This week I’ve noticed a common theme and something that I’m not overly-happy about! I’ve been having a number of conversations about client fees, and I must admit that I am mildly irritated by it.
Only yesterday I was in a discussion with a well-known investment platform. The platform is considering implementing a minimum fee for users. The fee they suggested is £159 a year (which is equivalent to £13.25 a month). The suggestion is so absurd that it makes me angry.
For example, let’s say a client aged 32 wants to start saving into a pension or an ISA but all they can afford is £100 a month – the minimum charge would reduce their monthly savings to only £86.75 and no one in their right mind would start a plan like that and no adviser could recommend it (I am smiling when I see the reaction from the FCA!). Younger people are our future, and we need to help them save for their futures in any way that we can.
I can think of many clients who I have helped over the years who started with almost nothing and now have healthy investment portfolios of a quarter of a million pounds. What about the client who is currently investing £100 a month and has just inherited a sizeable five figure sum? His experience of investing his £100 has given him the confidence to know how to invest his inheritance and he doesn’t want to go anywhere else to do it.
The Long-Term Viewpoint
We all have to take a longer-term view thinking about how the client starting out on his or her investment path can be taken on and helped by keeping costs as low as possible. In any case, I certainly do not want to be seen as someone who shows the door to young clients who need my help. In my meeting yesterday with this particular investment platform, I asked, “Do you want to make the headline XXX platform no longer helps young clients because they can’t make enough money out of them?” From the expression on their faces I think that my question was duly noted!
In a different session I was in a long discussion about how I could recommend that a client invest on a platform where the platform and fund charge amounted to 0.75%, when another platform and fund manager were charging 0.1% less. The quantitative analysis tools always focus on charges, whereas value is much more important than cost. For example, my recommendation has a very easy administration system so that if a client wants to make changes, they can be done in a few minutes. The alternative system takes 45 minutes to answer the phone and instead of accepting digital signatures, they insist on having paperwork signed by the client and posted to them. This not only causes delay and frustration for the client, but it takes up our time and that must be reflected in our charges. Whereas for our own recommendation, we apply no charges for administrative changes – the alternative would have to incur a cost of £50 or so, and that would soon mount up.
The last part of the discussion focussed on our charges where we charge 1% of the fund value per annum at 0.083% (which is paid monthly) and we a apply no other charges. Some adviser firms may have a different charging structure and charge 0.5% or 0.75% and then charge additional fees for other services – we decided on the simple option because it was more transparent and easier for everyone to understand. For our 1%, we monitor and make recommendations to our clients’ portfolios, supply them fund reports and analysis, perform a quarterly rebalance to ensure that their portfolio remains consistent, perform an annual ‘bed and ISA’ to ensure that our clients utilise their annual ISA allowance, make sure that they use their annual CGT allowance, and much more – all for no additional cost!
Additionally, each client is given an EDVOA report every year which illustrates that our involvement in their investment typically adds about 3.1% a year to their investments, so deducting our 1% gives them a net gain of 2.1% after the deduction of our fee. An example is on our website at the following: –
Over forty years ago when I was teaching metalwork and woodwork in a Birmingham comprehensive a wise head of department gave me a story that has stayed with me. He told me about one of the families in his class who insisted on having a new shiny bike at the lowest cost. They paid £50 for a new bike (the price was 40 years ago), the bike lasted 6 months because it was the cheapest and then they bought another new shiny bike which only lasted another 6 months. By contrast another family bought a bike for £100 which was still as good as new in 12 months’ time and was passed to their second child a year or so later.
The second family was focused on value and not cost and ironically, the first family paid more for their shiny new bikes over the years than the second family. The more expensive bike was probably safer too but that’s a story for another day.
So where do you sit? Are you someone who wants a ‘shiny new bike’ every six months or are you concerned about value? If you are already one of our clients, I know your answer already.