The 1% Advice Fee Is Toast
Discussion
Well 1% of a £20k pot prob wouldn’t cover it but 1% of a £1m pot would be expensive.
The biggest problem with these folk however is that after providing advice they try to manage the investments too, by claiming or allowing the client to believe , that the advisor has special powers .
The biggest problem with these folk however is that after providing advice they try to manage the investments too, by claiming or allowing the client to believe , that the advisor has special powers .
Yeah, although you shouldn’t - it’s easy to overlook the fee on small amounts but when you get into big numbers it makes life-changing differences. The internet has damaged the traditional IFA model. The new thing is to rename it to things like Wealth Management etc. To be fair to IFAs though, before the internet and public knowledge of companies like Vanguard they did a fair job of beating money in the bank. Investing has modernised, and awareness of costs is the latest headlines that’s all.
Tye Green said:
Well 1% of a £20k pot prob wouldn’t cover it but 1% of a £1m pot would be expensive.
The biggest problem with these folk however is that after providing advice they try to manage the investments too, by claiming or allowing the client to believe , that the advisor has special powers .
But in most cases that 'special power' is 'not being a gambling addict'. The biggest problem with these folk however is that after providing advice they try to manage the investments too, by claiming or allowing the client to believe , that the advisor has special powers .
This is the area where Derek was always spot on. The most crucial function of a good advisor is to stop the average client, who is an inveterate gambler, ignorer of good advice and sucker for every snake oil vendor from doing what they do.
Self managing is easy and there is no reason why anyone couldn't do it themselves and deliver solid returns. Except that they don't. They mostly go gambling and poss away all their potential.
The real problem though is among those just starting out on employment as this group are all gamblers almost to a man and the gambling industry has cleverly rebranded itself as 'investment houses' such as RobinHood or the other 'free' share dealing services which are just book makers reliant on fooling the punter into excess activity into higher risk products.
Advisors have needed a complete kicking for decades. An industry rife with thievery, incompetence, arrogance and inbreeding but that doesn't mean it isn't needed because it very much is and more than ever before. But it needs to evolve to fit the modern market.
APontus said:
The % model is a racket. All things being equal someone with £250k is being charged twice the amount for the same work as someone with half the managed assets. An annual or 6 monthly report by a paraplanner and lunch with your advisor for £2.5k is terrible value.
It is on such small portfolios. That's the thing that the consumers needs to understand has changed dramatically, which is that £125k even £250k isn't a viable portfolio size for true advice!!! Hence the appearance of solutions in that middle ground. And if you have a portfolio over £1m then you won't be paying a % because they will have bid you for the opportunity. DonkeyApple said:
APontus said:
The % model is a racket. All things being equal someone with £250k is being charged twice the amount for the same work as someone with half the managed assets. An annual or 6 monthly report by a paraplanner and lunch with your advisor for £2.5k is terrible value.
It is on such small portfolios. That's the thing that the consumers needs to understand has changed dramatically, which is that £125k even £250k isn't a viable portfolio size for true advice!!! Hence the appearance of solutions in that middle ground. And if you have a portfolio over £1m then you won't be paying a % because they will have bid you for the opportunity. The fee model is still broken at the bigger end of town where arguably the fee level should be based on how well their advice delivered. Tbh, the fee models and lack of alignment/accountability contribute significantly to my dislike of fund based investments.
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hstewie said:
The 1% fee always was toast - wasn't it?hstewie said:A small prtfolio and it wasn't worth it for the adviser.
A large portfolio and the investor is paying too much money.
The Mad Monk said:
bhstewie said:
The 1% fee always was toast - wasn't it?hstewie said:A small prtfolio and it wasn't worth it for the adviser.
A large portfolio and the investor is paying too much money.
Get clients, do minimal work for more money than worth then sell book/business for 3-5x recurring income and retire to the beach.
The middle-market UK consumer is ripped off to high heaven.
Pre-2015, a huge number of these people would have bought an annuity non-advised, however now it's drawdown and ongoing fees that really aren't justified.
bhstewie said:
It would seem not (Kitces does some excellent research for U.S based advisers)hstewie said:"In practice, our Kitces Research shows that median fees were 1.0% of AUM up to $1 million"
https://www.kitces.com/blog/financial-advisor-aver...
APontus said:
Almost the entire UK retail eco system is based on it.
Get clients, do minimal work for more money than worth then sell book/business for 3-5x recurring income and retire to the beach.
The middle-market UK consumer is ripped off to high heaven.
Pre-2015, a huge number of these people would have bought an annuity non-advised, however now it's drawdown and ongoing fees that really aren't justified.
I get a little fed up of the frequent IFA bashing on here so let me clarify my position.Get clients, do minimal work for more money than worth then sell book/business for 3-5x recurring income and retire to the beach.
The middle-market UK consumer is ripped off to high heaven.
Pre-2015, a huge number of these people would have bought an annuity non-advised, however now it's drawdown and ongoing fees that really aren't justified.
I've been an IFA for over 30 years, almost all of my clients have come via recommendations from other clients. I generally work 50+ hours a week, often 12 hr plus days and rarely have holidays, when I do I normally do at least some work as I'm a self employed sole trader, there is no one else to cover me if I have time off. Yes, I will probably sell my business at some stage but it's far more important that I find the right IFA to continue to look after my clients the way I have, than what multiple of my recurring income I'm likely to get.
I'm certainly not ripping off anyone. The only clients I have that are paying 1% ongoing advice fee are those with less than £125,000 under advice, most pay 0.5%, some less. That fee, in % and £ format is reconfirmed to the clients at every review meeting and has to be agreed by them for the following year. The ongoing advice service can be turned off by the client (or the IFA) at ANY time.
Do you not think that drawdown rather than buying a non advised annuity is a good option for many people? I certainly think it is. Many of the people that are now in drawdown, or indeed many people with investments, are in need of good quality independent advice. They don't have to take it, many decide to. Our charges are clearly explained to potential clients at the start and at the end of an initial meeting, which takes place at no cost to the client.
Finally, the original article is from the USA and apparently the chap was being charged 1% on an EIGHT figure investment. I would agree that that is way too much. He didn't have to pay it and in the end he decided not too.
Someone with no other assets and £100k in a basic drawdown scenario doesn't get or need £1000 a year's worth of advice (in reality an afternoon or twos work for a paraplanner and a brief meeting with a CF30).
I was a founder, shareholder and CF1 of an independent advice firm. I had a call team speaking to about 4000 inbound enquiries a month and distributed those enquiries to my own firm as well as hundreds of independent and restricted firms of all sizes, from PLCs to one man bands. My wife has been in the academy of one particularly well known restricted advice franchise operation.
Many advisors don't have much exposure to the 'man on the street', the kind of customer who's never had (or needed) an advisor before, doesn't understand how it all works, the terminology or the products. These people are so often drawn into the never ending cycle of 'ongoing advice' that they just don't need. They need guidance, someone to give generic information and advice, but not financial planning. They don't have assets to plan around.
The idea that someone with 1 pension pays the same advice % as another with much more complicated circumstances, simply because of the overarching value of the assets under management, doesn't seem like it's fair or in the customers' favour.
I sound like I'm bashing for bashing's sake; trust me I'm not and I apologise if that's how I come across. The advice system, as far as I see it, is broken for the 'advice gap' consumer. This isn't the fault of the advice community; they make hay within the regulation that's set. The 2013 RDR and 2015 freedoms could have been an opportunity to remove incentive based selling, but we all know the commission and risk simply moved to the % ongoing charge. One gravy train to another.
As far as I see it, consumers should pay a fair charge for the advice they receive and that be realistically relative to the amount and circumstances at stake. To me that should mean reduced regulation (and therefore liability) around simple needs, charged at hourly rates that truly represent the work done. More complex needs maintain the % fee.
When I look at the advice community and value for money for low value clients, I remind myself of this; if I wanted I could take a novice to level 4 and competent status in less than 12 months. They could immediately jump into a job that pays £70-100k a year (all things being equal vis-a-vis how they get their clients/client book). When someone with no formal qualification can earn so much so fast with no experience or evidence they're better than mediocre, the system is not functioning properly.
I was a founder, shareholder and CF1 of an independent advice firm. I had a call team speaking to about 4000 inbound enquiries a month and distributed those enquiries to my own firm as well as hundreds of independent and restricted firms of all sizes, from PLCs to one man bands. My wife has been in the academy of one particularly well known restricted advice franchise operation.
Many advisors don't have much exposure to the 'man on the street', the kind of customer who's never had (or needed) an advisor before, doesn't understand how it all works, the terminology or the products. These people are so often drawn into the never ending cycle of 'ongoing advice' that they just don't need. They need guidance, someone to give generic information and advice, but not financial planning. They don't have assets to plan around.
The idea that someone with 1 pension pays the same advice % as another with much more complicated circumstances, simply because of the overarching value of the assets under management, doesn't seem like it's fair or in the customers' favour.
I sound like I'm bashing for bashing's sake; trust me I'm not and I apologise if that's how I come across. The advice system, as far as I see it, is broken for the 'advice gap' consumer. This isn't the fault of the advice community; they make hay within the regulation that's set. The 2013 RDR and 2015 freedoms could have been an opportunity to remove incentive based selling, but we all know the commission and risk simply moved to the % ongoing charge. One gravy train to another.
As far as I see it, consumers should pay a fair charge for the advice they receive and that be realistically relative to the amount and circumstances at stake. To me that should mean reduced regulation (and therefore liability) around simple needs, charged at hourly rates that truly represent the work done. More complex needs maintain the % fee.
When I look at the advice community and value for money for low value clients, I remind myself of this; if I wanted I could take a novice to level 4 and competent status in less than 12 months. They could immediately jump into a job that pays £70-100k a year (all things being equal vis-a-vis how they get their clients/client book). When someone with no formal qualification can earn so much so fast with no experience or evidence they're better than mediocre, the system is not functioning properly.
Correct me if I'm wrong but don't funds in UK still have sales loads. . A portion of this was used to pay advisors, since advisors now want 1% Who is pocketing the sales load ????
In the US most funds haven't had sales loads for years.
One percent of money that you already have seems hefty, they did nothing to help you amass it. More logical would be a percentage of the gain that they get you on the amount you are bringing hem to handle. Remember there are already annual expences/ fees built into the funds
In the US we can get quite good in house guidance depending on your investment level. We also get the occaisional cold caller who tells you he can work miracles, their first question is "How much do you have" "More than you, ps off"
It appears IFAs only want to take on large clients, but most six or seven figure people already have a decent handle on the game, usually just need a bit of tax help.
In the US most funds haven't had sales loads for years.
One percent of money that you already have seems hefty, they did nothing to help you amass it. More logical would be a percentage of the gain that they get you on the amount you are bringing hem to handle. Remember there are already annual expences/ fees built into the funds
In the US we can get quite good in house guidance depending on your investment level. We also get the occaisional cold caller who tells you he can work miracles, their first question is "How much do you have" "More than you, p
s off"It appears IFAs only want to take on large clients, but most six or seven figure people already have a decent handle on the game, usually just need a bit of tax help.
jeff m said:
Correct me if I'm wrong but don't funds in UK still have sales loads. . A portion of this was used to pay advisors, since advisors now want 1% Who is pocketing the sales load ????
In the US most funds haven't had sales loads for years.
One percent of money that you already have seems hefty, they did nothing to help you amass it. More logical would be a percentage of the gain that they get you on the amount you are bringing hem to handle. Remember there are already annual expences/ fees built into the funds
In the US we can get quite good in house guidance depending on your investment level. We also get the occaisional cold caller who tells you he can work miracles, their first question is "How much do you have" "More than you, ps off"
It appears IFAs only want to take on large clients, but most six or seven figure people already have a decent handle on the game, usually just need a bit of tax help.
But I think this is where the general misunderstanding of the industry pears. In the US most funds haven't had sales loads for years.
One percent of money that you already have seems hefty, they did nothing to help you amass it. More logical would be a percentage of the gain that they get you on the amount you are bringing hem to handle. Remember there are already annual expences/ fees built into the funds
In the US we can get quite good in house guidance depending on your investment level. We also get the occaisional cold caller who tells you he can work miracles, their first question is "How much do you have" "More than you, p
s off"It appears IFAs only want to take on large clients, but most six or seven figure people already have a decent handle on the game, usually just need a bit of tax help.
Jeff, you talk about a structure whereby the IFA receives a percentage of the gain but that's not reflective of what the IFA is there to achieve.
A lot of people seem to think that the OFA exist somehow to beat the market but that's the role of hedge funds, active management etc and as such those products and their managers charge that 2&20 model, ie 2% annual management to pay the base running costs and then a 20% share of the performance.
Conversely, that's not the market the IFA is in and I don't think they've helped themselves at all in recent years given the massive influx of new potential clients to the market and the IFAs attempting to market themselves as some kind of glamorous character who can predict the future.
I've not seen Derek Chevalier on PH for a while but his explanation of what an IFA is is the traditional and correct one. They aren't people who cannot whose job it is to predict the future nor is it their job to outperform the market. Their job is to sit with the client and plan what the client wishes to end up with at the end of what period, to then look back, not forward at what the typical base returns are for the risk the client is willing to adopt and to simply calculate how much money needs to be added each month to achieve that end goal. Then on an ongoing basis they must monitor and maintain that agreed structure and if necessary switch assets from time to time.
In reality the 1% fee is a bargain. You absolutely don't want to be rewarding an IFA via a percentage of gains as you would be very specifically incentivising your IFA to take excess risk which is exactly the opposite of what they exist for. The role of the IFA in the market places is to dial out risk, that's what you're paying for.
That 1% is a relatively clumsy tool as it doesn't generate enough revenue to cover the acquisition and maintenance cost of a small account but that is dealt with by an IFA not accepting clients with less than a base sum such as £200k or £500k. It also create an excessive charge for those with £1m+ AUM but those people don't pay the 1% but have agreed a fixed sum that is lower.
The numbers that I quite vehemently object to are the charges for adding new funds. Modern execution means the costs for converting cash into equities is close to zero. Any desk costs due to inefficient processing should be born out of the 1% AUM.
I also don't agree with exit fees as they are currently levied. If you do a good job of explaining what your product is and what it will achieve then there is no typical reason beyond circumstance change for a client to want to leave. And so you shouldn't need a punitive charge to prevent this. Instead, being honest with the client and explaining how much they cost to set up and that the manager doesn't hit positive on that cost until Yr3 so if they wish to leave this is the amount that would be charged.
The flipside is that clients are very different today to twenty years ago for this industry. I've certainly found on the retail side the weird reality that clients no longer listen to people who actually know their answers but instead only listen to Mystic Meg, people from reality TV shows and a Dave on Facebook who if he was American would definitely be claiming to have been probed by aliens. It's a genuine and robust shift in the £500k+ market in the number of individuals who have a tenuous grip on reality.
There are still vast numbers of s
t IFAs out there and like GPS and dentists, loads of old ones who refuse to adapt to the 21st century but plenty of young ones who have a weak grasp on the concept of honesty and of course the fundamentally dishonest such as the door to door blokes who attacked the final Daley pension lot within seconds of the FCA allowing IFAs to get their hands on that money and simply take it. But there are plenty of good ones who do their job well and sit above the robo/neo market at the account size where those products don't tend to work and self managing has never been easier and there is no particular reason as to why an individual cannot self manage, design their own long term investment target, select funds, monitor, make changes and keep abreast of personal tax allowances and wrapper rules and regs. All the info is out there and people are able to read it all and they have time to do it if they wish. They aren't living in China assembling iPhones on 20 hour shifts.
But for those with £250+ who don't want to self educate, self manage and want someone else to do it all for them so as to maximise leisure time, paying just 1% is cheap and they can always go robo where the industry charges so little that a decade in they are still losing money on every account they take on.
Aside from ineffective regulation, the biggest problem in the market is lack of competition. RDR created a massive shortage of advisors and Pension Freedoms a massive increase in unsophisticated, low value customers. Advisors cherry pick and overcharge small fund clients because they can get away with it.
The asset value in advice firms small to large is really just the % ongoing fee on the assets under management. That is most firms' endgame, building that % aiming for a 3-5x multiplier when the consolidator comes knocking. Without that, advice firms are relatively valueless as entities.
Firms themselves still predominently work on a contingent charging model (except final salary work). This means you rock up to an advice firm, they do all the heavy lifting, research analysing your situation and suggesting alternatives, for nothing, and 'hope' they find a justification for you to move to them. This is an unacceptable conflict of interest and in pure business terms couldn't be anything other than a flawed business model. It makes no sense to commit to the cost/risk of doing all the work at no charge or commitment unless you know on enough occasions the dice are loaded from the start.
Huge amounts of personal wealth are syphoned off this way, moving from advisor to advisor or intra-product within an advisor where the punter gets little or no material benefit (at the end of the day, IFAs typically have access to all the same products and tools and work within the same regulatory, tax and financial world environment, so competent advisors should produce broadly similar results for any given client). The winners are the advisors themselves, who've transferred the ongoing fee to that 3x multiplier when they sell the business/book and the big business/PE that ultimately owns the consolidators, who buy and supercharge the gravy train in a vertcally aligned one-step shop that you inevitably get shovelled in to when it happens (effectively the SJP model).
The asset value in advice firms small to large is really just the % ongoing fee on the assets under management. That is most firms' endgame, building that % aiming for a 3-5x multiplier when the consolidator comes knocking. Without that, advice firms are relatively valueless as entities.
Firms themselves still predominently work on a contingent charging model (except final salary work). This means you rock up to an advice firm, they do all the heavy lifting, research analysing your situation and suggesting alternatives, for nothing, and 'hope' they find a justification for you to move to them. This is an unacceptable conflict of interest and in pure business terms couldn't be anything other than a flawed business model. It makes no sense to commit to the cost/risk of doing all the work at no charge or commitment unless you know on enough occasions the dice are loaded from the start.
Huge amounts of personal wealth are syphoned off this way, moving from advisor to advisor or intra-product within an advisor where the punter gets little or no material benefit (at the end of the day, IFAs typically have access to all the same products and tools and work within the same regulatory, tax and financial world environment, so competent advisors should produce broadly similar results for any given client). The winners are the advisors themselves, who've transferred the ongoing fee to that 3x multiplier when they sell the business/book and the big business/PE that ultimately owns the consolidators, who buy and supercharge the gravy train in a vertcally aligned one-step shop that you inevitably get shovelled in to when it happens (effectively the SJP model).
I'd agree although I'd add that a lot of IFAs don't get their 3x AUM when they sell their book because it's a small book of clients where you know a significant number will be triggered by the sale event to go shopping in the market and leave. I also think that the IFA market has massive competition today from self execution and robo while their operation costs have increased.
On a separate note, I suspect that many self managers are actually paying more in fees than they would with an advisor due to the gamification of the self ex platforms. If you look at Hargreave's annual commission revenues from self execution it looks to be greater than 1% of AUM which tells you that when someone self executed they have a propensity to trade/churn their own funds attempting to create alpha so pay far greater fees through excess activity than they would if an IFA were halting that practice.
The self ex model only works if you stimulate your client to over trade. So you give them an instant access trading platform and then ping them regular notes designed to get them to regularly switch funds and generate a steady flow of commissions. The latest industry wheeze being the zero comm model where the fees are larger than an overt comm charge and hidden in the execution slippage. That model has become so sophisticated that Company A can sell the flow to Company B for a fixed rebate and even execute on pseudo exchanges designed to create open arbitrage to the true market.
On a separate note, I suspect that many self managers are actually paying more in fees than they would with an advisor due to the gamification of the self ex platforms. If you look at Hargreave's annual commission revenues from self execution it looks to be greater than 1% of AUM which tells you that when someone self executed they have a propensity to trade/churn their own funds attempting to create alpha so pay far greater fees through excess activity than they would if an IFA were halting that practice.
The self ex model only works if you stimulate your client to over trade. So you give them an instant access trading platform and then ping them regular notes designed to get them to regularly switch funds and generate a steady flow of commissions. The latest industry wheeze being the zero comm model where the fees are larger than an overt comm charge and hidden in the execution slippage. That model has become so sophisticated that Company A can sell the flow to Company B for a fixed rebate and even execute on pseudo exchanges designed to create open arbitrage to the true market.
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