As you can tell, we are a big fan of fairer fees at FFAN. We believe that as the client you should pay for the work that is done, not for the money you have. However every solution is not without its problems and we thought it would be useful to explore the main one here.
Flat monthly fees work out incredibly well over the long-term for wealth that is growing, as the fee will take less and less of your money as your portfolio grows. As humans, few of us are wired to understand compound growth, but the effect of this widening gap between costs and growth, compounds into extraordinary savings for most people.
The reverse effect can be a problem though. If your wealth is shrinking fast, typically because you are spending hard in retirement, then flat retainer fees are increasing in size relative to your money. There is an inbuilt disincentive for a percentage based financial adviser to help you to spend your money, but let’s set that aside for this blog. A good financial adviser will help you to plan your way to spending every penny you have in retirement, if that is your goal.
A flat fee of £200 per month may start out as less than the percentage equivalent for a £500,000 portfolio but if that portfolio is spent down to £250,000 then the flat fee is suddenly withdrawing nearly 1% per year. If the portfolio halves again then the flat fee will be taking nearly 2% of the portfolio and so on. Whilst 2% is not an uncommon percentage charge for this size of portfolio from a percentage charging adviser, it rapidly becomes a higher and higher charge against the money you have, the smaller that money gets.
This is a very real problem with the flat fee model, as it is the reverse maths of the benefits of a growing portfolio.
Is there anything I can do to protect against this?
If you are someone who is intent on spending or giving away their money over time, you can still use a flat fee adviser. In fact, using one means that they are not financially incentivised to persuade you not to spend/gift your money away as they aren’t being paid a shrinking percentage fee from shrinking wealth.
The key to making this work in your best interests is to find an adviser who is priced at a level that means your capital can shrink substantially before the fee equals the equivalent percentage fee. Then check with them what their policy is on fees when they reach a certain level, do they have a simpler less expensive service that they can move you to. Also check both their policy and history of increasing their fees. Do they link fees to inflation, as this will mean that the fees are rising while your money is falling. This is not necessarily an issue but it does change the maths.
- Find the fee level that is right for you now and future you with a smaller portfolio.
- Check the adviser’s policy on fees as they become more expensive relative to you wealth.
- Check the adviser’s policy and history of fee increases.
- Ask the adviser to work the numbers out for you and explain how they would handle your situation.
Ultimately provided you are getting good value from a service, there should be no link between the value of your money and the fee that you pay. There might be many other aspects of your finances that a flat fee adviser would continue to help you with, even if you no longer had wealth to be managed.