The problems with the traditional percentage fee model
Cost
The compounding effect of an annual percentage charge can have a damaging effect on your personal finances.
Cross subsidy
If you have a larger portfolio, you may be paying a lot more for the same service. Is this fair?
Conflict of Interest
On a percentage fee model, the adviser’s income is reduced if funds are used for other purposes such as reducing debt or buying property.
Contingent Charging
If fees are only paid on funds you invest, can you be certain all other options have been considered?
Costs
The founder of Vanguard, Jack Bogle once said “The miracle of compound returns is overwhelmed by the tyranny of compounding costs”’
The compound effect of a percentage fee of your money can be significant, particularly with larger portfolios over lengthy periods of time.
Many couples now experience retirements lasting 30 years or more, and the percentage fees charged by wealth managers can create a very costly drag on returns.
Cross Subsidy
In simple terms, the more money invested, the greater the fees paid to the wealth manager.
According to a survey by Which? the average annual fee is 1% of the money invested.
This could mean that if you have a £1m portfolio you will pay £10,000 each year in fees and if you have £100,000 invested pay £1,000, often for an identical service.
This doesn’t seem fair or reasonable.
Conflict of Interest
On a percentage-based fee model, the wealth manager may receive an immediate reduction in their fee income if money is removed from the portfolio.
So, typical lifestyle events such as making gifts to children, buying property, or investing in
a business could lead to a reduction in the manager’s fee revenue.
This may create a conflict.
Contingent charging
By linking wealth management fees directly to a percentage of the money invested, the wealth manager will be paid only if you invest your capital.
No investment means no fees.
The Financial Conduct Authority has expressed concerns over contingent charging and the
need for wealth managers to sell investments to be remunerated.
Download our guide to
Fair Fees
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