Why You Should Avoid Percentage Based Financial Advice Fees

​There's unlikely ever to be a law banning percentage-based financial advice fees, but if the Financial Planning Industry were serious about becoming a profession and being fair, it would head that way. In my view, one of the big rackets in the financial advice industry, hiding in plain sight, is percentage fees.

It is up there with other advice distorting practices like commissions, fee-sharing arrangements and other sales incentives paid by large institutions and product providers.

While the Association of Financial Advisers, The Financial Planning Association and all "dealer groups" having already moved to "fee for service", the problem is that this almost always involves taking a percentage of each client's' money (referred to as "funds under advice", or FUA) directly instead of being paid out by the product manufacturers as sales commissions. Exactly the same result for the client,  just called something different.

There are four problems with this system:
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• Those with a lot of money pay far more than those with little money, for a service that costs the same. Socialists would approve since larger investors subsidise the less well off - a progressive tax - but it drives away those with more wealth from getting the advice they need;
• Advisers are over-rewarded for rises in markets for which they are not responsible. Since 1979 the Australian share market has produced a compound annual total return of over 10 per cent. Percentage fees go up accordingly. Yes, there are years when it falls, but usually investment markets provide advisers with fee increases that are a multiple of their cost increases;
• Most people don't understand percentages and compound interest, and think that 1 per cent is not much. The result is a fee structure that is fundamentally higher than it should be;
• By only being paid for money that's invested, advisers are naturally inclined to maximise that amount, whether it's in the client's best interests or not.

wetalkmoney do not charge a percentage of FUA because we don’t think it’s fair. A person with 10 million dollars is not costing us 10 times as much to look after as someone with one million. Fees should depend on your particular needs and the advice and service you require.

By charging each client a dollar amount like a doctor, accountant or lawyer, rather than a percentage, there is simply no question in whose best interests we are acting. And because we do not accept commissions and other sales incentives, we access ‘naked’ pricing. This is the true wholesale cost of a product, which is minus the sales commissions, marketing allowances, fee sharing arrangements and other sales incentives that inflate prices.

Is there likely ever to be a law banning percentage-based financial advice fees? Probably not.

But if the industry was serious about lifting standards and restoring consumer confidence, then that is the way it would be.

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