The question of how much is a fair fee to charge clients for investment advice and management is likely to be a thorny one for advisers and providers this year but it is right that it has come to the fore.
Most decent advisers know that long term, fees are a critical influence on long term performance, or often underperformance in the case of some funds and investments. Overall, fees for investing remain too high in the UK and percentage fees are often to blame. Does it really cost twice as much to manage a portfolio of £1m as a portfolio of £500,000? Well it does, if you are a client paying the best part of 2 per cent in annual fees and costs to invest and this is levied whether your portfolio rises in value or falls (a factor often overlooked).
I suspect that in many cases complaints from investors about mis-selling or poor investment performance have often come back to excessively high fees being charged by provider, adviser or both over the long term.
In addition, research recently has backed up the view that many investors do not properly understand fees. The lack of a simple and clear “one-number” charge doesn’t help. There are too many layered fees and additional costs and charges which increasingly obfuscate the overall cost of investing.
A survey by Alliance Trust Savings found that one in three investors did not realise that they were paying admin fees with awareness particularly low among the over-45s. Even those who did understand they were being charged admin fees did not know how much. Only a minority knew whether they were being charged a flat fee or a percentage fee.
I’ve long believed that the only fair way forward for advisers and planners is to charge a separate per hour advice fee and have a set fee structure. They may wish to have higher per hour fees for bigger portfolios and this is not unreasonable but they should be clearly set out and not based on a percentage of the overall funds invested. Yes it does cost more to manage a larger portfolio than a smaller one but it must be a fair figure reflecting the amount of research and management time required.
I’m uneasy with advisers charging a blanket percentage fee regardless of the amount of work involved or the client’s circumstances. That can’t be right and must potentially damage long term performance. I suspect too many investors do not realise the overall damage to long term performance from fees of 2 or 3 per cent or higher per annum.
Good advisers, particularly those who see the fiduciary role as critical in any client relationship, will, of course, spend considerable time talking to clients about the impact of fees on their investments and what clients are getting for their money. I suspect too many poor advisers, however, don’t bother and just slap on a blanket percentage fee regardless of the work entailed.