      The reason he doesn’t of course is because it’s easier to pontificate than to actually do the job.

    • I saw Paul talk at our firms conference last year and I found his presentation uninspiring and poorly researched. This article has done nothing to change that. Will he return his no doubt exorbitant fee? I doubt it.
      Will he only take his next fee if 100% of the audience vote for him to receive it? I would guess not.

  3. Whatever you do Paul, don’t suggest even more regulatory reform – that’s becoming a bigger industry than the provision of advice itself.

    Let’s move the same ‘performance principles’ you mention to mortgage advice – an industry where some clients have been conditioned over the years by pundits/experts/journalists to go for….FREE ADVICE!

    ‘Free Advice is best’ they’ve been told, year after year.

    Where’s the understanding that mortgage brokers have to make money?

    So, when you balance out that, as you suggest advisers have overheads for staff, and ever increasing regulatory costs (they NEVER go down) – why do some journos advocate that borrowers seek out free advisers?

    Oh, and as far as lenders paying commission? Pretty much the same level as in 2008 whereas the regulatory requirements for mortgage brokers increase year on year.

    Perhaps you can take on the lenders on our behalf?

  4. 1 – The adviser is paid for advice. Not investment management. Although selection of investments is part of the advice process
    2 – growth periods significantly outnumber negative periods. So, the end consumer would end up paying a lot more.
    3 – the model is not sustainable and would create financial solvency issues which lead to consumer detriment.
    4 – It would create bias risk which could lead to mis-sales (higher risk generally means higher returns over the long term)
    5 – Consumers and consumer groups are generally against performance bonuses.

    It is a bit like a journalist being paid for the number of comments in the article they post. So, rather than provide genuine journalism which adds value but may not generate much comment, they post an article designed to generate comments but with little journalistic value.

  5. Paul wouldn’t have been paid anything this year then – and in fact would have paid investors by encouraging them to invest all their cash in deposit accounts as they are so much better than equities…

  6. Money Guidance CIC 8th September 2016 at 1:15 pm

    Well, that would involve an interesting set of metrics, wouldn`t it?
    Having saved a client,say, £500,000, through a combination of Inheritance Tax mitigation and Fixed/Protection measures, I could then disregard all time-based factors and simply invoice him for £5,000 plus VAT.
    The possibilities are endless… we could remunerate Estate Agents based on the growth of the Halifax House Prices Index, or invoice journalists by reference to any opportunity cost associated with reading ill-thought out drivel.

  7. In his pension example, Mr Lewis makes the assumption that a tracker fund will underperform an active fund by 2% p/a. Does he have any reliable evidence for this claim?

    He also states that a 10% cut in the adviser’s fee is so small that they will not be impacted… if their entire cashflow is based on recurring fees and all clients have sufferd a 10% loss, they lose 10% of their turnover. It might only be £100 for one particular account, but overall it is a hefty chunk of their income.

    The entire article is predicated on the belief that advisers exist simply to help their clients beat the market – not remotely the case as far as I am concerned. But if the rewards are for financial gains, then should we take a cut of any tax savings that we make for our clients?

    Rewarding advisers for beating the market will result in greater risk taking and will only encourage those who believe they can predict the future. Unless being managed by an idiot, the returns that a client receives will mostly be a function of market returns.

    Advisers get paid the same regardless of portfolio returns because the work that we do doesn’t change in a falling market. If the FTSE drops by 20%, we don’t do 20% less work for a client.

    If Mr Lewis wants to consider an industry where performance fees reign supreme, I suggest he takes a look at the hedge fund industry – where performance fees don’t tend to result in exceptional performance.

  8. I agree on the basis that if that is all you are paying for, but it’s not….

    You are paying for the fact that your adviser is monitoring your annual and lifetime allowances, making sure that you use your ISA and CGT allowances, making sure you have the right protection policies in place, making sure you have a cash reserve, monitoring your potential IHT liability, making sure that when you come to take any income you are doing so in a tax efficient manner the list goes on and on.

    You obvioulsy havent had the pleasure of engaging with an adviser that delivers real value and until you have I think you should keep your opinions to yourself!

  9. your idea is presupposing that all advisers do is invest clients money Paul. Whilst I have great sympathy with not being charged a percentage of assets under management, it does not mean that your alternative solution is anything other than an equally bad solution. Advisers are not there solely to manage your money, they are there to do far more things. I won’t bore you with what those other things are, but suffice to say I am sure your own adviser does not simply manage your money. The issue with fair charging is that most clients are not willing to pay by the hour or by basing fees on the amount and complexity of work necessary to serve them. The second issue is that the cost of advice is partly too high because of the appalling regulators we have, where the FCA says one thing one day and another the next, where the FOS then disagrees entirely with the FCA and adjudicates claims on the basis of what the man on the Clapham Omnibus should understand. Adviser fees are not well designed, they are not commensurate with the work done for clients, and the amount of money paid by clients for advisers to do work which adds no value but which is essential for compliance risk management is obscene. However your good points about the unfairness of being charged a percentage of the assets under management are wiped out by the utter stupidity of your proposed alternative. As an intelligent journalist you should consider only being paid for articles which increase the publishing magazines readership. Anything which does not increase circulation should lead to you receiving nothing, and anything which reduces circulation should lead to you paying Money Marketing for the damage you have caused. Furthermore your own personal impact and control over circulation should be ignored, and you should be paid on the basis of results over which you have no real control. Your proposals are idiocy.

  10. Paul, applying your logic, would be it fair to not pay a salary to a School Teacher if their students did not hit the right grades one year? It doesn’t take a genius to work out that this is an unrealistic expectation. A lot of work has gone into it throughout the year and the results are mostly out of their control as many other variables come into play (the student’s ability, the exam questions, exam technique, social factors etc.). Equally in the world of finance, the returns are not in anyone’s control. Financial advisers do not guarantee profits either.

    Would you advocate to your editors to not pay you anything for your articles unless you hit X number of views/shares/comments for each article you publish? It doesn’t work like that does it?

    • Ah!…but maybe Paul IS being paid like that!!…. look at this thread: 65 comments a moment ago…and we’ve all got to look at the forest of adverts around it… if I was an advertiser, I’d pay extra to a journalist who can get the highest number of target customers to look at my inflammatory comments and adverts around it!…damn!… I’ve just paid him a bit more with this post!.. 🙂

  11. The fee is not for personally managing your money. Financial Advisers are not Stock Brokers. The fee is for ongoing advice and service

  12. The work of a financial adviser goes far beyond ‘managing money’ – not least because that’s the job of the investment fund manager! An adviser offers tax advice (so how do you quantify that?) and also peace of mind…

    The above approach also implies that, somehow, advisers can foresee the future (perhaps moving equity investors to cash in 2007 and reinvesting in March 2009?) – with perfect timing.

    Furthermore, that advisers can somehow control capital markets and if they can’t, they are the losers as they are working for free! I wonder how many firms would have gone bust using the above model in 07/08 (and also 01 into 02) – I suggest a huge number.

    Add to that, FSCS – what would premiums become if they were insuring against the risk of a stock market fall and the resultant failing of advisory businesses?

    I also take issue with the following …

    The adviser would have a direct stake in the costs of any investment so would tend to choose investments with the lowest charges. If they wanted to take a risk with a more expensive investment in the belief that gave a better chance of more growth then they would have a genuine stake in gaining or losing. And they would have a direct stake in getting the best return on my money.” ….

    If an adviser is independent and isn’t selling their own funds, what benefit would they gain in picking more expensive funds unless they felt it was in the clients best interest – the statement above implies a conflict of interest currently exists!!! Is there any wonder investors don’t ‘trust’ advisers!?

    The bottom line is that, whilst the above is all very idealistic, clients pay us for our time and our experience – whether in the short term, they make money is completely out of our control! Longer term, it’s perhaps different, but external influences are still the main players.

    Our clients understand this and that’s why we (and I suspect many good IFA’s) retain their clients and they are happy to pay us for the work we do – even if that means they aren’t always making money.

  13. I am not sure if Paul is deliberately being thick or just doing what any ignorant Journalist does and spouting misinformation as fact.

    How is it that the BBC allow someone who clearly has no grasp of regulatory requirements to work for them?

    What would be a good idea is if Journalists such as Paul had to pay compensation to their clients, the readers when they misinform them.

  14. Isn’t it a brilliant plan. And who will assist him if the adviser has gone out of business because the fees he has been able to earn from Mr Lewis aren’t enough to pay his regulatory costs.

    Would Mr Lewis be happy with a tracker that loses him 10% in a year as markets fall but a skillful manager chosen by the IFA breaks even, preventing him from losing £1,000?

    Final thought, lets start at £1,000 annual fee indexed. Or maybe linked to the increase in Regulatory costs? Does Mr Lewis think an advisers costs drop because the stockmarket falls!

  15. For the same reason doctors are not paid on results. (And they can kill you).

  16. Whilst it is absolutely clear, as you say, that the risk/reward model in current use is asymmetric, how does a firm managing say, £100million, manage under your model in 2008/9? I’d be surprised if many firms would have been able to afford the bill with assets falling rapidly as they did during that period. This would have created a lose/lose scenario as the adviser goes bust, can’t pay the bill and the consumer then has no-one prepared to take them on. Additionally, you have selected just one element of the value chain and it is clear that, in order to deliver real value, the whole cost of investment must fall, not just the advisory part. It does though, as you say need fixing as the value destructive nature of high overall charges is simply opaque for most consumers.

  17. This is simply crazy, advisers would provide advice which suited their business, and not the client needs, as the exposure would be too great to do anything else.

    He has really let himself down with this thinking

  18. Nicholas Pleasure 8th September 2016 at 1:35 pm

    Oh Paul…what a load of nonsense. I can see how this might appeal from a clients perspective but it would be impossible to run a sound sustainable business. When the market falls I have to fire my staff! In fact, when the market falls the very best thing I can do is tear up my client agreement with you.

    You see, being a financial adviser is dead easy when markets are rising. We send our clients nicely inflated investment valuations and they are all delighted. We actually earn our fees when markets are falling. That is when we are counselling nervous clients; preventing them from selling when the market is at the bottom, having bought high. Adjusting portfolios to control risk and generally providing useful, beneficial advice.

    It sounds as though your adviser isn’t doing that and provides no value when markets are falling. Therefore I’d be very happy to send you my card. And I charge less than 1% a year – what a bargain!

  19. I’ve got to hand it to you Paul that’s the best bait that you’ve dangled since you’ve been writing articles for this site!

  20. Paul
    If you only use an adviser to manage funds, then perhaps you should consider switching to Hargreaves Lansdown and picking a selection from their Wealth 150 (which I believe will also now include the low cost trackers you suggest as an alternative in your article). I believe that they will charge you a lot less than 1% for the privilege of investing with them.
    We already do get paid for results by our clients, as we charge largely flat rate fees for ADVICE that is designed to assist them in achieving their goals, maximise the benefits of legitimate tax planning, avoid unexpected tax shocks for exceeding Annual and Lifetime Pension allowances, maximise the proportion of their estates that goes to their families and other intended beneficiaries rather than the State in IHT, obtain the best value mortgage for them and their children, obtain the most suitable and lowest-cost protection with suitable trusts where relevant, etc. etc.

  21. By the same token, the managers of all the funds in which you’re invested would have to adopt a charging system similar to the one you’d like to see. In the event of a prolonged global downturn, they’d all go bust, so where would you be then?

  22. Why oh why do we give this man airtime. If he was paid by how many people like his articles, his show, or his comments, he would be bankrupt within a week.

  23. Good article – which highlights the issues which surround adviser charging models. Personally, I don’t get the argument that advisers need to be financially aligned with the interests of their clients. If client A has a portfolio of £50k and client B has one of £5m then the principle of financial alignment would suggest that advisers should devote 100 times more time (effort) to client B – which is clearly nonsense. Isn’t the only really fair charging model one of charging by the hour. The client is paying for advice – and whether that advice results in losses being minimized or growth being maximized shouldn’t make any difference to the amount the adviser gets paid. It also means that if an adviser does spend more time on clients with larger portfolios then they will indeed get paid more.

  24. Advisers are not mistrusted because of fund based fees, that is utter nonsense. They are historically mistrusted for selling stuff that was rubbish and having a vested interest to sell that “stuff”. That was almost entirely sue to commission, which was established because the vast majority of people do not want to think about their financial future and would invariably only do so if there was “no cost” or it was “free”.

    If you believe the 1% (or whatever) is purely for asset allocation and picking funds, I wonder how this would have helped your pension over the last 25 years… not a mention of the changes to reliefs, allowances and general constant moving the goalposts and how they interact with your personal taxes, income, life plans and so on… Paul you are yet again falling into the trap of focusing on the products, not the purpose. If you want a cheap pension get enrolled in an AE and let it run for 30 years, presumably you will be delighted with the results? Being remumerated based on £ growth or lost is only going to result in taking investment risk that is unsuitable… you need to consider the wider picture of how much value is added rather than always what is taken away….

    I can certainly concede that a flat % rate isn’t ideal, but if I were to constantly use projections and consider what value the advice given adds, then it invariably improves net worth by hundreds of thousands or millions, but I dare say you would challenge those assumptions about a “certain future” when its nothing more than a single forecast… much like the largely pointless illustrations.

    Invariably most people are left with the option to “spend time to save money or spend money to save time”…. ie, delegate it to an “expert” or do-it-yourself. So all you need to do is consider which is more scarce in your own life….

    Perhaps you could suggest ways to encourage those living in the UK to save for their financial independence that are currently available in Utopia.

  25. Paul, controversial statement which I am sure will elicit a torrent of response (not all of it positive). To some extent what you are arguing is based on the behaviour of Estate Agents which first came to wider attention in the book Freakonomics by Stephen J. Dubner, Steven Levitt in that estate agents receive a fee calculated as a percentage. This meant if an agent were to persuade you to drop the price by £10,000 this had a limited effect on the value received by the agent who got their sale but a very large effect on the proceeds you received.

    However for some, if the agent worked hard to get you an early sale at nearly the asking price or even above it you would feel that the agent’s fee is worthwhile (especially if you had previously been unsuccessful with someone else).

    The problem is that most clients would not be willing to pay a large share of future profits when these are made and that Financial Advice has considerable overheads many of which are through regulated/fixed costs which must be paid every year to be in business. Recharging losses back to the adviser in bad years would, to be sustainable, mean a higher share being expected by advisers in good years to offset this.

    Advisers cannot exist on fresh air and with your suggestion in the situation where there are world wide market events such as the 2008 crisis they would in many cases lose most of their income and need to pay the “sharing of profit” back to their clients. This may put them out of business at the very time their reassurance and advice is needed.

    Perhaps what you are arguing is that some advisers charge too much and do too little. It is something I very much agree with. Your plan would not fix this.

  26. Interesting, although he misses the point completely. If you don’t way to pay advice costs, platform costs, funds costs etc etc then put your money in the bank. You won’t have to pay any fees then. If you want to invest your money and use a professional to help you, then you should expect to pay for that service.
    It should also be pointed out that an adviser’s job is not that of a fund manager. The adviser is responsible for the suitability of investments and the tax efficient nature of these, not the underlying performance. To suggest otherwise shows a deep lack of understanding.

  27. Should this argument not be extended further to consider the investment charges levied by fund managers if we are to proceed down this route or is it only the financial adviser model which is broken Paul? Fund managers don’t seem to incur your wrath quite as much as the financial advice industry for some reason Paul.
    Also during years when the investment performance is poor but the client still wants to understand the impact of changes to legislation, a reminder about what options they have at retirement, help with reclaiming tax due for pension contributions, information about which assets to access for income to mitigate tax charges, whether they should consider salary sacrafice, views or opinions on an (misguided?) article they have read in the financial press pages, suggestions and analysis of whether they should contribute more do we tell them its tough they have not paid anything for that year?

    I suspect the advisers that you trust and respect have got it spot on which is really where this particular thought process should have ended rather than making its way on MM.

  28. I’m not a fan of 1% annual review fees for medium to larger sized investments, as it can translate into a lot of money for the task involved, but unlike you Paul, I do consider (within an annual review) not just what the investment makes in growth (or not) but also the suitability and relevance of a clients circumstances to their ongoing investments and also what value I am able to add in return for my annual fee (I can’t defy market behaviour however and certainly wouldn’t imburse a client for something which is beyond my control and/or which I have spent time trying to mitigate. Your logic is akin to suggesting that a lawyer serves a part of their client’s sentence (and refunds their fee), if they fail to defend them from prison?
    If an investment doesn’t warrant a large amount of work and the clients circumstances are unchanged, then the annual review fee should reflect this for sure (charge a lesser % plus additional if needed or just a straight £ fee). But let’s remember Paul, that under RDR, a review is just that, a full discussion and overview of a clients circumstances. If you have an adviser who charges you 1% year on your investments and doesn’t provide perceived value for this (and let’s face it, you don’t do you?), then you should change them or discontinue the charges. If not, then this article is rather pointless

  29. Interesting thought Paul but entirely missing the point about what advisers do. We challenged ourselves in this matter some while ago working with one of our clients and it became a nonsense trying to agree a yardstick against what to measure the return. It is also unfair to reward or penalise someone for returns when the outcome is so heavily influenced by factors over which the adviser has no control let alone influence.
    But more to the point, if you examine the client agreements of advisers, the fee that they receive is not solely for managing portfolios. If you examine the day-to-day activity of an average IFA I would be very surprised if it is not overwhelmingly dominated by taxation matters, broad financial advice and activity which has little to do with the portfolio returns. Charging a fee which in most cases reflects the size of the portfolio – and hence the overall responsibility – is a very good methodology. It is measurable, predictable, non-activity based and opens the door for clients to derive significant additional advice and adviser time without the worry of impending bills.
    Yet again we have hypothesising from a public ‘trustworthy’ figure completely divorced from reality.

  30. I think we should extend this plan to a wider community for example;

    * investment fund managers paying back some of the charge if the fund goes down in value;

    * Regulators refunding fees to the regulated if they fail to protect consumers against scams;

    * PI insurers paying back premiums to the insured if there is no claim in a particular year;

    * Estate agents paying back some of their commission if the buyer discovers they have noisy neighbours;

    * BBC Journalists paying back some of their fee if listener numbers fall.

    The list for applying this plan must be endless

  31. I find some of Paul’s arguments odd and inconsistent. He argues against percentage fees for advisers in managing investments but logically the same problems he sees applies across the whole fund management world – unit trusts including much loved low cost trackers, ETFs, investment trusts and pension funds all have an explicit annual management charge which are still payable even if the value of investments falls. Incidentally in the past there were plenty of commentators, no doubt Paul included, who berated IFAs for not recommending low cost investment trusts. They are somewhat silent on the fact that in many cases the OCFs are now higher than clean share OEICs especially if there is a performance fee on top.

    Paul complains that a loss of £10,000 on his investments only means a loss of a £100 fee for the adviser but it works both ways, a gain of £10,000 results in only a same small £100 uplift in an IFA’s fee so I am not sure what his beef is here.

    As for the £100 p.m. pension example I charge a one off initial fee and would never dream of applying an additional charge on top until the pension fund value was substantial. In fact I have a minimum investment portfolio size of £250,000 before I will consider applying a percentage fee of 0.6% p.a. for an annual review service. Paul throws out a lot of maths but fails to point out that a 1% p.a. charge on not a lot, well is frankly not a lot. To review an investment worth £15,000 at that rate would barely generate enough income to cover an hour of chargeable work.

    Another flaw in Paul’s argument is the assumption the value a client gets for their fee is judged solely in investment performance terms. He seems to discount any additional benefits of an investment review service – the calculation and management of chargeable capital gains, use of bed and ISA arrangements, tax reporting, adjusting the portfolio and its risk by slimming holdings in higher risk funds that have grown too big or to bank profits when they are available, to adjust a client’s changing income requirements etc. Paul there is more to being an investment adviser than securing capital growth. It is about ensuring ongoing suitability.

    An alternative fee option which a client may request is a fixed fee or a timed charge. Here the adviser’s fee is delinked from performance and is based on the work done. I suspect Paul would be unhappy with this too.

  32. Paul

    You need to rethink this, because your idea is ridiculous.

    If you go to the shop, buy some potatoes, expecting them to be delicious when roasted, only to be disappointed, should your greengrocer pay you money if your potatoes don’t match your expectations?

    Look, if you don’t value the advice you get (and believe me limiting losses is sometimes actually the best one can do) get a new adviser, but if you think you can find one who might be rewarded for his best efforts by paying you money you are clearly deluded.

  33. Many hedge funds charge (or used to charge) a significant percentage fee on outperformance of certain markets. I seem to recall some such charges being 20% of the outperformance.

    I cannot imagine however, any situation whereby a drop in the value of investments would lead to an automatic refund of charges from an adviser.

    If the drop could be shown to be due to negligence or improper activity, a complaint may (should) lead to compensation, but I can’t see anything else working.

  34. All Mr Lewis has done through this article is show himself to have no grasp what so ever of what financial advisers do for their clients.

    As mentioned above how do you quantify the advice provided around tax, how do you factor in the benefits of preventing a client panicking and cashing out during a downturn or spotting potential issues before they happen? All of these things are something that a good financial adviser would be doing as part of a review service.

    What about not being paid as a deduction from your portfolio? What about paying your financial adviser with a cheque from your current account. Every year they work out your invoice, based upon 1% of the value of your portfolio and then you pay by cheque. This is your choice under RDR. Would you then factor the cost into the performance of your portfolio?

    Where I would agree is that the percentage of funds undermanagement model is inherently unfair as different clients are charged different amounts depending on how much they invest/have invested. Does a £1m portfolio require 10 times as much work as a £100k portfolio? A flat rate fee or hourly rate is the most fair way of charging a client bank but can be a barrier to advice for individual clients, specifically less wealthy individuals, as the cost of advice could be a significant proportion of their wealth.

    As an industry we do have to become more honest with clients about how we can add value to them through the service we provide. In some cases this is going to mean saying to a client that they should not pay for an ongoing service.

  35. Well Mr Lewis, you’ve certainly achieved your objective of creating reaction by making ill-informed comments – not for the first time.

    I know we shouldn’t ‘bite’ but we do. Why? – because we all know you are so far off the mark by suggesting an adviser’s role is purely investment advice/management. Investing money is a means to an end and only part of the equation. I am a Chartered financial planner, not an investment guru/stockbroker.

    I suggest you may wish to re-evaluate the service provided by your own IFA, or re-think what they actually do for you.

  36. Oh Paul Oh Paul Oh Paul – how did you ever become a financial journalist when you haven’t the vaguest understanding of finance. How do people like you and Andy Haldane of BOE (who doesn’t understand pensions) ever get into these roles? Jobs for the boys or what?

  37. I sometimes wonder if you actually even understand what Financial advice is Paul? For starters, your adviser shouldn’t actually be “micro managing” your investment/s, given that they aren’t an asset or fund manager.

    Secondly the purpose of an adviser is to help you understand how best to achieve your goals, and to help organise and collate all of the things required for you to do so.

    Thirdly, markets fall sometimes, it’s called risk, if you don’t want any risk or to pay any “headline” fee’s or commissions for managing your money, go put them in a deposit account.

    Fourthly as you well know the FTSE all share is far from risk free and a 100% UK equity based investment would be totally unsuitable for about 99% of the population and you either know this and are being disingenuous, or you don’t know it are are incompetent, so which is it?

    If your going to write an article Paul, why not actually come up with something that could have a positive premise, rather than your usual, lets try to bash good advisers without appearing to do so angle.

    Do we ever see an expose of financial advice given by unqualified, unlicensed journalists, such as yourself, dressed up as something else? Err that would be a no.

    So please either learn what a financial adviser does, or stop writing frankly silly articles that are total and utter trash.

  38. He is a journalist and journalists write to gain reactions. I think, by George, he’s done it! He will probably buy Andy Haldane lunch now.

  39. A journalist writes a dog whistle, mis-guided article. He should only be paid based upon the satisfaction of the readers. In the case of an un-satisfactory outcome, where the reader has wasted time reading nonsense and will never get this time back, the journalist should compensate the reader in the form of a levy per word.

  40. Neil F Liversidge 8th September 2016 at 3:29 pm

    Personally I think journalists should only be paid for telling us good news. Who wants to hear bad news? Likewise the weather forecasters should only be paid if the sun shines. It’s obviously their fault if the weather’s bad. And as for the regulators, obviously they shouldn’t be paid if a firm goes pop and falls back on the FSCS because then, obviously, regulation has failed. Wouldn’t you agree Paul?

  41. As my son would say……”Don’t feed the troll”!

  42. I would like to congratulate Paul on a quite brilliant article.

    This is trolling of the financial advice community on a hitherto unimaginable scale.

    You will no doubt be getting paid by the above average comments count, rather than the quality of your article. Oh! Hang on….

  43. Doesn’t Paul work for the BBC ?

    A company living in the past where staff strike to protect their gold plated benefits, if only Paul could spend some time in the real world, he would certainly need to sharpen up his appearance to command his ridiculous fee agreement proposals!

  44. I used to really like what Paul did on Moneybox before he became a freelance journalist and started coming out with loads of rubbish like this.

    I guess when you’re freelance, it’s a bit like commission, it tends to create a bias….

    • Paul Lewis is starting to sound like a broken record and whenever he runs out of articles with real substance, he will resort to an ‘adviser bashing’ article to stir up controversy. Reckon we could all start a petition/complaint of some sort? Fed up of reading his articles, and actually makes me want to stop reading MoneyMarketing for that reason if he continues to publish here.

    • I’ve always been a freelance. For 30 years. Check first, comment later is a good rule. If boring….

  45. Why are we pandering to this idiot? Just ignore him and, like a nasty itch, he will go away. The sad thing is that, when published in the mainstream press, his disingenuous grandstanding drives people into the arms of the “expert in the pub”.

  46. I’m not a financial adviser but the real value my IFA brings me is knowledge, experience and tax advice. He saved me 22% of my portfolio value once by stopping me doing something ‘catastrophic’ on an execution only basis. He knows my family. I TRUST him.

    This XO service *might* have delivered me 0.5% pa better returns (having tracked the returns over the past few years it hasn’t) but so what – I pay my adviser fees gladly because principally I picking the right investment solution is about number 10 on the ‘list of important things’ he does. Paul is never going to get this.

  47. I am not surprised that Paul Lewis is writing this type of article. He is on a one man crusade to beat our profession to the ground. Unfortunately again his sweeping comments are without understanding of how our profession works. Things will never change the sun rises, the sun sets, Paul Lewis attacks our profession and offers poorly thought out alternatives – see Paul’s recent comparison of HSBC tracker to cash returns. Ultimately if you are running a successful practice which holds the clients best interests at the heart of your company then Paul’s writings are nothing but a pesky annoyance, a bit like a fruit fly.

    I am surprised that Money Marketing have decided to keep Paul Lewis on the books and that they are happy publishing this type of article. Maybe I got it wrong and MM is to the financial press what a rag tabloid is to intelligent journalism. Very little support for the financial planning community.

  48. Of course Paul is free to ask his adviser for a time costed fee, not one based on a percentage. What he’ll find though is that it is similar to the level accountants charge and then he can write an article about how the ‘poor’ can’t afford advice anymore – wasn’t that the point of the RDR?!

  49. It’s been on the cards for a while but I think he’s now well and truly lost it, has Mr Lewis. Send the men in white coats.

  50. Alex Irvine-Fortescue 8th September 2016 at 4:52 pm

    Paul
    Investing in equities does not and never has assured a positive investment return in every period. However investing in shares has proved to provide a better return in the long run than holding cash on deposit with a bank or building society while providing the investor with the same ready access to his capital. This has made equities an attractive investment proposition. Equity investment compliments property as an investment class. Property can be very illiquid. Your case does not make clear whether the decline in value of the investments was greater or less than the benchmark or stock index. Stock markets rise and fall. If your adviser is taking a lower fee (because the value of your investments has fallen) he may in fact be underpaying himself. Suppose the value of your investments has fallen less than the the benchmark/stock index then he has outperformed in a falling market. He would be justified in charging at least as much as had the value of your investments risen in value. You need to bear in mind that you have not signed up to a fund that will only rise in value in any market circumstances. Such funds are a myth.

  51. Paul has done his job.. he created the debate and noise he needed – he does not need to understand the detail, just where to prod.. and by reading some of the above, he achieved it.

  52. Just the usual rubbish we expect from Paul he obviously could not make a living at being an adviser, so he has decided to criticise instead.

  53. I think he’s confused advisers with fund managers. Where does he factor in the tax planning and peace of mind benefits of a good adviser? The problem that needs fixing is that advisers need to be measured on their performance outside of the increase in value of investments. If an adviser is helping someone provide an income from their investments, this could very well become more complex as time goes on and therefore more valuable. In cases where pensioners draw income directly from the pension fund, the funds are intended to be depleted at a sufficiently safe rate to ensure income keeps pace with living standards, whilst not running out. How does this fit in with the “increase in total wealth” fee model. If an adviser helps a family reduce the 40% tax bill on their estate, how should this be compensated?

    My solution to the problem is for an adviser to work on a salary basis in the same way as a gardener or bookkeeper. Nothing to do with percentages. If your gardener does certain things for an agreed fee, this should be no different to an adviser. If a purchaser of these services recognises the cost of compliance and training, they’ll see it’s not a cheap service to provide. One years FCA fees would equate to 20 or so high end lawn mowers. I don’t have a gardener. I don’t see the value in it. Whilst it is a fact that advised clients tend to make more money, not everyone needs an adviser or can see the value in one. If Mr Lewis only measures and adviser by the increase in the value of his portfolio, I’d suggest that he badly needs an adviser, specifically one that can explain the value of planning and peace of mind.

  54. Years ago I sold a client a critical illness policy. Poor client has wasted his money as he is still healthy. Maybe i should give him back the commission I earned.
    None of us place clients in investments we think won’t perform. We spend time analysing possible outcomes for assumed risk. We all want them to succeed.
    Every so often we choose one that turns out to be C**P.
    Bit like journalist’s articles really!
    However, if he is paid by the number of responses to his articles, (i.e.commission) that would be interesting, as our fury is his continuing wealth.

  55. Percentage of funds under advice is just using five words when the old one, commission, would do just fine. Mr Lewis has simply drawn attention to the facts: apparently small percentages add up to a hell of a lot over time. RDR was meant to get rid of commission. It hasn’t. His alternative may or may not be barmy, and there is of course a better way. Charge a fee. A proper one. Not a percentage of anything.

  56. Paul has defeated his own argument, he readily accepts that if markets fall 10% the adviser fund based fee falls 10%, not just for him but every other client as well. that means the adviser has suffered a total 10% pay cut, and you can guarantee that regulatory and PI costs will have increased. the amount of time and effort expended is still the same, with lesser reward, in my book that is sharing the pain.

  57. Trevor Harrington 8th September 2016 at 10:35 pm

    I have absolutely no comment on this latest offering from Paul.

    However, I offer you all an interesting piece of advice which you might care to dwell on :-

    “Never fight with pigs ….. you will get covered in Sh1t …. and they will enjoy it …”

  58. I would have thought that Mr Lewis would understand that some advisers charge performance fees. To assume that everything is percentage-based is a fallacy and, I would say, reduces this article to inflammatory nonsense.

  59. Here’s a scenario. Markets/funds/Paul’s portfolio suffer a temporary fall in value. Adviser dutifully refunds a slice of his fund-based adviser charge. A few weeks later, Paul phones adviser to discuss the outlook for recovery, why some funds have suffered worse than others, why a few have actually increased in value whilst others have fallen, whether he should make any changes, those sorts of things.

    Adviser says: Sorry Paul, you insisted that you’re prepared to pay for my services only when your portfolio has increased in value, even though I told you right from the start that there’d be occasional bad times as well as good. Must go, I’ve got work to do for my paying clients, ‘bye.

    Would you be happy with that?

  60. Everybody…can’t you see what he is up to here and you don’t think for one minute he actually reads these comments!

  61. Out of your many comments, I may be one of the few that actually supports Paul Lewis – at least in principle, but not quite the way he suggests. My argument is why should anyone pay a percentage of the fund for managing an investment? I don’t pay my solicitor a percentage, I don’t pay my accountant a percentage, I pay them a fair rate for the professional job they do that they’ve had to spend many years training for. So why not a financial adviser? If I have a pot of £500k I’m going to pay an annual fee to the adviser of £2,500. Does that seem reasonable? After the pension / investment has been set up, what is the adviser actually going to do each year? Yes, they will monitor the fund performance, move things around if performance can be improved, come and talk to me to make sure my objectives and my attitude is the same. But does that justify £2,500? No. If I am lucky enough to have £1m in my pot, does that justify £5,000? No. Maybe the adviser will reduce the rate as I have a large fund and reduce it to £3,300. Still No. I agree the adviser needs to make a living and needs to be rewarded for their expertise. So why not charge a flat fee for ongoing advice? How about a flat fee of £1,500 per year – and maybe to expand on Paul Lewis’s thinking, the same flat fee plus a percentage of the growth the adviser has managed to achieve. Sounds very fair to me – and probably Paul.

    • The only flaw in that plan Brian, is actually having the clients agree to paying a suitable fee.

      Then it reverts to the ‘my mate down the pub says’ or ‘this money website says this’..

      When clients’ individual circumstances are involved, putting a broad brush approach on charging is very simplistic in my view.

    • Many firms do in fact charge like this – don’t tar every adviser with the same brush.

  62. Hilarious really. All this guy does is write articles which deliberately antagonise the advisers on here to get a reaction and it seems to work every time. Maybe you should ignore him and not comment – he might go away!

  63. “Those comparisons just complicate things. Much better to look at absolute performance – have I got more money or less money at the year end?”
    Unfortunately, Paul, it is a complicated area – hence the need for advisers in the first place. Your over-simplified solution just doesn’t cut it. Financial advisers get paid like legal advisers, based on the advice they give not on the success of it. Sometimes it just doesn’t work out but as long as the adviser gave the advise in good faith, he or she has earned the money.
    Given your influence, it ill behoves you to propose simplistic solutions, which will only confuse the public and contribute to the unfair sensation that whenever money is lost on a ‘risk’ product, it is someone else’s fault. People who invest ultimately make the decision, and to make advisers pay because they don’t give advice with the benefit of hindsight would be unfair, would decimate the industry and would ultimately result in financially unaware people having to make huge financial decisions based on information from family and friends – not the safest way to go.

  64. Seems to me that Paul has struck a nerve. My experience of Financial advice has been costly and primarily focused on investing large (to me) sums of money with little effort in obtaining an understanding of my needs. I value good advice, and would pay accordingly but in investment advice can only dream for a quid pro quo to which Paul directs us, after all surely the market will compensate the adviser in the good year…..

  65. John Hutton-Attenborough 12th September 2016 at 8:30 am

    So Paul. You have lost £100 because the fund has gone down. But in getting you there I have saved you potentially £2,000 in tax or even £4,000 if you are a higher rate tax payer. The fund is held in a tax friendly structure saving you more money over time and when you are able to can take back 25% tax free. I will be keeping you informed about changes in legislation affecting the £10,000 in the meantime and advising you about what you should be doing to take opportunity as it arises.
    …..and you are just worried about £100! Not sure I get your logic here.

  66. You have to hand it to Paul. 72 posts and counting. Is this a record?

  67. In short, Paul, advisers are generally paid by results. If your clients are happy with the service they receive from you (whatever the most recent fund performance may have been) they stay with you, but if they are not they go elsewhere.

  68. Paul, With talents like yours you are wasted as a financial journalist. Let’s you and I go into business together. I am the founder of a financial advice practice right back to 1982 and I have served on the APFA board and the Smaller Business Practitioner Panel of the FSA/FCA until 2014. I will put up half the capital and we’ll run with your charging model as suggested in your above article. How long do you think it will be before we go bust?

  69. If only we could apply such models to Solicitors (only paying them on a successful mortgage completion), or Accountants (on the successful reclaim of tax etc). It seems that intangibles such as ensuring that people put the right plans in at the right time – advice – aren’t worth it….. There’s a difference between financial planning and being a faux fund manager.

  70. I’ve kept on reading the articles of Mr Lewis on this site and each time I’ve been hoping to get something out of reading them. However, this is yet another article published by Money Marketing that demonstrates that he is unable to add any value to the readership. I respect what he does with his radio programme, but it is clear to me that has no real understanding of what financial planners do, or what is required to manage a practice that has sustainability. This will be the last article of his that I will read in MM, which is a shame.

  71. I’m not sure why MM would want to regurgitate this tripe!!

  72. Paul Lewis should be paid on whether the readership like his articles or not. Based on the comments in relation to his latest offering, if that were the case he would be going unpaid.

  73. I would just congratulate him on his idea
    And wish him luck on his quest
    From a direct background I learnt
    To walk away fast from these type of prospective clients

  74. On re-reading all this is would appear that Paul is a little behind the times. His piece bespeaks of a transactionary model. How would his idea be achieved for those advisers who do ‘what is says on the tin’ – charge for the advice. If the advice is not taken the fee is still payable. If the advice is taken then it may take some time to discover its efficacy. If it isn’t good then presumably Paul would want the adviser to pay a refund. I hardly think this would be a viable commercial model.
    Funds under management are a different matter and here perhaps the standard fee could be reduced pro rata and drop in value. So for example a 10% drop would entail a 10% reduction in the fee which is normally charged in arrears. Perhaps then the standard fee could be increased by say half the percentage rise in the investments. So a 10% rise would merit a 5% rise in the basic fee. Would Paul consider that fair?

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