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31/7/2020

3 Comments

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.
A percentage sign covered in flames
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:
​
  • 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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3 Comments
John
25/1/2016 11:53:53 am

Tony, my adviser charges a combination of flat fee and %. I figured that the adviser should have an incentive to grow my portfolio. What are your thoughts?

Thanks

Reply
John
2/3/2016 06:44:07 pm

It's a fair point John. My view is that your adviser still is rewarded for events that are outside his or her control and there is still a natural inclination to maximise investments, when for example, a better solution might be to repay debt.

I can't speak for your adviser but the way we work, each client agreement renews every two years. There's my incentive to deliver value - if I don't, clients don't get renewed.

I hope that helps.

Tony

Reply
Lawhorn Mortgage Company link
22/10/2020 06:05:17 pm

Most people can easily find places to trim variable expenses and plan for periodic ones, and your lifestyle should align with your income, but making serious headway on the road to financial security may require a rethink of what you really need – including what you consider a fixed expense today.

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