In 1902, the French administration running Hanoi had a problem with rats. The city’s smart new sewers had turned out to be a superb rat motorway, and the rats carried plague. So the authorities did the sensible thing and put a price on them. A small bounty for every rat killed, payable on production of the tail.
It worked, in the way these things do. Tails poured in by the thousand. And yet the rats didn’t thin out. Then someone noticed live rats scurrying around Hanoi with no tails.
The rat-catchers had worked it out faster than their employers. Why kill a rat when you can dock its tail, let it go, and wait for it to breed you more tails? A few enterprising souls skipped the streets altogether and started farming rats at home.
The bounty didn’t reduce the rats. It paid people to produce them.
I think about that story whenever the subject of how you pay for financial advice comes up, because every payment arrangement quietly contains an incentive, and the incentive doesn’t care what anybody intended.
Which brings me to Bill Perkins. Perkins is an energy trader, a former hedge fund manager, and, as he’s the first to insist, not a financial adviser. His book Die With Zero makes a provocative case: that the goal isn’t to end up the richest person in the graveyard, but to use your money, deliberately, for a life, and to run it down on purpose rather than hoard it for a day that may never come.
Along the way he makes a point that stuck with me. If your adviser is paid a percentage of the assets they manage for you, they have no earthly reason to help you spend that money down. Their fee rises and falls with your balance. Every time they suggest you give more away, spend more on the family, or retire a couple of years early, they are, in a small and precise way, voting to cut their own pay.
It isn’t that your adviser is a villain. It’s that the percentage model pays them, quite exactly, to prefer your money stays where it is.
Now, plenty of advisers overcome that pull every day and do the right thing regardless. Incentives aren’t destiny. But they are real, and they only point one way, and the client rarely sees the tension at all.
This, in case you were wondering, is a large part of why we charge a flat monthly fees. Not because it’s tidy, though it is, but because it takes the tail-docking out of the equation. When our fee doesn’t move with your balance, “spend a bit more”, “give it away now”, “you can afford to stop” all cost us precisely nothing to say. We can give you the advice that suits your life, rather than the advice that suits our invoice.
Perkins wanted people to reach the end having actually used what they earned. That’s hard enough to do on its own. It’s harder still if the person helping you is quietly paid to hope you never manage it.
We help people in Hook and across Hampshire, Surrey, Berkshire, Sussex and Kent plan for the life they want, including the spending of it. It’s a nicer problem to work on than most.
Altor Wealth Management LLP is authorised and regulated by the Financial Conduct Authority (FCA number 769033). Registered office: Landmark House, Station Road, Hook, Hampshire RG27 9HA. This article is general information, not personal advice. The value of investments can fall as well as rise, and tax treatment depends on your own circumstances and can change.