Cost of ‘overcharging’ percentage advice fees calculated

Cost of ‘overcharging’ percentage advice fees calculated

The percentage fee, based on the value of the money invested, transfers too much money from your life savings into the coffers of wealth managers, according to a report.

Capital Asset Management has produced an 18-page report that claims to lift the lid on the “vested interests” that have resulted in many consumers paying too much for advice and wealth management.

Alan Smith, chief executive of Capital Asset Management, said: “Investors should be asking some tough questions of their wealth managers if they insist on clinging to the old broken model.”

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The report calculated just how much some individuals are being overcharged for the services they receive from advisers in 2017.

Option A in the report is the 1 per cent percentage advice fee model and option B is the flat-fee-for-service alternative version. 

A lump sum of £1m is invested over 30 years at an annual growth rate of 7.6 per cent. 

The percentage fee of 1 per cent starts at £10,000 and moves in line with the portfolio value. 

The flat fee also starts at £10,000 and increases at the long term inflation target for the UK (2 per cent), adjusted every three years. 

After 30 years the difference in value based on these two charging methods alone is then highlighted by the report as the investor who selected option A would have £1m less than the investor opting for option B. 

The report stated: “That is clearly a vast sum of money which the investor has overpaid and transferred from their own family’s wealth to that of their wealth manager.”

According to the report, the secondary problem is that the fee paid by clients is not always equal to the service they receive in return. 

The report claimed the wealth management advice fee of 1 per cent a year or thereabouts (the percentage may vary), is often well documented and hidden in plain sight. 

The report stated: “Over a lifetime of investing, this percentage fee eats away at the money being invested (the portfolio) but the real consequence is rarely seen, known or understood by the investor. 

“There is a flaw here because in the percentage model even if the service selected is simply to manage investments, there isn’t a direct cost relationship between managing, say £100,000 and £1m. 

“The point is that it doesn’t cost the wealth management firm ten times as much to manage £1m and yet the fees charged may be 10 times greater.”

The report quotes Paul Lewis, presenter of Radio 4 Moneybox, as supporting this view.

He said: “Only use a financial planner who you can pay in pounds. Never choose one who wants to charge you a percentage of your money. Percentage fees are a hangover from the days of commission. 

“If you cannot afford the fee in pounds you probably do not need financial advice.”