It’s smart to pay flat fees
Writing in FT Money today, Jason Butler argues ‘you need a plan not an expensive portfolio‘. Smart thinking.
‘While most people need a dynamic financial plan which will help them improve financial outcomes’ observes former financial planner Butler, ‘most are getting an expensive commoditised portfolio management service. Or as someone once said, people are paying the price of a Picasso for painting by numbers’.
Butler quotes an example of a former client with a £6m portfolio who came from a private bank where his total investment costs were setting him back £120,000, 2% of assets, every year. In our experience this is not unusual and it’s not just the private banks who know how to rack the charges up while concealing the truth that the investment solution is just not worth it.
But is there really a viable alternative, other than for the very wealthy? For a comprehensive, personalised, unbiased wealth management service, he suggests most providers would charge a fixed fee of £25,000. But hardly any do charge flat fees, let alone at any typical level.
We do charge fixed fees, based on service scope and cost. We have done since we started, ten years ago. Whilst there is a clear correlation between each of wealth levels, the scope and complexity of the problems and the professional time and skill required for designing and implementing optimal solutions, we think the true costs per client typically lie between £5,000 and £25,000 pa. This range includes an estimate for the small part of a wealth manager’s costs and capital requirements that are determined entirely by size. This is a much narrower range than in typical wealth management firms but it is hard to make it even narrower.
To this flat fee must be added the low-cost investment vehicles Butler favours, plus a ‘platform’ charge (low-cost providers do not typically provide custody). Since these third-party charges are value based, the 2% all-in cost can only be bettered with a starting portfolio of £325,000.
The portfolio-based fee convention is a socialist business model, transferring wealth from large to small investors via subsidisation of service costs. But it is not one the wealthy consciously voted for. We share Butler’s view, well put in this article, that portfolio-based fees create conflicts between clients and agents, who cannot possibly all share the same set of interests, and then only do by chance. He gives some good examples. But we also feel strongly that an industry based on cross-subsidy is not ethical. It falls foul of strict fiduciary standards, for instance, which is why you do not see it in the professions (see our paper, If investment managers were fiduciaries). But that leaves the industry with a considerable challenge if it is to solve the ethical problem without creating economic barriers. The challenge might be described as providing goal-based portfolio management for people with much less than £0.5m to invest, at all-in costs of no more than 1% for most of their plan duration, allowing them to retain about three quarters of the expected long-term risk premium.
Technology is almost certainly a big part of the answer. Butler suggests basic ‘virtual’ services might come in around £300. The gap between £300 and £5,000 is still a sizeable incentive for someone to come up with a strong value proposition for the mass affluent market right up to the very wealthy that is planning based, customised and more Picasso than painting by numbers. What most encourages us is our own experience that, the more complex and multi-faceted the problem, the better (not just cheaper) it is to solve it with computer logic. See our recent post, The rise of the robots.