By ROBIN POWELL
There was an excellent piece by Neal Templin on financial advice fees in the Wall Street Journal the other day.
The question he was exploring was whether it’s time to say goodbye to the 1% advice fee. The piece featured 62-year-old Keith Rudman from North Carolina, who used to pay a small fortune to an adviser who charged him a percentage of his investable assets every year.
Then, four years ago, Mr Rudman parted company with his adviser and moved his eight-figure portfolio into passive investments. He now uses a financial planning firm that charges by the hour for advice on everything from from tax-loss harvesting to estate planning.
“They’re providing a ton more services than my old financial advisers and they’re charging me between a 10th and a 20th as much,” he explains.
My kind of consumer
Keith Rudman is my kind of consumer. Frankly I’m amazed there aren’t many more wealthy people who’ve come to the same conclusion as he has.
Expressed as percentages, investment costs seem relatively insignificant. But they add up and, just like returns, they compound. So you don’t just lose the amount of fees you pay; you also lose all the growth that money might have had for years into the future.
Say, for example, the adviser you use recommends a portfolio costing 1% a year. (In fact, if you’re exclusively using actively managed funds, the fees and charges, including transaction costs, could well be two or three times that amount. But I don’t want to scare you, so let’s assume a conservative 1%).
Imagine you invest £100,000. If that investment returns 6% a year for the next 25 years, you’d end up with about £430,000 minus costs. If, on the other hand, you paid 2% a year in costs — i.e. a 1% advice fee plus 1% for asset management — after 25 years you’d only have about £260,000.
In other words, paying just 2% a year would wipe out almost 40% of your eventual returns.
When viewed like that, the 1% advice fee starts to look very expensive. And remember, the more assets you have, and the longer you invest your money for, the more expensive it becomes.
How to receive value for money
As we’ve consistently said on this blog, good advice and, in particular, proper financial planning, are definitely worth paying for. There’s nothing wrong, in principle, with an adviser charging 1% every year. But, to justify that fee, they need to be providing a commensurate amount of value in return.
Sadly, the truth is that the vast majority of advisers around the world don’t even come close to providing that level of value.
For me, that leaves consumers with two main options. Yes, I know I’m biased and conflicted as everyone in this space is, but you should choose a firm, like RockWealth, that charges fixed fees rather than percentage fees and provides a comprehensive range of services.
Alternatively, if you don’t feel you need an on-going relationship with the same adviser or advice firm (and frankly many people don’t), you should find an adviser who is willing to charge you an hourly fee as and when you need advice.
Ten years from now
It is, of course, up to advice firms to charge their clients in whatever way they want. But, ten years from now, my guess is that very few firms will still be charging 1% a year.
Percentage fees aren’t wrong per se, especially for younger people with smaller portfolios. But firms will come under increasing pressure to reduce the percentage they charge — certainly for wealthier clients. I also expect to see many more firms offering fixed-fee, hourly-fee or subscription-based charging models.
For now though, it’s time to face facts: the 1% advice fee is pretty much toast.
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Robin is a journalist and campaigner for positive change in global investing. He runs Regis Media, a niche provider of content marketing for financial advice firms with an evidence-based investment philosophy. He also works as a consultant to other disruptive firms in the investing sector.
