We are big supporters of the flat fee adviser model (in fact it is the main reason for our existence) and usually we post good news stories about why this is the best approach.
In this case we thought we would look at an adviser who started out as a flat fee adviser and then changed. The initial reasons for the choice of flat fees and the narrative around the change back to percentage fees, both support why flat fees are best. It is an extraordinarily frustrating tale but a cautionary tale nonetheless.
The full video of the interview with our good friend Abraham Okusanya is available to watch here or you can listen as a podcast.
The interviewee Mary Waring ran a small and successful financial planning business and charged a flat fee, monthly retainer. Mary makes the case for flat fees from 08:20 onwards. She talks about how she charged a fixed fee for the initial work because the value to the client was in the initial planning. In her view the standard practice of not charging for the initial planning work but then charging a percentage on implementation put the value on the wrong part of the process. As she says, most advisers charge a percentage of the investment up front when that is really just admin. Why should clients pay the largest amount for paperwork filling and the smallest amount for the strategy planning.
Mary also makes the point about ongoing fees that the issue with ongoing percentage charging is that it doesn’t take twice as long to manage a portfolio that is twice the size. So why would a client want to pay twice the price?
Her arguments for the flat fee approach are excellent, which makes the end of her story from 41:52 onwards all the more difficult to understand.
Mary’s exit was to sell to a percentage charging firm. As Abraham says, that is a good investment for the buying firm as they could purchase for a multiple of the flat fee revenue. They can then move the clients to a percentage charge, which instantly increases the revenue. So as an example (these are not Mary’s numbers) if you buy a firm for £3million based on total firm income of £1million and you can quickly increase the income to £2million, you make your investment back very quickly.
Of course, the people who are paying for this are the clients, who suddenly have an increase in their fees.
So if it is worse for clients, how did Mary justify selling to a percentage based firm when she believed so strongly in the alternative?
Well, from the interview it seems that she took the view that if the clients didn’t like it, they didn’t have to agree to it.
Maybe that was okay with the clients but it will have left them without much option. As you can see from the website here, there are still a small number of flat fee firms in the UK. Having convinced them that a flat fee was the best way to work, Mary then sold them to a firm that operated in the opposite way. If a client didn’t like this change their options were limited.
To be fair to Mary there is a limit to the number of options if you are selling a flat fee financial advice firm. In the same way that there is only a small number of flat fee firms, there are by extension a small number of acquirers.
The whole interview though is worth a watch, as it is a complete vindication of our approach from a positive and a negative perspective.