Fee for Service Financial Advice

Fee for Service Financial Advice – what is the problem with percentage based advice fees?

Many reviews into financial advice have recommended that percentage based fees be banned in financial advice, most recently the Hayne Royal Commission[1] but much of the industry fights to keep these percentage based fees. So what is wrong with percentage based adviser service fees?

A percentage based fee causes a bias towards growing the clients wealth which advisers argue is good and it can seem that way but many changes people and in this case the lure or effect of these percentage based fees causes negative effects. Negative effects I have noticed personally working with clients and also reviewing other financial advisers work are:

A percentage based fee creates a risk taking attitude in advisers were they want growth in clients assets, as for each 10% in asset growth an adviser on a percentage based fee will grow their own income 10%. There are times when it is good to be conservative; there are also clients who either through their own attitudes or stage in life need to be invested in a conservative way. In these cases the advisers desire to grow their own income may overpower the interests of the clients to be invested in a conservative (and low growth) way.

When clients are in retirement it also creates a bias problem – a bias towards clients not spending their money. Think if a client spends $100,000 on a home renovation and that client’s financial adviser is getting paid a 1% advice fee then their income goes down $1000, that is a meaningful reduction in income. Some of you may go hang on that is good to not spend money but you need to remember the whole point of the retirement system is you save and grow your money while you work and then spend it when you retire. When I am working with retirees I often need to spend time teaching and coaching clients about this; that it is ok to spend money in retirement and live life. Obviously it is best to do this in a planned way where you have forecast how long your retirement funds will last but you are supposed to spend money when you retire!

Under and over servicing – lets say you have $100,000 in super and your adviser charges you 1% – that is a $1000 fee per year you are paying your adviser. Now lets say the same adviser has a client with $2,000,000 and they are also charged 1% – that is a $20,000 fee. Now if you have $2,000,000 invested yes maybe there is a little bit more work than on a $100,000 client but there is not 20 times the amount of work so in practice clients with larger balances are subsidising clients of the same adviser who have smaller balances. On the other side if you have a smaller balance you may find you are not able to get much service because the adviser knows they are not making much money from you as a client.

Because of these problems I personally do not charge percentage based fees for any of my clients. As an adviser a lot of my work is one off advice on a specific financial situation a client finds themselves in for example they might be retiring and what to understand how much they will have to live on, the age pension and these sort of topics. Or perhaps the clients have just inherited a sum of money. Where we do manage clients money on an ongoing basis we charge set fees for this work which are agreed with the clients each year based on the amount of work and requirements of the client.

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[1] https://www.royalcommission.gov.au/banking#:~:text=The%20Royal%20Commission%20into%20Misconduct,into%20misconduct%20in%20the%20banking%2C