IFA fee structures (new thread)

harlequin95

I'm looking to engage an IFA for the first time in many years; I've read the "IFA Quote" thread - I've always felt it strange that the market (us punters) appears to be happy to pay a fixed % pa. Consider:

1) Does an asset pool of , say, £2M, need 8 times as much servicing as a £250k pool?

2) At 0.75% pa (not untypical) the larger client above will pay £15,000 pa. This is a huge sum.

3) In times of high real growth (and/or high inflation), fixed % fees of this order seemed quite acceptable because they were small in comparison with real or apparent increase in value, but with the prospect of continuing low growth and low inflation I struggle to find them acceptable.

4) I've heard that some IFAs may cap fees, or use a sliding scale with % reducing as pot grows, though I've never been offered that. That would seem fairer, although it could reduce the incentive to seek growth - undesirable.

5) So the big question. Do any IFAs offer a fee structure which seriously rewards good performance? Of course I'm not expecting them to share in any losses (though that would be a really good incentive!), but paying, say 0.25% of the value + , say, 20% of the annual gain would seem a win-win situation to me. (I'd probably be happy to go rather higher than that 20% figure, it's a starting point for discussion)

EdSwippet

Have you looked at unbiased.co.uk?

Their adviser search offers several selectable payment options, one of which is 'fixed fee'. Other options, such as 'hourly rate' might also appeal more than percentage of assets.

jem16

harlequin95 wrote: »

4) I've heard that some IFAs may cap fees, or use a sliding scale with % reducing as pot grows, though I've never been offered that. That would seem fairer, although it could reduce the incentive to seek growth - undesirable.

Then you need to look around at a few in your area.

5) So the big question. Do any IFAs offer a fee structure which seriously rewards good performance? Of course I'm not expecting them to share in any losses (though that would be a really good incentive!), but paying, say 0.25% of the value + , say, 20% of the annual gain would seem a win-win situation to me. (I'd probably be happy to go rather higher than that 20% figure, it's a starting point for discussion)

I think you misunderstand what an IFA actually does. They are there to provide advice and planning but they are not there to guarantee (or even offer) fund performance - that would be the job of the fund manager.

Paying a 20% share of the annual gain would lead to problems with clients being put on higher risk portfolios than they would be happy with and the potential for higher losses. That's not what I would want from an IFA.

coyrls

You don't say what you want to engage an IFA for but there is no requirement to pay a per annum fee at all; you can pay a price for specific point advice. I am very slowly (my fault) getting round to getting quotes from IFAs for some advice that I need. The one quote I have so far is for 2 separate "one-off" pieces of advice and added together the quote comes to less than 0.75% of my (larger than average) "pot".

sandsy

A topical subject, a new article on this very topic today on Citywire's new model adviser section:


http://citywire.co.uk/new-model-adviser/news/percentage-problems-why-one-ifa-changed-the-way-he-charges/a806468?ref=new-model-adviser-todays-news-list

xylophone

Citywire's new model adviser section:


http://citywire.co.uk/new-model-advi...days-news-list

"Our duel aims of putting clients’ interests first and being willing to innovate and stay firmly ahead of the curve led us to debate the fairest way to charge for our investment services."

Pistols at dawn.......?:D

harlequin95

jem16 wrote: »

Then you need to look around at a few in your area.



I think you misunderstand what an IFA actually does. They are there to provide advice and planning but they are not there to guarantee (or even offer) fund performance - that would be the job of the fund manager.

Paying a 20% share of the annual gain would lead to problems with clients being put on higher risk portfolios than they would be happy with and the potential for higher losses. That's not what I would want from an IFA.

Regarding the latter point I can see the issue and it's food for thought.

I don't think I have any misunderstanding about what an IFA does. Advice and Planning may be good or bad, and my experience is that monetary incentives improve the quality of most services.

Clearly we don't engage IFA's other than with the expectation that they will add value, in general terms. I accept that this added value may come in many complex and subtle ways, and my putative link of fees to investment growth is a very crude measure, especially over the short term. But I think it's entirely logical that we should pay more for good advice which genuinely adds value, and less for poor advice which doesn't.

dunstonh

I've always felt it strange that the market (us punters) appears to be happy to pay a fixed % pa.

Its simple to understand and allows an element of cross subsidy. Most firms (nowadays, not historically) will do a tapering to ensure those with larger amounts dont get too much.

1) Does an asset pool of , say, £2M, need 8 times as much servicing as a £250k pool?

Not 8 times. It does cost more to deal with a portfolio of that side and it also comes with greater liability risk.

2) At 0.75% pa (not untypical) the larger client above will pay £15,000 pa. This is a huge sum.

0.75% is not atypical. However, the larger client would not likely find themselves on 0.75%. They would usually find it discounted.

4) I've heard that some IFAs may cap fees, or use a sliding scale with % reducing as pot grows, though I've never been offered that. That would seem fairer, although it could reduce the incentive to seek growth - undesirable.

Its the method I use and I know several other firms locally that also use that method. The retail distribution review certainly encourages tapering or having a decency cap in place.

5) So the big question. Do any IFAs offer a fee structure which seriously rewards good performance?

That would be a foolish pricing method. it would create risk bias. It results in the IFA being paid on the basis of something they are not doing. Plus, growth periods outnumber negative periods and you would pay more in the long run. it would create a high level of volatility to cashflow which could result in the firm failing and that is not a desirable consumer outcome.

Chickereeeee

harlequin95 wrote: »

I don't think I have any misunderstanding about what an IFA does. Advice and Planning may be good or bad, and my experience is that monetary incentives improve the quality of most services.

Clearly we don't engage IFA's other than with the expectation that they will add value, in general terms. I accept that this added value may come in many complex and subtle ways, and my putative link of fees to investment growth is a very crude measure, especially over the short term. But I think it's entirely logical that we should pay more for good advice which genuinely adds value, and less for poor advice which doesn't.

Take two portfolios, based on the recommendations of two seperate IFAs:

Porfolio a) after 10 years has doubled in value in real terms. But during the 10 years had halved in value, then recovered strongly in the last 4.

Portfolio b) after 10 years has only increased by 50%. But its value has not dropped to more than 90% of the inital amount in the intervening years.

Which has performed 'best'? Which would you thought had performed 'best' in each of the 10 years?

C

harlequin95

OK, cogent arguments have been made against linking fees to portfolio growth. I broadly accept those arguments;

What then could be used fairly and safely as a quantitative measure of an IFA's performance from the perspective of an individual client?

BTW I think some readers have assumed that I equate an IFA's performance directly with the performance of a portfolio managed according to his advice. Not so, although I initially suggested the latter initially as a potential indicator of the former. (And let's face it, something we are all interested in!)

dunstonh

What then could be used fairly and safely as a quantitative measure of an IFA's performance from the perspective of an individual client?

Are they doing what you employ them to do.