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Paul Lewis: Percentage charges are destroying client wealth

Paul Lewis

I didn’t do Latin at school (I was in the German stream), so I had to look up “ad valorem”. My online dictionary reveals it is the Latin for “rip-off”.

Estate agents love ad valorem, although they are not usually posh enough to call it that. Almost all charge a percentage of the selling price of the property. The average is 1.4 per cent, though it can be as much as 3 per cent.

Do they do four times more work to sell a £1m house as a £250,000 flat? No. Does a London agent do more than three times the work of one in Wales? No. Do London agents work 60 per cent harder today than they did five years ago? No, no, no.

They get away with it because such a large amount of money is passing through the seller’s hands that a thin sliver of it is hardly noticed. It is their tax on selling, like stamp duty is a tax on buying.

I guess half of the advisers reading this are nodding in agreement: “Hmm, yes, ad valorem is a rip-off. Never thought of it like that.” But the other half will be thinking: “Hang on a minute, isn’t that how I charge my clients?”

Indeed, the FCA found around half of regulated advisers impose this tax on the wealth of their clients. The average maximum charge is 3 per cent upfront and then 1 per cent a year.

Hitting the bottom line

A 1 per cent charge does not sound like very much but that drip, drip, drip out of the bottom of the pot is destroying clients’ wealth. Compound interest may be the eighth wonder of the world to create wealth but a percentage charge uses the same maths to destroy it.

IFA Capital Asset Management chief executive Alan Smith has produced figures that show an investor with £1m held for 30 years with a 1 per cent a year fee could be £1m worse off at the end than someone who paid an annual flat fee for the advice.

His slightly heroic assumptions are an investment return of 7.6 per cent and inflation of 2 per cent. He assumes both fees start at £10,000. The flat fee rises with inflation, while the 1 per cent fee automatically rises with the client’s wealth.

At the end of 30 years the investor with the IFA charging a flat fee will have assets of £7.7m, while the investor paying 1 per cent of their wealth will have £6.7m. Most of that £1m difference has gone to the adviser. No wonder many prefer that model.

If the assumptions are changed, the outcome is less dramatic. But the principle is the same. Imposing a tax on the wealth of your clients – even a small one – compounds over the years to a much more substantial drain on their money than charging a fee for the work you do.

Of course, at some point in your client documentation you have to say what your charge is and give this year’s fee in pounds. But full disclosure would reveal it might amount to them having £1m less in their investment fund over 30 years.

“A 1 per cent charge does not sound like very much but that drip, drip, drip out of the bottom of the pot is destroying clients’ wealth.”

Failed arguments

One reason given for using a percentage charge is that it helps those with low assets. Someone with £25,000 can afford 1 per cent of that (£250) but would be reluctant to pay £1,000, which would be 4 per cent of their total wealth.

Advisers argue there is a cross-subsidy that helps the less well-off afford advice. If so, then an adviser should be explaining that policy clearly to their £1m clients. If it does not really cost £10,000 a year to manage their wealth, they must be told they are paying over the odds so that a poorer client’s fee can be subsidised.

It is also a myth that a percentage fee somehow aligns the adviser’s interests with their clients’. If a client’s wealth falls from £1m to £900,000, they lose £100,000 – but the fee is just £1,000 less at £9,000. In fact, it can misalign interests. Buying a property to let out or paying off debt may be the best advice. But the adviser’s interest is for the client to maintain the invested assets on which the percentage fee is charged.

In the bad old days, there was an upfront commission payment and trail commission for the life of the product. That is replicated in a percentage signing-on fee and a percentage annual charge. In reality, both are a client’s wealth dripping out of the bottom of their pot while dividends and capital growth fill it from the top. Even if dividends dry up and capital growth goes into reverse, as they will from time to time, the tap at the bottom still leaks client wealth out to the adviser at much the same rate.

France is one of the few European Union countries to impose a wealth tax. It begins at 0.5 per cent on wealth over €800,000, rising to 1.5 per cent tax on assets above €10m. French taxpayers get efficient trains, excellent healthcare and nuclear weapons. What does an adviser offer for the tax they charge that could not be sold for a fixed fee?

These and other considerations led Alan Smith to move Capital Asset Management’s charges away from a tax on his clients’ wealth to a fee for the job done. I have met several advisers who have made, or want to make, the same move. I hope this movement spreads.

PS: Ad valorem does not really mean rip-off. It means by value. One thing I learned from my German lessons was: Halten sie immer ein wörterbuch zur hand.

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 105 comments at the moment, we would love to hear your opinion too.

  1. Quick question Paul. When I pay my Income Tax, why is it expressed as a percentage of my earnings. Surely I should pay the same as anyone else for the job which is done by HMRC?

    Life is about percentages, like it or not.

  2. The client has the choice to use an adviser for on-going services, or not. There are plenty of advisers offering transaction only services. The client can choose an adviser that charges less than 1%. He/she can also choose to use a fixed fee adviser, or ask an adviser for a fixed fee. The key word is *choice*.

    To put it simply, people with more capital and/or income pay more tax, so the value of financial planning is potentially greater.

    You could use your role to help individuals understand that they do have a *choice*. We actually need to encourage people into financial planning to help with competition and cost, not put them off. Surely greater adviser choice will lead to better competition between advisers and lower cost for clients?

    Perhaps your efforts would be better served concentrating on something other than adviser bashing.

  3. Paul, I often find myself agreeing with a message that you are trying to get across but reading through I disagree on most of your arguments. I take your point re an ongoing adviser charge eating away at an investment but i simply cannot agree with your point re the value dropping. In your example you have pointed out that if an investment drops from £1,000,000 to £900,000 then the client has lost £100,000 and the adviser only £1,000. You are, however, comparing pounds and shillings figure to that of a percentage. If you were to say that both the adviser and client had lost 10% i don’t think it would have the same shock and awe impact you are going for.

    • Also, the client’s investment will probably recover meaning no loss at all, whereas the adviser actually suffers a loss to his income that year, exactly as it should be. I’ll bet a pound Paul gets commissions through his site, paid as a percentage. So, bah, humbug.

    • All I have to say is this, speaking from the “high risk” area of FCA regulated activities that is debt management and debt adjusting. At the outset of the authorisation process it was made quite clear to firms that fees should reflect work done and/pr value achieved and that they were particularly concerned about customers who made large contributions and who were charged ad valorem fees as clearly the amount of work done was similar to clients making lower contributions.

  4. The sentiment is well delivered and is correct. Percentage based charging is inherently unfair. We are currently in the process of moving to fixed fees for everything, including ongoing, with 3 different “monthly cost” amounts expressed in £££’s so that the client can choose which level of service they require and know exactly what they will get for that and the fixed cost of it, be that £100, £225 or £500 per month.

    The interesting part about the article however is that it doesn’t address some key problems – how does someone with £25,000 pay for their advice on an ongoing basis? £100 per month for them may be unaffordable and if they still elect for it to be taken from their contract would represent 4.8% per annum – completely improper and would wipe out their growth entirely a lot of the time. Couldn’t do that. So, how do the people with £25,000 (or for that matter £50,000 or £75,000) pay for the ongoing service they receive? Or is £100 per month as an ongoing fee too much? Hardly.

    On the flip side, I have a client with £1.7m invested. My previous charging structure of 0.75% for her would have brought in £12,750 per annum in ongoing fees. There is no way at all I would have been able to show that amount of work done every year for that client and it’s entirely possible I would have had to do some fee refunding if the regulator had looked into it. In the future, she will pay £500 per month, but still funded by the contract if she chooses that method, but it will be equivalent to 0.35% in the first year and less in future years if the funds continue to increase. But it’s clear, it’s transparent, and she will receive exactly the same service as someone else with only £1m invested by also paying £500 per month.

    The problem with the article is that it is black and white. Percentage based charging is bad, charge fixed fees. But when the client can’t afford to pay those fees do they forego advice, to everyone’s detriment?

    I have no good answer. Neither, sadly, does anyone else by the looks of things!

    • I don’t think this charging model to be unfair necessarily. The IFA practice will have the same level of costs and the same expectation of profit regardless of which model is used. The income generated will need to be the same and it is the client bank which is paying for it. Operating a contingency fee model does not pretend that the fee represents the amount of time spent; why should it? It is a means of charging with equivalence to all clients. A fee for a piece of work may be 3%. If considered on a sum of £50000 or £100000 you could argue that the client of the latter is paying more in ££££;equally true is that they are paying exactly the same in % terms and that the drag on the investment performance (investment performance is what it is all about by the way) is exactly the same. Charging fixed fees purely based on time costing would mean that there would be a substantially higher drag on the investment return to the point of the advice being questionable in economic terms; I think that would be unfair. It is not just some estate agents who operate on such a model, some work for Accountants, Solicitors and other professions are the same. I suspect also that the fee a freelance journalist can charge for an article is not tightly bound to the time they have spent constructing it.
      The game is about opinions.

    • Rob have you ever though of agreeing with that client an hourly rate for example if he has portfolio of £25,000 surely that would not take longer than an hour to review at cost of say £250.00 for the service that £20 per month. Depending on circumstance you could always agree with him to see once every two years
      I can always recall a conversation I had with our compliance officer at the time of introduction of regulation (in the 80’s) I stated the one thing missing from the rules is the requirement to have time ledger similar to other professions If that was imposed advice could be measured It would show the value and transparency of advice to the client thus increasing trust In addition more it could have been used to measure the effectiveness of regulation by having a monetary value placed upon it That way we could have more robust debate with the regulator He agreed but said it would never happen
      It not too late for adviser to start using time ledgers and could have a big impact on advice process It might even demonstrate to Paul that an ad valorem fee in some circumstances is the right payment method for the client It could also enable us to put much better case to the regulator
      I did study Latin an Ad valorem fee is a method for charging a duty, fee, or tax according to the value of goods ( in our case advice) Paul if the client quite happy paying the fee in the knowledge it is fixed payment limit on it and the adviser can demonstrate the value he is giving the client via the time sheet What is the problem of such a payment method
      While I know Alan very well he may have used the time sheets in his practice Look at the data and concluded he could work on a flat fee.

    • Rob,
      But let’s look at the liability issue that Paul Lewis seems a bit blind to. (Journalists are not held liable for their work after all).Lets say your back office team makes a finger error on a trade for your £1.7m client. In making good the clients position you will be dealing in pounds. However your error will cost you VASTLY more than if it had happened with the £25k client. So as valorem charging brings revenue into line with liability. how do your flat fees resolve this issue?

    • FCA research indicates that half of advisers DO have an answer – they charge per hour or fixed fees not percentages.

    • Living the Dream Dream ..... 10th February 2017 at 10:39 am

      Rob ….. your ‘fee’ structure is more than fair in the minefield of picking a modern day adviser. Charging a £1m client 1% per annum is not good (disgraceful for those who have the gaul to charge more than this) for long term business retention. Based on working 52 weeks on that clients investments they are being charged nearly £200 every week of the year ……. I dont believe they are receiving this kind of attention and I feel you and your firm agree. Charging your £1m plus clients aporoximately £115 a week is fair and equitable and I sincerely hope your clients who you have recommended move to your new structure reward you with more quality high quality clients.
      Lets hope more advisers follow your business model ……… but alas I wont hold my breath on thst one as most feel that they have attained a new examination certificate and are worthy of charging a ransom still, just like the pre RDR days eh!
      All the best for 2017.

  5. Paul, I have to challenge you on your use of English despite your having “a dictionary at hand”: Surely you can have an average charge or a maximum charge. How do you have “an average maximum charge”? Seems like a contradiction in terms to me!

    • That is the term from the FCA research. It collected the max and min charge from each firm so ended up with an average maximum charge and average minimum charge.

  6. For once I agree with Paul. Whilst we are on the subject of Latin my old A Level Maths teacher used the phrase “ceteris paribus” a lot in class. It means all other things being equal.

    Given this, how can anyone justify a fee that given the work required for a particular job eg DB to DC transfer should be proportionate to the transfer value. Charging someone who has a £1m transfer value twice as much as someone who has £500k is wrong. That is the problem with a lot of advisers post RDR, they still can’t wean themselves off taking charges from their clients products in the form of remuneration.

    • Living the Dream Dream ..... 10th February 2017 at 10:45 am

      Sanjay …. my thoughts entirely …… nothing has changed with 90% of adviser firms out there .. you I hope are in the 10% that has.
      Good luck and much success in 2017.

    • Surely most of the advisers in your scenario would apply a modicum (bit more latin) of common sense on a £1M transfer value and perhaps not take the full 3% initial or 1% adviser charge? However the fees taken surely should also reflect the additional risk that a £1M piece of business brings to a business versus a £100k transfer value?

  7. So why does a % adviser charge ‘destroy’ wealth more than a % manager charge or a % tax charge and as for more work being involved, we find that wealthier people generally have more time spent on them. This is because of the complexities of both their internal issues but also because of the complexities of the tax and pension codes operative in the UK.

    So where a % or fixed fee is being charged, it will erode returns if taken in isolation (i.e. Ignoring work done) but when did one get a free shop at Waitrose etc?

    As for dictionaries Paul, you need to get a different version which is more accurate.

  8. Paul very interesting.

    Whilst on this subject could you sort out the following

    I watch the BBC about 5 mins every day, if that. Why do I pay the same licence fee as someone who watches BBC for hours?

    When I treated myself to a business class flight why did I end up paying 3 times the cost of economy yet I went the same distance?

    • These are both your choice – if you don’t like the value on offer then don’t buy it. Paul is just pointing out the poor value of %age fees, I believe. Similarly, don’t invest there if you don’t think it’s value for money.

  9. Sorry Paul but whilst it may be right in some instances, you are demonstrating the fool’s paradigm of one who ‘knows the price of everything but the value of nothing’. It is not dissimilar to the ‘passive’ aficionados who become lost in their own piety. Add to that – in investment management terms anyway – the fact that liability has to be considered in the costs – and effectively that is the ‘insurance’ a client must pay for the privilege of prospective complaint, vulnerability or whatever against the advisory firm. The bigger the pot, the bigger the liability and regulatory responsibility. Of course at the end of the day, what true value is the adviser/manager or whatever delivering to the client?

  10. Simple answer – have a tiered % charging structure with higher values getting a size discount……

    • Couldn’t agree more. There is higher risk from advising on/managing larger assets and that risk needs to be compensated, therefore a tiered % charging structure is a very good middle ground.

  11. ‘Ad valorum’ charging is appropriate as the regulatory risk grows in proportion to the assets. In an unregulated market flat fees might work, in a regulated market percentage fees are necessary.
    Anyone who says otherwise is incorrectly pricing the risk inside their business.
    I assure you clients want ‘ad valorum’ compensation if there is a claim.

  12. My accountant didnt seem to mind charging me a flat fee of £3k to sort out a 100k turnover company with a £1500 CT bill.

    1% would have been lovely.

  13. What about when my local council increase my already very large council tax bill each year? It is always increased by a percentage and as I pay more than a terraced house in the same area I have a higher increase. Do I receive any more services than they do? No I don’t, but it decreases my wealth. Why don’t you explain how unfair that is Paul?

    By your argument all savers should receive a flat rate of interest regardless of how much they invest. Credit Cards? Fund Managers? Estate Agents? IPT, IHT, CGT, VAT and many other things that are based on percentages.

  14. Why do we keep arguing or discussing how we get paid? Its up to the client to decide how much our advice is worth to him or her. As Rob discussed above, someone with £25k might have a problem finding an adviser. I would charge £250 for the advice and transaction assuming it was simple. My 0.5% would give me £125 a year to phone the client and make sure everything was OK. That’s my business model and would be agreed with the client at the start. Other firms might need to charge more and/or offer a more extensive service proposition. That is their prerogative.
    My PI insurers would view this case as very low risk and their exposure as nearly non-existent. Compare that to a £1M investment and the reason I might charge more is because I need to consider many other matters, not least of which is my PI costs! I might tell the client my initial fee is £5k but this is no more fixed than saying 0.5%. Ongoing fees would be agreed with the client but might still be expressed as a flat fee or percentage. If the client believes these are too high they can ask me to reconsider the ongoing charges or go elsewhere.
    Paul just cannot see that the client controls the cost however we choose to express it.

  15. An even fairer way of charging is as a percentage of value-added. If you increase my fund by 10% you can have 10% of that (ie 1%) but if you increase it by 20% you can have 2%. If you don’t do your job properly and cause me a loss then you pay me.

    • As I suggested a few months ago here in Money Marketing and got even more abuse than this month! But thanks for your support at least for the idea.

      • Surely even, Paul Lewis, would accept that underlying investment performance is out of the control of even the most competent adviser. Would you like a period of global uncertainty (just think 2008/09) to put every adviser out of business? Where would you go for advice after that and who would you write about?

  16. Biggest pile of rubbish I’ve read in a while and again it’s from Paul Lewis, who consistently bashes and trolls the financial adviser community for a bit of media attention. This is reflected in you calling “Adviser charges” for PROFESSIONAL SERVICES rendered a “tax” – you clearly love being extreme, very much like a Trump or Farage of journalists.

    You forgot to mention that percentage based charging are a great reflection of RISK involved to the business and to some extent, the complexity and amount of work required. Clearly a £1m case is riskier and MORE costly (compensation wise) if FOS finds against the advice given than a £10,000 case, and so our PI insurers charge us higher premiums with higher AUMs (and riskier cases) and FSCS fees charge us on our TURNOVER. A percentage charging automatically builds the risk of these into our fees.

    Percentage based charging is certainty not the issue here – solicitors, accountants etc. they all have a similar way of pricing. If you “ban” percentage charging, the likely alternative would be charging “banded” fees based on amounts investment – e.g. between £0 – £100,000 initial/ongoing charge of £2,000 and between £100,000 – £250,000 charge is £1,000 etc. Very much like how some accountants price their jobs, and conveyancers price theirs? But this is also similar to % charging.. so you go round full circle all because you dislike or don’t understand percentages?

    Any ethical business will have a “decency limit” imposed on % charged so the monetary values are not excessively high. So this discredits your example of a £1m investor with “starting fees of £10,000”, so most likely the % charging would be capped. You ought to compare the same percentage fee vs fixed fee for a lower value client as not many have £1m to invest – say 1% ongoing fee on £500,000 is £5,000, but this is much cheaper than the £10,000 fixed fee you stated earlier so clients will be saving £5k pa!! Amazing how the world works if you take a different perspective and broaden the grass-filled mind of yours, Paul.

  17. You can turn anything into a percentage, flat fees included. It’s just a different way of expressing a cost. It is between the adviser & the client what is agreed & how much it will cost.

    Perhaps an accurate headline would be “fees charged to investments affects the value of client’s holdings”, but this wouldn’t be as controversial, would it?

    I am sick to death of Mr. Lewis’s continuing sniping at the adviser community – if it was a balanced view I wouldn’t mind, but he has rarely been balanced. Always looking for a way to deride what we do, & normally in a deliberately sarcastic & confrontational manner. Unfortunately he has the ears of a lot of people via his radio show, who take heed of his “advice” whether it is appropriate for them or not. About time he started putting that benefit to use & actually helped raise the benefits of seeking good, proper financial advice from REGULATED advisers, but I won’t be holding my breath.

  18. Paul you are right, because everyone receives a fixed compensation figure in the event of an upheld compliant. Lenderink-woods.

  19. Fixed fee would mean clients with a smaller investment value effectively subsidising those with greater value investments (albeit in bands). I thought the FCA didn’t like this?

    We have a tiered structure, so as the wealth increases the ongoing service additional percentage decreases. It is as fair as we can make it. We also charge on time spent for advice and implementation, so £100k or £1M you only pay for what we do.

    Perhaps Paul could provide us with the algorithm that treats all clients exactly the same.

    I won’t hold my breath.

  20. I agree with the general sentiment, but you do overlook one important benefit of using %-based charges, cross-subsidisation.

    The effort involved in managing a £10k investment isn’t much different from £100k, but are you saying that all customers should pay exactly the same fixed amount?

    A % fee model can mean that wealthier clients help to pay for the less affluent, and in my book, that’s a good thing. What that percentage should be is a different matter…

    • As I say in the article (under the neading ‘failed argumants) if you do cross-subsidise in this way then you clearly must explain that to the over-charged millionaire. I presume you do so.

      • And I presume you are informing MM that they can reduce the amount they pay you for some articles when you sell them to other publications? Or is it OK for you to cross subsidize your income?

  21. Interesting article, however you have used a compound interest rate of 8% per annum. The case looks even more convincing if you use a higher rate.

    Why not just say that adviser charges destroy clients returns due to the fact that a 0% charge would make your clients portfolio look even better? why not just assume no charges and leave the cash in the bank? oh, that would be because there would be no gain!

    If you don’t like looking at percentages, why do clients look at what percentage returns they have had?

    In your scenario, I would assume that the adviser charging his £10,000 flat fee would increase his fee over time to keep up with inflation? a £10,000 fee today needs to be considerably more in 30 years time.

    All of this is hypothetical, as no one ever gets exactly 8% per annum every year. You need to take in to account the sequence of returns. If your client was to lose 20% in the first few years then make the money back then he would be better off paying the percentage.

  22. There has always been a conflict of Relative vs Absolute amounts, especially when talking about fairness. Taxation is another example – why should there be higher rate tax bands when a single rate of tax would be ‘fair’ to all tax payers – after a personal allowance deduction, person A earning twice as much as person B would pay twice as much tax (answer: because the single rate needed to generate the same overall tax income would start riots)

    For advice charges, percentage (Relative) charges on the amount involved surely have to be included somewhere – your PI insurance is based around that figure for example. But it seems to me that to be ‘fair’, that needs to be a much smaller percentage and the rest made up of a combination of fixed-fees (maybe a monthly retainer as derived by Rob above, maybe zero) and charges based on the actual work done (by hourly rate, maybe adjusted based on the fixed-fees).

    Getting the right combinations of Absolutes and Relatives and being able to describe it clearly is the problem. In fact calculating percentages of a pension pot is the easy part – hourly rates are more complicated – an hour of an Advisers time will cost more than an hour of a Paraplanner or Administrators time, so trying to produce a clear, simple easy-to-understand scheme of charges for a website conflicts somewhat with a justifiable and ‘fair’ breakdown of actual charges for a particular job. No wonder most Advisers stick with using a percentage of funds!
    (I am not an Adviser BTW)

  23. My wife is a partner in central London firm of solicitors. When a very large estate comes in they automatically add a “value charge”- typically 1.5% in addition to their rather high time charges. Reason the potential liability is much greater than small estates.
    Same with Ifa. You may be down for compensation completely disproportionate to the amounts charged for the work on the Lewis/smith model.
    Lewis argument is facile. If it were not I would pitch a tent in a park and give advice for say a couple of hundred pounds regardless of risk and liability
    Moreover my PI insurers base premium on risk and that is assessed by quantum.
    Guys. Lewis argument is so obvious, easy and plain wrong. Hey have a go at architects- they invariably charge 10% of the spend. Don’t you agree.

    • I agree. Lots of other firms do it hence my mention of estate agents at the beginning of the piece. When I get a column in Architects Today I will write something similar!

  24. Evidently Paul doesn’t use a stockbroker. Charges arte usually between 1.5% and 2% in AND out. Oddly the Government itself charges by percentage (tax) and that destroys more wealth than anything else!

  25. I think we all disclose the initial and ongoing fees which we charge before advice is given or a transaction is completed. It is then up to the customer to agree to paying this charge. Was that not one of the points of the RDR?

    Then, if agreed to by the client, at ongoing reviews we go through this disclosure again. Again, this is subject to client agreement.

    What does Paul propose to amend this system for the better? A compulsion to levy a fixed fee? A ceiling on such fees? A mandatory level of service to justify such fees? Projections of fees into the future with fanciful inflation and growth percentages?

    Does he think our clients are so stupid that they can’t decide on these payments themselves? Is the client’s personal assessment of the value of our services not sufficient?

    Paul should not stop with us. There is no field of human endeavour that he could not judge from afar and no doubt better than the paying customer.

  26. And precisely how are a lot of the inputs to an advice business charged? PI insurance, FSCS contribution, FCA fees are all ad valorem. So is VAT (where applicable).

    An increasing percentage of all charges for services is not for work “done”, its essentially for work perceived to be “not done”

    Silly Paul. Missed that one.

    I suppose Paul thinks electicity charges and credit card interest rates are all just sky high rip offs and not expensive because of the high cost of subsiding those who don’t ever pay (and default). No, surely I haven’t heard such lame claims on the radio before.

  27. In setting our charges as a percentage of ‘funds under management’, Paul is arguing that this is unfair on the wealthier, as in broad terms we might spend no more time servicing the needs of the millionaire versus the household with £50k invested. However, the other consideration in setting our charges is about the value we add to the client’s wealth if fund values rise. By charging percentages, we are motivated to do a better job for our clients, as we are incentivised to increase their wealth. We are hopefully remunerated on the basis of the amount of work we do for the client AND the extent to which we increase their wealth in the good times and minimise their losses in the bad times. In other words, we give VALUE FOR MONEY, Paul.

  28. Paul is clever.
    Paul charges flat fees on £50k portfolios the same as £5m portfolios.
    Paul makes a simple mistake (it happens) on the £5m portfolio that costs the client £10k
    Paul is now out of business because instead of rebating ~6 months fees (and apologising), Paul is now bankrupt.
    Dont be like Paul

  29. Paul Lewis you are a liar.
    ad valorem is a method for charging a duty, fee, or tax according to the value of goods and services, instead of by a fixed rate, or by weight or quantity. Latin for according to the value.
    How do you charge for the garbage you spew out.
    I wonder what your qualifications are, mmmm

  30. Andrew Cartlidge 9th February 2017 at 4:32 pm

    Ad valorem charges ensure that a fee charged for investment management is in proportion to the sums invested and managed. Is this not positive – that smaller investors pay less? This is far more attractive to all clients than large invoices periodically, with 20% VAT added for good measure. Paul Lewis’s assertion that most clients are charged 3% of the sums they invest are nonsense – most firms would apply that rate only to smaller investments. When examining what is charged – one also has to consider what is being provided and without knowing that, Mr Lewis is no position to generalise and criticise. There is usually far more effort and resource involved in managing and administering larger portfolios – and may firms provide tax mitigation, income strategies and other consultancy within their investment management charges. Any management consultant will advise professional firms in any sphere to charge hourly rates if they can – and for all categories of staff – because that is the most robust financial model. Turnover can be budgeted, billing targets issued and ‘chargeable hours’ allotted to clients in order to suit. A larger transaction will result in more being billed – because a price will have been attached to it, irrespective of the hours actually spent. (In one infamous case a Judge found that a team of four had managed to bill a century of chargeable of hours on one matter!!). Is Mr Lewis suggesting that more of us should move to a system of hourly rates? The beneficiaries would not be our clients. In principle all clients would accumulate more if they paid nothing for advice or management. Independent survey evidence – including that produced by the FCA – proves the opposite, that those whose finances are professionally managed end up better off.

  31. Sick to death of Paul Lewis:
    1) slating a profession that he has no experience of carrying out.
    2) tarring all financial planners/wealth managers with the same soiled brush.
    3) commenting on how to run a business when has no understanding of the costs to keep the lights on for a regulated business; I’d imagine our business costs are higher than a freelance journalist on the take from MAS, the BEEB and Money Marketing.

    On a separate point our practice operates on a fixed fee basis with a competitive ongoing cost for wealth management – that’s what works for us. However I would never be so crude to count another financial planner’s money or dictate what is the wrong or right way of charging for the services delivered.

  32. Paul needs a new dictionary!

  33. Click bait, the Katie Hopkins of Money Marketing. Ignore him & he might go away.

  34. Waste of ink and if Money Marketing continue to use people like this ‘numpty’ that just want to make sound bite headlines, I personally will read a different online information site.
    Incidentally, my ongoing advice fees are tiered.
    If I charge a fixed fee in ‘cash’ the Client will have paid tax first so every £1, 000 will cost the Client £§,250 £1,666, or £1,818!

  35. Not sure my Drawdown clients with would agree with you Paul. Having their fixed fees increase every year with inflation, when their assets are staying the same or reducing wouldn’t go down very well.

    Provided charges are fully disclosed (% and £), clients have a choice. It’s up to the adviser practice how it frames its charging model and if the client doesn’t like a particular model, or doesn’t feel it is good value, they will find another one.

    Apart from the obvious higher regulatory risk, clients with larger funds nearly always take up more time and effort that those with smaller funds and less complicated need, in my experience.

  36. For all the interesting posts on here I feel Simon West has the correct answer! I would also add that fixed fees would deter the ‘little fella’ unless derisory in amount while providing something of a bargain for the HNW client. No, ‘ad valorem’ is about adding value and as long as you deliver
    percentage based charging is appropriate as, I feel, the FCA survey result shows. Why? Because that’s how the majority have structured their business proposition. Surely they can’t be all wrong?

  37. “France is one of the few European Union countries to impose a wealth tax. It begins at 0.5 per cent on wealth over €800,000, rising to 1.5 per cent tax on assets above €10m. French taxpayers get efficient trains, excellent healthcare and nuclear weapons.”

    I can only assume that Paul clearly hasn’t been to France recently!!! My experience of their transport systems is most definitely a negative one. And it is their wealth tax that makes France’s super rich move to London and other cities around the world, taking their wealth with them.

    France’s state functions are paid for by one of the highest levels of personal income taxation in the developed world. Mostly it’s the average guy paying for it through his earnings, not the super rich paying a wealth tax!

    The rest makes sense, but is cyber-advice really going to give clients with modest assets a decent service when compared to a service that was previously more personal?

  38. Some months ago Paul Lewis was telling advisers they should be paid by results, now he’s telling them they shouldn’t be paid via a % of the clients investments.
    It boils down to Paul Lewis is paid to write articles, many of which hammer advisers because he doesn’t really value or like what we do.
    Many of the above comments show how many charges are paid via a %.

    Paul Lewis has a ‘bee in his bonnet’ over adviser charges, and really would like to dictate how we are paid. But he doesn’t work for the FCA, isn’t elected as an MP and really needs to move on, as there is not a case to answer here.

  39. Nice bit of free PR for Capital Asset Management. Their website article criticises wealth managers for charging percentage fees, which I believe that they used to charge themselves before switching to fixed. It’s a marketing ploy. I’ve no problem with that but my own clients like paying % fees – they know that the more their money grows the more we get paid (and they get to keep the vast majority of that growth) but the reverse is also true. My own investments are made into exactly the same funds as my clients’ and they like this overall ‘skin-in-the-game approach’. At the end of the day the way we charge is academic – it’s all about the value we add. If we don’t add enough the clients are free to walk away at any time.

  40. While on the subject of payment for work done, I seem to recall you bringing all of this up in another article recently. I hope that you haven’t taken payment for this article as well as the last one?

  41. Marcus Henderson 9th February 2017 at 5:42 pm

    Paul must love this, what a prickly thin-skinned bunch we are!
    I think the comments in the article, and similar that have gone before, are not anti-IFA but very much focussed on the method of charging. The fact we are where we are suggests it isn’t a straightforward argument. There are undoubtedly truisms in my fellow IFAs comments relating to risk and value but I find it strange that the alternative is seen as more attractive. To my mind the best financial outcomes derive from a deep and thorough understanding of a persons circumstances, knowledge and experience, and goals and objectives. In the world of ad valorum I’m happy to spend as long as it takes to ensure the best possible outcome, provided only that my business allows me to meet my commitments to my family and HMRC. Fixed fees and hourly rates don’t build relationships and understanding; rather, they risk a dumbing down of advice, and missed opportunities as client’s interact less to save money. I’ve spent much of today looking at the feasibility of a client running a mortgage well into their retirement (I don’t advise on the end product), researching commutation and deferment options on an armed forces pension, and researching the tax treatment of an Australian Super potentially being repatriated to the UK. Strangely none of the clients who I’ve helped today have ever questioned the value of my services.
    Turning to the article itself, I think it would be fairer to draw comparison between fixed fees and some combination of time-costed work, and tiered ad valorum charges, which would be more typical of an average IFA today, but that wouldn’t be nearly so much fun!
    Education (which this isn’t), regulation, competition, and technology should together be allowed to encourage refinements in the way we charge, with an end goal of ensuring as many people as possible have access to the highest standard of advice; the ultimate test of value being whether they, with full understanding of the charges, choose to be advised.

  42. An article that hits a nerve I guess with all of us. I doubt Industry will ever find a definitive answer as to the best way to give value to the client with adequate recovery of costs + margin for the work undertaken for the adviser and business they represent. Just remember Paul the consumer has choice as to the perceived value that they are receiving or received from the adviser. Tell me do you explore what the “mark up” is on buying all of your consumables? Guess you shop around and just sometimes it is not about price that comes into the ultimate decision to buy but other factors such as trusting the brand, quality of the service, ease of access to the product.

  43. Whether commission is good or bad hardly matters. But RDR was supposed to bury commission, which not only lives but thrives.

    I argued for years that charges were a matter to be determined between client and adviser, but that all charges should be expressed and disclosed in cash. Nothing has convinced me that I was wrong. Nor am I persuaded that 1% of a million smackers is justified by the greater adviser risk. If the job is done professionally, where, pray, is the risk? After all, if the markets tank, there is no recourse to the adviser, unless he or she has given outlandish advice.

    Paul Lewis points to a simple truth, but if the millionaire is happy to cough up £10k per annum on top of all the provider charges, so be it.

  44. So I guess you will be lobbying the Government due to VAT being percentage based and therefore inherently unfair?

  45. Holey percentage charges, Batman ! Mr Lewis has been in the industry a long time and has only just noticed ” percentage Charges ” remove a lot of investment growth from your fund ( or portfolio ) ? Perhaps this is why insurance companies investment houses and financial advisers, now mainly restricted, could be better known as “The Riddler “. These Jokers have been exploiting their consumers for decades and or centuries form the fat cats and without profits – to with profits to unit linked products ( which started to show how much was being taken – by malicious, foul play, and deception ). The introduction of the LAUTRO Commissions Rates – and subsequent ” Commissions Cap”, – largely ignored. The scottish widow life assurance company for widows and orphans, a Mutual Company – paying up to 180% of LAUTRO commission rates, along with “pensionbuilder” range a unitised with profits to cover up charges, and the insolvency of SWRBS employer Scheme – along with the many one Trust PEnsion Schemes held by the sloppy widows ( out of date out of touch but still sold by the company agents and employees). It would appear Mr Lewis has just picked up on these charges e.g. 3 &% up front ( between 3% and 6/8% at standard life – to attract their newly created restricted firms based on their commissions traders – instead of being paid for work carried out). A further annual fee of between 0.5% to 1% ( as the norm ) – up to 4% per annum “deducted form the clients portfolio – because many clients do not check how much they are paying. The cost of these charges should be placed in the Key Features document showing the effect of Compound Interest ( on charges ) and as deductions form the Client portfolio. Like Rail Tickets and charges, Utilitiy Bills etc., – people are being ripped off ( in my opinion legally) by a Reckless and Incompetent Government. And the FCA is where exactly ? Next big Government scam is Royal Mail Pension Scheme – wrecked redundant and reputation is tarnished – like the Governments Pensions schemes and COMPULSORY PENSIONS ( a bit like State NI State Pension Scheme the Great BIG UK Pension Ponzi Scheme – organised by successive Governments. Holy Feckless Politicians Batman ! These Jokers claim to be ” Running our Country “. With the lack of business for Americans in the Far East no wonder the banks and American investment houses have invaded England Wells Fargo and other “cowboy” bankers – Fidelity run by standard life – Metro Bank and Blackrock Invesmtent ( major shareholders in the likes of Barclays Bonk! ). Holey Moley ! Batman ! – Given the American Intervention and Intrusion policy – How safe is our investments ?

  46. “The average maximum charge is…”

    Nice work Paul.

  47. The bottom line of this argument is that people don’t work without being paid. Not even Paul Lewis. The next question is how should financial advisers be paid for the work that they do. Should they charge a percentage of assets under management or should they charge an hourly rate? I agree that the percentage charge can be a blunt instrument as it doesn’t necessarily reflect the work involved. Then again an hourly charge could be a blunt instrument because the number of hours taken to do the work, could be disproportionate in relation to what the client is willing to pay. The next question from Paul Lewis would be how do you work out the hourly rate and does it actually take that much time to do the work.

    There is no right or wrong answer to this question. It is a free market and clients are free to deal with those people they feel are offering the best deal.

  48. @Ian Lees – Do the research and see how people who have taken regular retirment planning advice, fare against those that haven’t. There used to be 223,000 adviser and now there are only 23,000.

  49. Adviser in the North 10th February 2017 at 8:35 am

    It is not percentage charges per se that is wrong here it’s charging a flat % and not having a tiered system that reduces as the size of the portfolio increases. Oh and 1% is too high.

  50. Paul, whilst you are correct, the system will never change until the fees and charges that an IFA are charged in terms of Professional Indemnity Fees, FCA fees, FSCS fees are flat rated instead of percentages which they are at the moment. Furthermore does it cost a fund manager anymore of his time to look after a £1M or £2M of assets yet they charge a percentage.

  51. Who cares about the bones of the article……..the only thing people will read is the headline

    Thanks Paul you wield your pen like a 8 year old who just un wrapped his light sabre with very little care who or what might be damaged in the process.

    You may say you do this to be objective and tell the truth, or you may just what to promote/secure your own future by topping the comment count !

    Either way, I live in hope and believe Karma, will, one day make you lick the spoon you use to stir the …………

  52. Comparing your charges to taxation is a false equivalency and a poor argument. Taxation seeks to raise revenue based on what people can afford NOT what they get in return for the tax. If that’s how you see your business (i.e. those with more to invest should pay me more because they can afford it) then you are in a bad place.

    The other argument of (pricing liability) is also weak – Try telling a client that you are going to charge them more in case you make a mistake and they make a claim. Wave as they walk away.

    Percentage charging is a hangover from commission and needs to be eradicated from this industry in order for it to progress.

  53. Nice DH. Paul do me a favour and try something else like tackle the travel industry around increasing costs around school holidays. If you put a bit more effort in on more meaningful subjects that potentially effect far more people in this country than the issues raised here I for one would be very grateful.

  54. I know that, but the question remains valid!

    Why do I pay more (or less) on a % basis for my share of any ‘services’? Because it is deemed the fairest way.. not by me but by our peers, the difference is that we have little choice, but clients can walk away or even turn the earnings/service tap off if they wish to.

  55. Nos non morituri non te salutamus

  56. I do not really care what Paul Lewis thinks I should charge my clients. That is something that I discuss with them and then agree on an appropriate charging structure to cover the work I undertake for them.

    My clients understand that I have to make a living and have certain overheads that need covering so that I remain in business. This allows me to continue advising them into the future and to help them get the best out of their money and to live a lifestyle that they wish to.

    I believe in being as fair as I can when agreeing to a charging structure, which can mean I provide extra hours of my time at no additional cost, and also being contactable within a reasonable period of time.

    My clients strangely seem to like what we do or they would tell me, or walk away. I get some new clients and lose some based on my charging structure but that is life.

    Finally when I buy or sell a house I can agree a % fee or a fixed fee, just like I agree wih my clients so I see no reason to a change waht I do to suit others.

    If it works for me and my cliente then great.

  57. Ultimately, let’s remember this is an opinion piece. Advisers and clients don’t have to agree. Paul makes some good points worth debating but why all the vitriol and lambasting? Shrug your shoulders and take the ad valorem fee.

    In practice it’s a market and that will decide how much and what is charged. At present the FCA, through RDR, have created a market hugely in favour of the supply side so it can charge pretty much what it wants. Banning commission has probably increased charges which is somewhat ironic but it’s what happens when you try to legislate for a utopian ideal.

    Paul can exhort as much as he likes about his preferred method but if it’s not available you can’t have it. At least not in the current market.

  58. Oh Paul

    When was the last time you received any medical treatment in French. Yes it is streets better than our lamentable NHS, but it is NOT entirely free. You have to pay (admittedly not a lot) see see a GP and there are other charges as you go along. Contrary to what someone else has posted their transport is also streets ahead of ours and far cheaper too, but you really can’t claim that it is as a result of their wealth tax – that is a journalistic leap too far. Their taxes both income and social are a lot higher than ours and I can assure you that there are a whole host of ways that the wealth tax can be ameliorated – please take the word of one who has relatives in Paris and who have lived there all their lives.

  59. Oops in France (as well as in French!)

  60. The FCA want the market to decide and are likely to introduce the requirement for clients to sign a fee agreement each year quoting the amount in pounds and pence that the advice will cost them for the next year – that may focus the minds of advisers charging 1 percent year and doing nothing other than send a newsletter and offer a review.

  61. Interesting points Paul and I know you are generally supportive of Financial Advisers. It would interesting to know if you believe fund managers and Insurance companies should charge a flat fee or a percentage rate!!! Also is time spent a better measure than value added when calculating fees.

  62. It is nice to see Paul Lewis popping up in reply to some comments but why is it only to correct a quotation or refer back to the article and never in response to a legitimate challenge of his views?

    Paul……………………??????

  63. To charge percentages or not that is the question. As for value and choice surely that is the most important. Take this ‘real life’ example. I manage £1m for a client that also has the same value with another adviser. I charge on a percentage basis and they charge a fixed fee. We returned 16.2% last year and they returned 9%. We have outperformed the other adviser by 16% over 3 years and 24% over 5. Needless to say the client pays us about 0.5% more p.a. and is now moving his other portfolio to us. He knows we cannot promise this kind of return every year but the figures speak for themselves. We have cost him 2% more (not comments about compounding please) over the term but made significantly more for said client.

    We are more profitable as a firm and as a result have a very robust and strong research department, one of the best around according to us. Our service levels are on a par (in our opinion better) with our competitors and this example is not an isolated instance.

    The client chose to split his funds in the first instance because of our fees and being the sensible firm we are we discounted them to be more attractive (so your article is valid to a point), however, he has been happy with both advisers but ultimately money talks. We are not all created equal and that goes for our services. Imagine if clients could sue for under performance on that scale… the fixed fee advisers would last about 5 minutes.

    Articles like this are important to create debate but unfortunately they sometimes come across as one-sided, it would be great if we saw more balance from your articles as you would be taken more seriously and your message be delivered and valued more widely. Giving assumptions that talk about straight line assumptions is never great, the real world is very different as we all know.

  64. […] fund managers are paid through ad valorem fees, a percentage of the funds invested. In a recent article, Paul Lewis, the BBC presenter, jokes that ad valorem is Latin for rip-off. Again the ad valorem […]

  65. […] fund managers are paid through ad valorem fees, a percentage of the funds invested. In a recent article, Paul Lewis, the BBC presenter, jokes that ad valorem is Latin for rip-off. Again the ad valorem […]

  66. […] fund managers are paid through ad valorem fees, a percentage of the funds invested. In a recent article, Paul Lewis, the BBC presenter, jokes that ad valorem is Latin for rip-off. Again the ad valorem […]

  67. […] fund managers are paid through ad valorem fees, a percentage of the funds invested. In a recent article, Paul Lewis, the BBC presenter, jokes that ad valorem is Latin for rip-off. Again the ad valorem […]

  68. […] fund managers are paid through ad valorem fees, a percentage of the funds invested. In a recent article, Paul Lewis, the BBC presenter, jokes that ad valorem is Latin for rip-off. Again the ad valorem […]

  69. […] fund managers are paid through ad valorem fees, a percentage of the funds invested. In a recent article, Paul Lewis, the BBC presenter, jokes that ad valorem is Latin for rip-off. Again the ad valorem […]

  70. […] fund managers are paid through ad valorem fees, a percentage of the funds invested. In a recent article, Paul Lewis, the BBC presenter, jokes that ad valorem is Latin for rip-off. Again the ad valorem […]

  71. […] fund managers are paid through ad valorem fees, a percentage of the funds invested. In a recent article, Paul Lewis, the BBC presenter, jokes that ad valorem is Latin for rip-off. Again the ad valorem […]

  72. Paul seems to have an issue with the fact that removing a percentage of the funds to cover adviser fees reduces the potential yield of the investment and therefore percentage based fees are bad. What about a client paying fixed fees who opts to have them deducted from their investment? Exactly the same problem, is it not? Granted, the fixed fee will not grow with the investment but maybe it should. The risk and complexity of a clients circumstances can change due to their level of wealth.

    Can Mr Lewis suggest a fair way of advisers being paid to provide advice in a highly regulated environment where the adviser is liable for as long as his career lasts(even longer in some cases)?
    Alternatively can Mr Lewis point out another industry that has to justify it’s fees against what the client could have had in the future? Car salesmen don’t tell you what new model might be coming out if they want rid of whats on the forecourt, lawyers don’t tell you what you could have spent your money on if you hadn’t paid them etc etc.

  73. I would be interested to know what Paul thinks about the charging structure used by St James’ Place

  74. This man is a mathematical genius – not

  75. Why not do it the other way around Paul and work out the difference between fixed flat fee and % charge for a client decumulating assets??? Swings and rounds or ad valorem.

    Well done you have had your weekly wind up successfully achieved with over 100 responses/comments

  76. Paul should work for Panorama, they also choose far to often to omit key information and use unsubstantiated figures to present a slanted STORY as being factual.

    It is surely obvious that different people have different requirements and therefore choose different options based on their priorities.

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