Introduction
If you have never used a financial planner before, you may not understand how much it costs to use one, or how they calculate their fees. This blog outlines our approach – a fixed fee financial advice service, and compares it to the old model of paying percentage-based fees.
With the percentage based structure, the fees you pay for financial advice increase as the amount of money invested with the financial planning firm increases.
At Principled, we believe in a more transparent and client-friendly approach. We calculate our fees based on the complexity of managing our client’s finances, and in this blog post, we’ll delve into the reasons why opting for fixed fees for financial advice is a superior choice for individuals seeking sound financial planning.
Transparency and Predictability:
Fixed fees provide a clear and predictable structure, allowing clients to budget effectively for their financial planning needs. With percentage-based fees, the cost of services can fluctuate based on the performance of your investments, potentially leading to unexpected charges. In contrast, fixed fees eliminate uncertainties, fostering a transparent client-advisor relationship.
Alignment of Interests:
When financial advisors charge a percentage of assets under management (AUM), their remuneration is directly tied to the value of a client’s portfolio. This can create a conflict of interest, as advisors might be motivated to recommend strategies that boost the AUM, even if they may not be in the client’s best interest. Rather than encourage clients to live a fulfilling life, they could encourage clients to be tighter with their money, turning them into the “richest person in the graveyard”.
Fixed fees align the advisor’s focus with the client’s goals, ensuring unbiased recommendations without the temptation to prioritise asset growth over financial well-being.
No Punishment for Success:
Percentage-based fees can become a burden for clients whose portfolios experience significant growth. As the value of assets increases, so does the fee charged by the advisor. For example, if a client inherited some money and added it to their investments, they would suddenly be paying a bigger fee to their adviser, but the service that they continued to receive would likely be identical. Fixed fees, on the other hand, remain constant regardless of portfolio performance. This approach ensures that clients don’t feel penalized for achieving financial success and are more likely to stay on course with their long-term investment strategies.
Incentive for Efficiency:
Fixed fees encourage financial advisors to be more efficient in their service delivery. Rather than relying on the size of a client’s portfolio for compensation, advisors are motivated to streamline their processes and provide high-quality advice that adds tangible value to the client’s financial situation.
Better value for individuals and couples with more savings
With percentage based charges, the clients with more capital effectively subsidise those with less capital. The clients with lower capital pay much lower fees, despite often receiving a very similar service to those with more capital, and so the financial adviser relies on the higher capital clients to be profitable overall.
Fixed fee financial advice: more appropriate for a modern financial planning service
Modern financial planners do much more than simply manage investments for clients. In fact, many financial planners outsource the day to day investment management to discretionary fund managers.
We believe that we add much more value to our clients’ lives through diligent, holistic, financial planning. We facilitate difficult conversations, we help people form and understand their goals, and put in place suitable arrangements so that they can live fulfilling lives. Amongst many other facets of our service, we provide cashflow models, put in place protection arrangements where appropriate, advise on various forms of tax, help people get the most out of their cash savings, deal with annual and lifetime allowance matters, and undertake complex calculations on defined benefit pensions.
Charging for all of this by applying an arbitrary percentage, to a random value of investments that are under the adviser’s control is nonsensical to us. We believe that if you claim to be a modern holistic financial planner, you should set your fees in a modern and transparent manner, and not base it on the old commission model.
Conclusion:
At Principled, we firmly believe that a fixed fee financial advice service creates a client-adviser relationship built on trust, transparency, and shared goals. This approach not only provides predictability and fairness but also ensures that our clients receive unbiased, personalised advice that puts their financial well-being first. Choosing fixed fees over percentage-based fees is a step towards a more equitable and client-centric financial planning experience.
With our charging structure, we believe that if you are an individual or a couple with capital of around £400k, we are likely to be competitively priced compared to a percentage based adviser. Generally with fixed fees, the more capital you hold, the better value the fee structure becomes for you, to the point where you could be savings several thousands of pounds each year by moving away from a percentage based fee structure.
Whilst this post refers to the fees financial planners charge for providing an ongoing service, we’ve previously discussed initial fees for protection products. You can find this page here: Fee based protection services offered by Principled – Principled (principledfinancialservices.co.uk)