About seven years ago, I attended a meeting with 20 other financial advisers from around the UK.
Of the 20, my firm was the only one charging on a time cost basis. Everyone else relied on a percentage of the amount invested for their remuneration. The consensus was that we were committing financial suicide, clients will not pay for our time. (To be fair, there have been times when I have thought they would be proved right, but, hey ho, tell me I can’t do something…)
They did not know I had been running our business for over 20 years.
The following is typical of the conversations I had that day:
Me: “What is the aim of your business?”
IFA: “To get £50 million under management. We charge 3% for initial advice then 1% per annum after that. We will then earn £500,000 a year.”
The reality: Very nice! No mention of the benefits to the client.
Me: “What do you do for your money?”
IFA: “Well, we will analyse the client’s attitude to investment risk, research funds, using alpha, beta, Sharpe ratio and information ration to build a portfolio within their risk profile.”
The reality: So, you find out how much pain the client can take (like sticking pins into them) then you give them that pain.
Without cash flow modelling, how can they know how much risk the client needs to take to achieve their objectives?
The fund recommendations are based on past performance, which is a prehistoric way of doing things.
You would charge £3,000 probably for no more than 6 - 8 hours work for a portfolio of £100,000…. Ouch!
Me: “So, what do you do then to earn your 1%?”
IFA: “Every year we will review the funds and if they are under performing, we will recommend switching to new funds. We will also re-balance and provide a six-monthly newsletter. We will do the same next year and the year after.”
The reality: Hmm, every year, you are going to (not) tell the client that you got your research wrong the previous year and need to switch funds. You will charge for re-balancing the portfolio, (which, on the platform we use, only requires a box ticking so it is done automatically every year) and all the ‘newsletters’ I have seen are basically either offers to sell new products or are a catalogue for the poor client to buy new products. I hope the paper is absorbent, so they have some real use.
Would you pay £1,000 + a year for this service?
Good value? I don’t think so.
If the adviser relies on the value of your investments for their remuneration, what happens when the client asks the adviser their opinion on encashing £50,000 to help their daughter get on the housing ladder?
Exactly…there is a massive conflict of interests that most people seem to be unaware of!
These wealth managers, who cream off 1% for adding very little value are dinosaurs and their days are numbered.
The future of financial advice is not advice but planning.
The Oxford English Dictionary says that advice is ‘an opinion as to a future action’ whereas planning is ‘devising a scheme to achieve a purpose’. Planning precedes advice or recommendation.
Financial planning is a professional service for individuals, their families, and businesses, who need objective assistance in organising their financial affairs to achieve their financial and lifestyle objectives more readily.
A good financial planner should not get excited about products and the link between advisers’ remuneration and those products should be broken. If a product is recommended, it should only be because it will do a specific job and the adviser should not be paid specifically for establishing this product.
When this link is broken, clients should benefit from a professional service, similar to accountants and solicitors, and pay a non-product related fee, either time based or fixed. When fees are paid directly, and not hidden as an ‘adviser fee’ deducted from the product, they should be able to understand and measure the value of this service.
If you meet a financial adviser and they are only interested in your money, treat them as a T-Rex and run for your money and your life(style)!
If you would like to talk to a truly independent financial planner please get in touch on 01661 860438 or email David at firstname.lastname@example.org
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