Flat Fees
There are several fees in financial planning. Initial plan fees (adviser), initial investment fees (adviser), ongoing fees (adviser), ongoing administration fees (platform), ongoing investment management fees (investment manager and sometimes adviser), ongoing fund fees (fund manager) and transactional fees (various but collected by the fund manager).
A reduction in any or all these fees is money that you have saved, which will increase your wealth. Over time, growth on a bigger pot of wealth will compound up and grow your money to a much bigger number.
Simply put; if your investments grow 7% a year but the sum of the above charges is 2% a year, your money will only grow at 5% a year. Over 36 years, 2% per annum additional growth will double your money. That is a huge impact and could be the true cost of remaining with your existing adviser.
Before we look at whether you can reduce or avoid these fees, let’s look at whether they are worth paying at all. The starting point is to consider what value they all add. There are various research reports (largely US based) which try to quantify the value an adviser can add to your wealth. The headline numbers quoted are often large with additional 2%-4% per annum.
One of the most often quoted reports is the 2013 Morningstar Report Alpha, Beta and now Gamma. There are a couple of notes of caution with this report. Firstly, Morningstar sell services to advisers, and you should always look at how money motivates research. Secondly there are a lot of assumptions in the report that might not reflect reality, as it is so hard to measure whether an adviser adds value. Leading adviser blogger Michael Kitces covered the report in this post. So be careful of any adviser claiming to add 4% per annum of value, to justify the cost of 2% per annum.
Where an adviser can add value is in coaching you up to the right level of shares in your portfolio (more shares = more volatility but also higher average returns), coach you not to make errors in your portfolio in reaction to events, minimise tax on your portfolio and help you to plan your future. This is worth paying for, but some advisers will take a low or no initial plan fee and/or initial investment fees if they are focussed on a long-term relationship with you as a client. Provided the planning is still good then this is one way to reduce the initial costs.
There is little to no evidence that an adviser can get you a better ongoing return on your investment by fund picking, so let’s look at the other ongoing fees.
Platform fees are next up, these are worth paying because anyone with money needs someone to hold their investments (custody), manage their tax reporting to HMRC and handle cash in and out. Platform fees vary from zero in the US, and 0.05% to 0.5% per annum in the UK. There has been a downward trend in platform fees in the last decade but look at what you are paying for a platform, as even a 0.2% difference in fees will make an impact over time. Typically, the smaller percentage fees from adviser platforms are only available to those with large portfolios as most platforms have tiered charging. Many direct to client platforms will charge fixed fees which can be incredibly cheap but most wont deal with advisers and so only suit self-investors.
There is often an investment manager (with a discretionary or advisory agreement) between you as the client and your funds. This might be your adviser or an investment manager that your adviser has selected. The charges for this type of management range widely from 1% for a bespoke portfolio to as little as £20 per month for a templated portfolio. The bigger your portfolio the more you can save looking for a flat monthly investment management fee.
Ultimately your portfolio might be invested in funds, individual stocks, or a mix of both. Any funds used will also have an ongoing charge and again the costs can vary enormously, read our page on investment planning for more information about this.
At Altor we only take on clients who are interested in a long-term financial planning relationship with us. Every client we take on costs us money initially, but we know that we will recover this over time if we do a good job. We will not charge an initial plan fee or implementation fee and so your money will not have a lower starting point due to costs. We never take a percentage of your money and charge everyone one of two flat monthly fees depending on complexity. For those with £1million plus of wealth this is significantly lower cost than the average percentage equivalent and will compound up over the lifetime of our relationship into a much bigger pot of money to spend than the alternative. We also work with a range of investment managers the majority of whom offer a flat monthly fee for their services, driving further cost reductions. Lastly, we have access to institutional pricing of funds which means very low fund charges compared to the average, with the most used being 0.08% per annum. The combination of all these savings adds up to a huge compound increase in our client’s money over time compared to our competitors.
If you are reading this and have less than £1million invested (which starts to reduce the cost-effectiveness of our flat fee model), please do contact us as we work with several advice firms that are set-up to advise on smaller, simpler portfolios and charge a lower flat monthly fee.
Flat fees are the only option available to Altor clients in our Bespoke, Main and Family Services.
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