Paying Ongoing Advisor Charges

TheTracker

dunstonh wrote: »

it does matter as the charge in month 12 will be based on that value at that time.

£10k increased by £2000 after 6 months will see 6 months of fee taken on 10k and 6 months on 12k if paid monthly. If paid annually in month 12, the fee would be 12 months worth on £12k.

So, 6 lots of £10,000 @ 0.0833% is £49.98 and 6 lots of £12k @ 0.0833% is £59.98. Total £109.96

Whereas if taken as a single amount at the end of month 12 it would be £12,000 @ 1% which is £120

No, you've made mistakes.

First, you need to account for AER. If you're modelling a 20% increase in a year then thats not 20/12=1.67%pm but instead 1.531%pm (Excel RATE(12,,-10000,12000)). And a fee of 1%pa is .08372%pm (Excel RATE(12,,-10000,9900)) not 0.0833%. Second, you've forgot to adjust the reduction in monthly capital due to monthly fees when calculating the fee. Finally, you've modelled an arbitrary point of increase (in month 6), and if you want to see why this is important look at the consequence if you'd modelled it in month 1 or in month 12.

So with an average monthly growth rate of 1.531% and a monthly fee of .08372% your final capital after 12 months is £11880. Or with an average annual growth rate of 20% and an annual in arrears collection of 1% your final capital after 12 months is £11880.

Now what's interesting from a fee collectors point of view is that they make less money directly from the punter. That's because the money is in the market less time. Although in both cases the punter ends up with £11880, in the annual case the fee collector makes £120 but only £110.52 in the monthly case. Of course if the fee collector puts the collected fees into his own investment that is returning 20%pa then it would rise up to £120.

Perhaps I'm harsher than Average Joe, but I'd expect this to be basic stuff for IFAs.

Now I'm not an accountant or mathematician having only received high school maths, so take this as E&OE but in true Forum Style I'm pretty sure I am right and you are not.

Al.

The days of advisers taking 1% are fast fading. I can see a date/time when it'll become practically free - I am working on reducing my costs even further between now and next April whilst maintaining fair profitability. The Uber decision this morning typifies change and has introduced a wedge into the rockface that we (as advisers) ignore at our peril.

jem16

Al. wrote: »

The days of advisers taking 1% are fast fading. I can see a date/time when it'll become practically free

If you take absolutely nothing for ongoing advice, how are you making anything for reviews etc that you would expect from the ongoing cost?

Are you doing this work for nothing?

JohnRo

Pure speculation on my part but perhaps the robo adviser model is oriented towards covering the real costs rather than simply taxing client wealth, since the work required is significantly reduced.

Al.

Jem,

No, I can be profitable by being smart, I suppose what I'm not doing is being gratuitously profitable. I have spent nearly three years cutting my cost base, negotiating hard where I need to, and working more smartly in different ways. That benefit, I can pass on to my clients.

Specifically, no, I'm not working for nothing. Reading this messageboard shows me that many people are more insightful and better informed than many advisers were/are.

Al.

JohnRo wrote: »

Pure speculation on my part but perhaps the robo adviser model is oriented towards covering the real costs rather than simply taxing client wealth, since the work required is significantly reduced.

I have a robo service and to a large extent, you're right. It'd be unfair to correlate it on a like for like basis because I was working until midnight recently, on an case that robo would never ever be suitable for. That sort of case incurs cost that are unavoidable.

But for many clients, who don't want the intricate planning and costs that seems to be attached to them regardless of their needs, robo can get to the nub of an issue simply, quickly and effectively.

Ironically, many advisers went through purges of their client banks a few years ago, shedding unprofitable clients in a process known as segmentation. Many of them are the ones complaining now, that robo service is impinging on their livelihood.

Robo is for everyone but it's cheaper that brokers like Stanley and Hargreaves Lansdown and for many, it's a great option to at least consider.

jem16

Al. wrote: »

Jem,

No, I can be profitable by being smart, I suppose what I'm not doing is being gratuitously profitable. I have spent nearly three years cutting my cost base, negotiating hard where I need to, and working more smartly in different ways. That benefit, I can pass on to my clients.

That's fair enough.

However what I'm trying to ascertain is where you make this profit as it has to come from somewhere if you don't work for nothing.

So, for example, an IFA charging 1%/0.5% will do a yearly review, rebalance, Bed&Isa, increments to investments with no initial charge, etc. That is all going to take time so the adviser has to be paid somehow.

Or are you saying that wouldn't be included with a robo service?

Al.

Ok, gotcha - ok, this might help.

Fiver a Day charges (for the vast majority of clients) 0.79% pa. That includes my advice, the fund costs (typically, 14/15 funds), the DFM, the rebalancing and the bed and ISA - and compares very well with practically anyone else, and certainly with the likes of Hargreaves (2% or so?). I have a fair use policy with access via phone or Skype - as long as no one takes the mickey, I'm happy enough - I've never been a clock watcher (life's too short).

Instead, to keep my accountant happy, I'm using technology to gear up efficiency. I'm still profitable and the clients get a great (ok, I'm biased) service. I don't think many clients will want to, or will certainly in future, become more resentful at paying 1% or so for a dogmatic, cross subsidised service. My face to face advised service costs typically, 0.6% - with the fund cost on top.

For many people, the face to face service will still be best, for many people, the self directed service will be best. There will also be good robo propositions in the future and there will be some very bad ones (just wait until the life companies get unleashed). Robo isn't for everyone - it's an option, that's all. It's a good option for some and it's a bad choice for others.

jem16

Al. wrote: »

Fiver a Day charges (for the vast majority of clients) 0.79% pa. That includes my advice, the fund costs (typically, 14/15 funds), the DFM, the rebalancing and the bed and ISA - and compares very well with practically anyone else, and certainly with the likes of Hargreaves (2% or so?). I have a fair use policy with access via phone or Skype - as long as no one takes the mickey, I'm happy enough - I've never been a clock watcher (life's too short).

Ok thanks but still missing out on a bit. Out of that 0.79%pa what is the charge for the fund and platform and what goes to you?

I don't think many clients will want to, or will certainly in future, become more resentful at paying 1% or so for a dogmatic, cross subsidised service. My face to face advised service costs typically, 0.6% - with the fund cost on top.

Some advisers will charge 1% on smaller amounts and 0.5% on larger amounts. Is your 0.6% across the board?

For many people, the face to face service will still be best, for many people, the self directed service will be best. There will also be good robo propositions in the future and there will be some very bad ones (just wait until the life companies get unleashed). Robo isn't for everyone - it's an option, that's all. It's a good option for some and it's a bad choice for others.

No I have no issue with that as it's down to the individual. I was really just trying to work out what you meant by advice "becoming practically free" as that is not going to happen.

We can't expect advisors to be working for nothing and it's not giving people the right expectation to suggest that it will.

Al.

Jem,

Ok, in answer to your question then, a typical middle risk client on Fiver a Day will cost 0.79% per annum. That includes the cost of the funds and the platform, as well as the advice, the ongoing help, DFM, rebalancing etc. The only extra is a fiver each six months if you want a paper copy of the statement (which would otherwise be e-mailed to you as a pdf). Out of the 0.79%, I am paid 0.34%.

My (typically) 0.65% per annum is for my (other) conventional face to face service - I don't charge the 1/2/3% initial funds either, I charge a fee of £234 per investment, per wrapper (Husband and wife doing one pension each, one investment ISA each therefore, is £234 x four). Most of my clients fit a common profile so I can afford to be quite tightly and accurately defined with that ongoing cost. Like any adviser though, I'd take a commercial view when I'm presented with assets that may predicate a more pragmatic view.

I do think advice will become free, or as near as damnit. I can see my Fiver a day service reducing in cost further, to 0.48% or so. It isn't a race to the bottom, and business can still be profitable. But we have to be a) smart) and b) pragmatic. The 1980s/1990s/2000s days of financial services excesses are over (I only came into this in 2008, great timing, right?) and the likes of Hargreaves etc which have 'x' billion under management costed at 2% pa or so might well end up with a nasty hangover.