IFA: Clients don’t understand percentage fees

Last week, Money Management’s ‘secret IFA’ struck a chord with a number of readers with a diatribe on these pages taking umbrage with an apparent industry drive against percentage fees. Here another senior adviser (who has also asked to remain nameless to avoid a public flogging) responds.

That other secret IFA claims that percentage based fees are the right way to charge. He doesn’t like anyone to disagree with him because if they do they are “sanctimonius prigs”. How grown up is that?

Everyone has the right to a different opinion and that is all we are talking about; each approach has advantages and disadvantages. When other people voice an opinion apparently they are telling him how he should be doing it. He sounds very insecure: they are after all just voicing an equally valid opinion.

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Clients, we are told prefer paying percentages rather than monetary amounts and having tried all of the methods of charging over the years, the IFA has concluded that percentages are what is best for the client.

I agree and disagree because life, after all, is complex.

I agree that charging as a percentage is a perfectly valid way of charging, I disagree that all clients understand it. Let me tell you a story.

A new client came to see me. Husband and wife had inherited a lot of money, took advice from an IFA who advised them to invest the money. We examined the advice and as is the norm it was really good. Suitable products, suitable funds, suitable risk profiling - you know the kind of things that competent IFAs do every day.

So why had they come to talk to another adviser? Well unfortunately after the good advice had been delivered the ongoing service seemed to have slipped. The clients had now encashed their investments and were back in cash.

They showed me the suitability report and we started to work our way through it. They had invested £500,000.

“How much did your adviser charge you to do that?” I asked. Answer: “£1,000.”

“That sounds really good value to me, are you sure only £1,000?” I continued. Answer: “Yes, that’s right £1,000.”

Yes, you have guessed it. When we got to the final page of the report for the disclosure of adviser charging there it was: 1 per cent. So not £1,000, but £5,000. Clients understand percentages, do they?

By the way, I still think £5,000 was a pretty reasonable deal for them and told them so. But just don’t pretend people automatically understand percentages, because they don’t.

Occupation of these clients? Teachers (don’t get me started on the UK education system). They were in no way thick, but what they saw was not what they were being charged.

So it is a regulatory requirement that if adviser charges are expressed as a percentage they are converted into a monetary amount and disclosed to the client before the client buys a service. Simple really. Are you doing that each and every time?