Financial Advisors percentage based charges

JohnWinder

While you agonise over advisors' hourly rates or % of 'assets under management' fees, here's some US data which might shine some light.

'At median levels, we found that primarily AUM advisors are generating revenue at rates that would imply hourly fees between $350 and $800. This is in stark contrast to the $100 to $300 implied hourly fees generated by advisors operating on a primarily hourly basis, and speaks to the challenge of building an hourly practice that is as financially successful as advisors operating on an AUM basis at common fee levels.'

https://www.kitces.com/blog/financial-advisor-average-fee-2020-aum-hourly-comprehensive-financial-plan-cost/

cfw1994

Interesting comments!

But if you're wanting it because you feel under-informed about financial management and investing, then I think the risk to you with that service is that you're a bit bamboozled by what you're told, unable to fully appraise it because you're not adequately prepared and skilled, and finish up feeling you need an advisor for life who may do no better for you than you might have done for yourself with better preparation. The problem with needing to get advice is that you're ill-equipped to evaluate its quality; and if you can properly appraise it, there are good reasons to think you won't do better with it.

This is sadly the truth, I feel.   

We see time & again on these boards how people often end up with portfolios with 10-20 funds or more: usually looks more like a design to suggest that managing this stuff is terribly complex, with dire risk warnings designed to strike fear into the heart of the customer (“how would you feel if it dropped 50%?”).

Advisors face a couple of headwinds in a long term relationship, at least in making you better off: none are likely to have your interests at heart to the extent you do; and they bring costs you can avoid without them.  

Clearly many people are scared of managing money, and/or might make a mess of it....but nonetheless, I have always said that the only person with your financial well-being truly 100% at heart...is yourself.

I work in the world of IT, & there is an oft-repeated phrase used: “compensation drives behaviour”.
If you want your rep to sell more of product X, you incentivise it.  Financial advice firms, wealth managers, IFAs are all businesses, not charities.  They have an associated cost.  

One difference when compared with almost any other business is that other sectors make their money from a one-off fee, whereas advice firms continue to nibble away at the pot under management, with an on-going detriment to the customer.  That is rather a conundrum, and hard to change.  

As evidenced in the article linked in John’s post above...the final paragraph of which summarises things rather gloomily:

Ultimately, the key point is that there does not appear to be any overall trend of decreasing financial planning fees, despite common claims that fee compression is coming for financial advisors. Rather, the trends we actually see in our financial advisor research are increasing fees. Furthermore, these trends are observed consistently across advisor fee models. Which suggests that, despite strong proclamations to the contrary, financial planning fee compression may be largely a mirage.

dunstonh

We see time & again on these boards how people often end up with portfolios with 10-20 funds or more: usually looks more like a design to suggest that managing this stuff is terribly complex, with dire risk warnings designed to strike fear into the heart of the customer (“how would you feel if it dropped 50%?”).

Just have a think how many core countries/regions there are.  US, UK, Europe, Asia, Japan etc.  Then the different fixed interest sectors.  A portfolio of 10-20 funds is right on the ballpark of what you would expect.

As evidenced in the article linked in John’s post above...the final paragraph of which summarises things rather gloomily:

I wouldn't take much notice of US based articles.   They don't have EU directives and a  similar regulatory and compensation system to the UK.  Plus, the UK has seen costs falling whereas that article indicates that is not happening in the US.  

JohnWinder

dunstonh said:

Just have a think how many core countries/regions there are.  US, UK, Europe, Asia, Japan etc.  Then the different fixed interest sectors.  A portfolio of 10-20 funds is right on the ballpark of what you would expect.

Never a truer word said. But does one need 10-20 funds? A well diversified global tracker for equities, and something similar for bonds would probably serve people well, and if the SPIVA research is to be believed better than most alternatives.

Malthusian

JohnWinder said:

dunstonh said:

Just have a think how many core countries/regions there are.  US, UK, Europe, Asia, Japan etc.  Then the different fixed interest sectors.  A portfolio of 10-20 funds is right on the ballpark of what you would expect.

Never a truer word said. But does one need 10-20 funds? A well diversified global tracker for equities, and something similar for bonds would probably serve people well, and if the SPIVA research is to be believed better than most alternatives.

Right up until the point the US tech bubble bursts, then global trackers will be a giant scam. At least in the eyes of everyone who thought that multi-fund portfolios were a giant scam to make investing seem complicated.

Bigmac1

Thanks JohnWinder - you've hit many nails on the head.  I've researched and read up as much as I can, taken the Pensions advice service opportunity and I'm struggling to see what an advisor can add to the pot, especially balanced against the risk of simply leaving the money is relatively safety where it is.

dunstonh

Never a truer word said. But does one need 10-20 funds?  A well diversified global tracker for equities......<snip>

A pure global tracker gives you significant US holdings.     The fall in Sterling with the rise in the US markets to bubble proportions has made these look very nice.    With Sterling going the opposite way now and the US markets at P/E ratios above that of the 1920/30s depression and only beaten by the period prior to the dot.com crash, do you really want to be that heavy in the US?

People pick single sector (as in IA sector - country, region etc) because it allows them to set their weightings to suit their risk level.

 and something similar for bonds 

"bonds" covers a wide range and some types of bonds are totally out of favour at the moment.    A catchall fixed interest securities fund would include the unattractive stuff.    So, again, single sector fixed interest securities allows you to pick the weightings for the different types.

In the US, which is much more inward looking than the UK when it comes to retail investing, it makes sense to have a US tracker and a bond tracker.  No real issues of currency fluctuations and home bias towards the largest market.

and if the SPIVA research is to be believed better than most alternatives.

You can read these things in different ways.   It is not to be believed if your intention is to follow it as a rule book    However, it is irrelevant because it covers active vs passive. Not weightings.  And it takes all funds in an area. That includes funds that get filtered out very quickly. Such as closed insurance company and bank funds, closet trackers etc.    In reality, a bit of research can improve the ratios significantly.

[Deleted User]

(Independent) Financial Advisers are often likened to tradespeople - plumbers, tree surgeons or (pre-covid) real doctors.
But  these professionals make a tangible difference, you can see the outcome of the work of the arborist. 
We need a more fitting comparison, I think.

JohnWinder

dunstonh said:

A pure global tracker gives you significant US holdings.     The fall in Sterling with the rise in the US markets to bubble proportions has made these look very nice.    With Sterling going the opposite way now and the US markets at P/E ratios above that of the 1920/30s depression and only beaten by the period prior to the dot.com crash, do you really want to be that heavy in the US?

People pick single sector (as in IA sector - country, region etc) because it allows them to set their weightings to suit their risk level.

We might be at a time when a US dominated global equity tracker without currency hedging looks attractive to a GBP investor because of its recent performance, but we've discussed before (and been warned ad nauseam on fact sheets) that past performance is a poor basis for choosing investments. See the 'ASIC A review of the research on the past performance of managed funds September 2002'. 

• Good past performance seems to be, at best, a weak and unreliable predictor of future good performance over the medium to long term.

The benefit of that tracker is independent of past performance; it is that it is widely diversified and will provide very close to market returns at low cost without needing to bet on something outperforming something else. That's not everyone's cup of tea when managing money but it's a good start that takes some beating, and, in aggregate, 'active' investors can't beat, and likely incur higher costs.

dunstonh

See the 'ASIC A review of the research on the past performance of managed funds September 2002'. 

2002 pre-dates platforms and is from a period when most investors in the UK used balanced managed funds, cautious managed funds or with profits funds.   Most of which issued by insurance companies and banks (which were usually pretty poor quality or expensive closet trackers).

but it's a good start that takes some beating, and, in aggregate, 'active' investors can't beat, and likely incur higher costs.

Being fully active is not a good idea.  However, using the best of active and best of passive (i.e. a hybrid approach) is proving to be popular amongst investors and is yielding better than passive only for very many investors.