While our innovative approach to fees sets us apart from other financial advice and planning firms, we also recognise that the way most firms charge creates confusion. To bring some context to our fees, in this article we explain the fee structure most other firms offer and look at how that can impact you over the long term.
Large initial fees based on the amount of money you are investing
Research published by the Financial Conduct Authority (FCA) in December 20201 shows that financial advisers typically charge:
- 2.4% of the amount invested as an initial fee, plus;
- 0.8% per year for ongoing advice.
On a portfolio of £1 million, that’s:
- An initial fee of £24,000, plus;
- An ongoing fee of £8,000 per year.
This is regardless of your requirements, the complexity of your circumstances, or the amount of work involved.
Pay additional fees each time you add to your investment
In addition to the ongoing advice fee of, in this example, 0.8% or £8,000 per year, many firms will apply further charges for:
- Investing money in your existing financial arrangements
- Annual ISA contributions
- Withdrawing money from pensions and other assets
- Creating your lifetime cash flow and financial plans
- Fund switches
- Arranging protection contracts such as life insurance.
This means that if you have an additional £100,000 to invest, based on this example, a further £2,400 would be charged to add the money to your existing financial arrangements and, on average, an additional £800 added to your ongoing fee each year – even if the service you’re receiving is exactly as it was before.
The prospect of paying further fees can impact your willingness to make some investment decisions that would otherwise be your preference. For example, we have recently had several clients who were reluctant landlords that have now sold their properties and invested the proceeds. If they had anticipated a 2.4% initial fee and their ongoing fee to increase as a result of this, they may have continued being landlords for years to come, despite their views on doing so.
What you pay increases with the value of your portfolio
Most financial services firms charge a percentage of the amount you are investing rather than a fee that’s fixed. This means the amount you pay increases as your wealth grows over time.
Initially, that might seem fair. It’s not hard to imagine a financial adviser justifying this approach: “We’re pulling in the same direction; the more money you make, the better we do.”
But in reality, this means much less money stays in your pocket over the long term.
Let’s look at an example of an investment of £1 million with a financial adviser charging 1% per year, as many do. We’ll also assume that their investments grow by 5% each year after charges.
At the end of year one, the financial adviser receives £10,500. However, by year 10 that’s risen to £14,880 each year. An increase of almost half the ongoing fee agreed at the outset. Given many investment timeframes are over several decades, rather than one, when totalled up this has a huge impact on your long-term wealth.
We believe such a significant increase in fees should be discussed and agreed in advance. Are you now getting more value in return for that additional fee? If your circumstances have become more complex the fee increase may be warranted, but experience tells us that is often not the case.
A percentage-based fee structure also means there’s an inherent conflict of interests. Your adviser may be inclined to recommend you invest your money, or leave it invested rather than spend it, as this determines what they are paid. With this approach, it can be difficult to have confidence they are acting in your best interests.
A fairer way to charge for financial planning
We believe a fair approach is one where you have absolute clarity of what you’ll pay in advance, based on your requirements not on the amount of money you’re investing. We don’t charge initial fees. Instead, we establish an all-inclusive* subscription, fixed in advance for the year but paid monthly, to reflect the work we’ll do over the coming year and the value we’ll add.
This can mean a saving of tens of thousands of pounds on initial fees alone.
Should your circumstances change and your affairs become simpler over the long term, we’ll reduce our subscription fee to reflect this. Equally, if your affairs become more complex and your requirements change for a period, we’d discuss and agree any increase to your fee in advance.
There are no tie-ins at any stage.
It’s worth us confirming how our fee structure sets us apart from other financial advisers.
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Most other financial advisers |
Life Matters |
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Initial fees
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Yes |
No |
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Percentage-based ongoing fees
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Yes |
No |
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Additional charges for investing more money
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Yes |
No |
If you’d like to understand how our fee model could work for you, we’d be delighted to have a chat.
We’ll compare our fees with those you’re currently paying and explain the services we offer. Armed with this information, you’ll then be able to decide what you believe is the fairest approach.
You can contact us at your@lifemattersfp.flywheelstaging.com or call 01202 025481.
* While this is almost always the case, we reserve the right to charge a separate fee for highly complex or unexpected projects. These will of course be agreed with you prior to engaging in any work.
1 FCA – ‘Evaluation of the impact of the Retail Distribution Review and the Financial Advice Market Review’ – December 2020 – Annex 1, point 63.