Percentage Fee or Flat Fee - That is the Question

GSP

I will be transferring out, taking a flexi access drawdown and decided to go with an IFA who charges by percentage rather than flat. It was more of a decision of feeling comfortable with him rather than being a financial one. Over the longer run it will cost me more, as his bit cheaper transfer fee will be more than offset. In time, I understand I can just move advisers if I wish, so will weigh up things as they go.

Been reading posts where its suggested to go with the flat fee adviser, but I suppose on both sides of the coin there's an argument who to choose.

A flat fee adviser I spoke to suggested a % one would take more risks to try and get a greater return. My meeting with my % adviser however felt that he was more risk conscious and cautious. I suppose there though the more left in the pot each year gives a greater return for him, but did not feel he would stand in the way of our decisions as we go along.

Interested to hear any thoughts on members pro's and con's as to who they would choose between the two sets, obviously discounting those who are pension fund savvy enough not to use one.

Malthusian

A flat fee adviser I spoke to suggested a % one would take more risks to try and get a greater return.

Shocking. We wouldn't want greater returns, would we.

Any IFA worth dealing with knows that if you take more risk you will get bigger ups, but also bigger downs - which if they are taking a percentage fee means their fees go down as much as they go up. Of course, on average they would expect the fee to be higher - higher risk equals higher return - but only to the extent that their client benefits from greater returns. Hence my sarcasm. Even if this assertion was true, they would only benefit to the extent the client benefits.

If anything a percentage-based IFA would want to take less risk. Business owners don't like volatile income. As the client, you are presumably investing for the long term so it doesn't actually matter if the fund value goes down. It does however matter to the IFA, because his turnover is going down but he still has to pay his staff's salaries.

I have long asserted that flat fees will be very fashionable until we have a market crash. A flat fee of £750 per annum for looking after a £100,000 portfolio sounds pretty reasonable as long as the £100k goes up. When that £100k has (temporarily) fallen to £60k, clients are going to start thinking in percentage terms. "Why am I paying 1.25% per annum? Why does my adviser get a bigger and bigger slice of my portfolio the more it falls in value?"

I am assuming by the way that by "flat fees" we are talking about fixed initial and ongoing fees in return for an agreed service. If we are talking about hourly fees then just no.

Linton

A % advisor should not take more risks than a flat fee one as the risk level should be determined by the assessment of your level of risk acceptance, not the advisor's. The flat fee advisor suggesting otherwise would make me suspicious of him rather than lead me to question your initial choice of the % advisor. The most important factor in your choice is which advisor do you feel happier working with, that would seem to be the % advisor. Then compare the actual costs. The % advisor is initially cheaper and as you say it is purely a matter of long term costs you can always renegotiate the charges or change advisors in the long term so I dont see the flat fee advisor offers anything to your benefit.

So on all counts I suggest you stay with your initial choice.

dunstonh

A flat fee adviser I spoke to suggested a % one would take more risks to try and get a greater return.

When someone does not have the confidence of their own business model and has to resort to slagging off another in an attempt to get business then that tells you more about them than the one they are criticising. On here, we can discuss the merits and negatives of different options but in real life talking to a potential client, you do not slag off others with made up rubbish.

I cannot see any potential for bias as the advice has to be suitable to the individual. If you assess someone to be a certain risk profile and you then recommend investments above or below that risk profile then either would be a mis-sale. Why would any adviser want to risk such an obvious missale?

LHW99

Even more important than flat fee v % fees is whether you like / trust / get on with the advisor IMO

GSP

Thanks for your replies which make me feel more confident In our choice.

bigadaj

I'd have thought most firms would be flexible to provide either option.