We were speaking about flat, monthly fees with the MD of a percentage based firm recently (part of our job is advocacy amongst the profession as well as clients). He said that this approach wouldn’t work for him because his clients ranged from very small (an ISA worth £20,000) to very large (£4,000,000). His firm takes 1% of his clients’ portfolios and so his smallest client pays £200 per year and his largest £40,000 per year.
Both numbers are shocking in their own way. The £40,000 per year seems too high for an annual review, simple tax planning and an in-house portfolio. The £200 per year can’t possibly cover the cost of giving the smallest client the same service (minus the tax planning!).
We asked why he was willing to lose money serving his smallest clients and he said that he felt guilty about not helping these people and therefore wanted to take on anyone needing help. This is laudable in a way, but assumes that there is no alternative for the smaller client and of course there always is. In fact there might be an online service that is better for someone with a £20,000 ISA and is still lower cost than he is charging. So he isn’t helping the client, is losing money, is cross subsidising from the largest client (which is probably keeping those fees artificially high) and is increasing the complexity and therefore risk in his business.
A better answer is for advisers is to focus on the type of client they are best set-up to look after. If an advice firm has a really slick service for clients with £20,000 ISA, they are better doubling down on that niche and not attempting to look after the more complex, wealthy client who probably needs a different service. The same goes for the firm that is excellent at providing the kind of service a £4,000,000 client needs and just looking after similar clients to that.
In this way each firm is specialist at looking after people who are similar to each other. More profitable for the business and a better, more appropriate service for the clients.
This is the most extreme example that we have come across but all firms charging a percentage share the same problem. A % fee incentives advisers to onboard as many clients as possible almost regardless of what they are worth. In the same way that to a hammer everything looks like a nail, for most advisers, every client looks like revenue.
There are multiple studies that show that advisers can offer a better service if they look after a niche and that prospective clients most value a firm that looks after people like them. In reality most firms build a disparate collection of clients of all ages, all professions and with all levels of wealth. This makes it less efficient and therefore more costly, to learn multiple employer benefit packages or deal with the needs of a 20 year old and 80 year old.
The solution is of course to charge everyone the same £ fee and not % fee. It becomes clear very quickly who an adviser can and can’t serve when you ask them to set a single price for their service.
The push back is often that flat fee advisers can’t offer a fee that is attractive to clients with smaller wealth. As you can see from our Home page with a map of flat fee advisers and transparency over their charging, there is a wide range of flat fees available in the UK. If these firms, pushing against the entrenched and unfair industry charging model can’t make a service profitable for your circumstances, you will be a loss making client for a percentage adviser and that is not a good place to be.
If you want to be matched with an adviser who will charge fairly for your own circumstances, get in touch with us.