When it comes to financial planning, the norm is to pay a percentage of your portfolio as an up front fee and another percentage fee, usually lower, for ongoing advice. At the low end of the value spectrum, this can make a lot of sense, as a 3% initial fee on a £10,000 portfolio is £300, which is likely much less than you would pay for a professional adviser if you retained them on an hourly fee basis. But what happens when you are looking at investing more?
Unless the adviser has caps in place, that 3% can very quickly increase out of reasonableness. At £100,000 investment, the initial fee has expanded to a healthy £3,000 for the adviser. At £1 million, it has ballooned to £30,000 initial fee, which is frankly far more cost than you could possibly incur if you hired that adviser to do the same work on an hourly basis even if they were charging £500 an hour or more.
Does a portfolio of £1 million take 10 times longer to set up than one worth £100,000? No.
So what's the alternative?
Fixed Fees
A fixed fee offering takes the initial perspective that certain financial planning tasks take a certain amount of time. For example, setting up an investment portfolio takes between 5 and 10 hours of adviser time and some additional time from administrators and paraplanners. Slightly more time is needed for pensions than simple investment accounts because pensions are complicated and each scheme adds to that complexity. If you want to include more advanced tax structures like insurance bonds for tax deferment or Venture Capital Trusts for income tax rebates on investments into UK small companies, then the complexity goes up further, but these tend to be applicable only in the rarest of cases.
For most people, the initial situation is likely to be an investment account and a pension. For this my initial fees would be £2,000 for the investment account and a further £2,500 to review the pension scheme, transfer it into a new pension if the old scheme isn't fit for your purpose, and investing it in line with your objectives and risk tolerance.
That's a total fee of £4,500. On a 3% fee basis, that would be equivalent of £150,000, so if you have more than that to review, the fixed fee model is almost a no-brainer.
My fixed fee approach doesn't just apply to the initial fees though. I also have fixed fees for the ongoing fees based on the overall level of complexity of your portfolio rather than the value you hold. For simple cases involving either an investment portfolio or a pension only, this ongoing fee is £2,500 a year. The fee goes up to £5,000 if the portfolio includes both pension and investment portfolios.
If the ongoing fixed fee doesn't work for you because you aren't yet over £250,000 or £500,000 in value, I also have an introductory fee model which caps the ongoing fee at 1% of the portfolio value until you reach the point at which the fixed fee becomes more sutiable.
The net result of this fixed fee approach is that I get a fair fee for the time I spend working with you on your finances and you get to keep more of your investment returns for your objectives.
Conclusion
Fixed fees make your portfolio grow faster once you get over a certain level of invested wealth. Paying a percentage fee acts as an anchor to your growth, making it much harder to achieve your long-term goals. Look into fixed fee options where you can because you will likely be much better off as a result.
I am a Chartered Financial Planner operating my own firm, an independent financial advisory practice. I help private clients and owner-managed businesses to make better financial decisions, giving…
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