You’re happy to pay a fair fee for an excellent wealth planning experience but have concerns about costs, hidden charges and value.
The biggest challenge for business owners is that most wealth managers charge fees based on a percentage of the assets you give them to manage.
In addition, if the fee is based on your non-business investment assets, you could miss out on advice about your business strategy, reducing debt, buying property or helping your children.
To learn more about the challenges with percentage charging for wealth planning advice, see our short video.
Most financial advisers charge for their services on an ‘ad valorem’ basis—that is, a percentage of the money you give them to manage. The FCA confirm that the average charge is 0.8% a year.
This means that the larger your portfolio size, the greater your fee – for broadly the same service as that received by another investor with a smaller fund.
The ‘percentage of assets fee model faces several other challenges, which we summarise as the “Four Cs.”
The compound effect of a percentage-based fee can be very significant, particularly with larger portfolios over longer periods of time.
With many couples now experiencing two-person retirements lasting 30 years or more, the percentage fees charged by wealth managers can create a very costly
drag on returns.
This, in turn, negatively affects your long-term outcome as your fees increase every year in line with market returns (which average about 7% a year).
The impact of these costs is not trivial and can make a real difference to the success of
retirement plans and investment goals.
It is vital to receive impartial advice reflecting the entire market place and not limited to a small range of options.
Most large advice firms in the UK offer a restricted advice service. Capital is proudly independent.
In simple terms, the more money invested, the greater the fees paid to
the wealth manager.
According to the FCA, the average annual fee is 0.8%% of the investor’s portfolio.
This could mean that a client with a £1m portfolio is paying £8,000 each year in fees, and the client with £100,000 invested pays only £800, often for an identical level of service. This creates an inherent cross-subsidy with wealthier investors subsidising less affluent ones.
Fundamentally, this isn’t fair or reasonable, as some clients are being
disadvantaged and are often overpaying very significantly for the services they receive.
On a percentage-based fee model, the wealth manager receives an immediate pay cut in their fee income if money is removed from the invested portfolio.
So, typical lifestyle events such as giving gifts to children, buying property, or investing in a business would reduce the managers’ fee revenue.
As a result, there may be some resistance from the wealth manager to support a recommendation to sell assets within the portfolio.
Other suggestions may often be made to preserve the portfolio value and the ongoing
fee income.
By linking wealth management fees directly to a percentage of the money
invested, the wealth manager will only be paid if the client invests money.
No investment means no fees. So, alternatives such as paying
off debt or keeping a healthy cash buffer may be overlooked, as such options would not generate a fee income to the wealth manager.
The FCA has expressed concerns over contingent charging and the
need for wealth managers to sell investments in order
to be remunerated.
Having worked with successful entrepreneurs for many years, we recognised the flaws in the dominant wealth management fee model and decided to do things differently.
We designed a simple, retainer-based model based on several relevant factors and not simply the size of the investment portfolio.
We built a pricing calculator that reflects the value our services can offer our clients. Once agreed upon, we charge on a flat monthly retainer, increasing only in line with inflation and not the investment market.
Our fees can usually be paid by your business or collected from your investment account; no VAT is payable.
To learn more about wealth manager fees, download our free paper ‘Fixing The Broken Model’.
