Financial planning is a long road to your clients’ final destination. The quality of that road, the tarmac, the lighting, and who they take on their journey with them, can all determine how long it takes them to reach where they’re going — and what shape they’re in when they finally get there.
A good financial planner will put your clients’ needs first and any potential solutions second. They will work on building trust and understanding. So, when they eventually generate a plan for your clients, it is tailored to their specific needs and is best suited to helping them meet their long-term goals and to unlock their desired lifestyles.
This is where their attitude to fees becomes key. Traditionally, many financial planners tend to use a percentage-based model that aims to guarantee them higher returns if they have generated significant growth for their clients’ assets.
However, this system doesn’t put your clients’ needs first, so a fixed-fee approach may have more value for them than a percentage-based agreement.
Read on to discover why financial planners typically charge percentage-based fees, how fixed fees could be better for your clients, and a few key lessons from a sour old miser of Christmas Carol fame — “bah humbug!”
Percentage-based fees were the industry standard, but people are pushing for change
Up until the last few years, it was considered the industry norm to charge clients on a percentage-based fee model. This incentivised financial planners to take bigger risks with clients’ investments in order to generate greater growth and better returns for the adviser.
A study by the Financial Conduct Authority (FCA) found that advisers charge an average of 2.4% of the amount invested for initial advice and 1.9% a year for ongoing advice (made up of 0.8% for advice with underlying product and portfolio charges on top).
We believe this approach is inherently unfair on the client as it puts their financial future under unnecessary risk and doesn’t put their best interests first and foremost.
Financial planning is a peaceful hike to a mountain’s summit, taking in the views along the way, before reaching the end goal. It isn’t necessary to down energy drinks and sprint up the mountain. The end goal is the same, but one approach to getting there is far more dangerous than the other.
According to Money Marketing, the majority of advice firms still charge clients using a percentage-based model, particularly for ongoing services, but this system is coming under increasing scrutiny from the FCA. The pressure on firms to review their internal models could intensify further when the new Consumer Duty takes effect in 2023.
Read more: Everything you need to know about the FCA’s Consumer Duty and how it affects your clients
At Grey Parrot, we believe percentage-based fees are unfair. Instead, we charge a fairer fixed fee that reflects the actual work we do.
The dilemma your clients face is whether to be Scrooge or get “Scrooged”. So, what would old Ebenezer do?
Fixed fees ensure that your clients goals come first and solutions second
We know which system Scrooge would prefer if he was acting as your clients’ financial adviser — the one that generates him the greatest returns.
Money Marketing shows the disparity in returns for financial planners, based on respective charging models, in the chart below:
Source: Money Marketing
This data backs up FCA suggestions that advisers across the board have increased their ongoing charges since the Retail Distribution Review (RDR) and it is likely that many have not added additional services to justify their greater gains.
So, in order for your clients to avoid being Scrooged out of funds they shouldn’t have to part with and might better be used elsewhere, they should flip the script and think like Scrooge themselves.
A fixed-fee system reflects the work planners do, and isn’t a fee based on the value of your clients’ ongoing investments. It puts your clients right at the heart of any plans and key decisions.
Let’s take someone who invests £500,000 with a traditional financial adviser charging them the FCA’s 1.9% average of that amount each year. Over 10 years, let’s say their investments increase in value to £1,000,000. That means the amount your clients pay to them has now doubled – even though they’re doing exactly the same amount of work. We don’t think that’s fair.
So instead, we charge a fixed fee, adjusted for inflation. That means, in 10 years’ time, even if the value of your client’s investments has doubled, their fees won’t have changed in real terms.
We know that when grumpy old Ebenezer is considering his investments, he is going to want an adviser that puts his goals before everything else and generates growth while saving him money. So, oddly enough this holiday season, it might be worth your clients thinking like Scrooge.
Fixed fees save your clients money and ensures the service they receive isn’t dependent on how much they invest
If your client’s financial planner has been delivering the same amount of work for them year on year but has seen their respective fees skyrocket as your clients’ investments have begun to see sizeable returns — it can leave a bitter taste in their mouths.
It’s almost hard not to feel like Scrooge when you feel like you’re being ripped off each year.
At Grey Parrot, our fixed-fee model allows for those extra funds your client might generate to be put to better use, such as building compound returns on their investments or helping them account for any unexpected expenses that would otherwise cause budgetary constraints.
We also won’t push your clients to take unnecessary risks. We aren’t incentivised to get your clients to invest just because it pays us more. So, when they’ve hit their goals, we can simply turn around and tell them — stop!
It doesn’t mean we don’t work hard to ensure their investments generate the wealth needed to reach their goals. We just approach investing differently with our evidence-based, passive approach.
Read more: What can the story of Billy Beane teach your clients about the benefits of evidence-based investing
At Grey Parrot, we believe the core goal of financial planning should always be helping your clients to meet their long-term goals and achieve the type of lifestyle they desire. In working together with that objective in mind, both parties thrive.
Get in touch
If your clients could benefit from an alternative approach to receiving financial advice, and possibly benefit from significant savings achieved through a fixed-fee model, they should contact us by email at info@grey-parrot.co.uk or call us at 02039 871782.
Please note
This article is no substitute for financial advice and should not be treated as such. To determine the best course of action for your individual circumstances, please contact us.
The value of your investment can go down as well as up and you may not get back the full amount you invested. Past performance is not a reliable indicator of future performance.
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