Painful Percentages
Percentages are subtle and unthreatening, while paying pounds stings. But does this mental accounting cost you money?
Today we assess how each approach impacts your costs, then further explore how this drives incentives in the finance industry.
Disclaimer: we coach on a fixed fee basis so are completely biased! (but also passionate about the best model for you over pure profits).
Playing the percentages
There are two typical business models for financial advice and coaching - percentage or fixed fee.
Percentage fees apply to your overall invested portfolio value for ongoing service
Fixed fees for a particular service such as advice about your situation, coaching towards a goal, or gaining knowledge
Percentage
% Up front / onboarding / transfer-in / initial advice fee. Typically 1% - 4%
% Ongoing Management / Advice fee. Typically 0.6% - 1.5%
% Exit fees in some cases!
Most wealth managers and IFAs charge percentage fees, though some work fixed fee.
Fees are deducted directly from your portfolio held on their platform, though you may be invoiced directly if your money resides elsewhere.
Fixed
Range from £500 - £5000
Most coaches work fixed fee for two main reasons.
Firstly coaches don’t run platforms holding your money, so cannot deduct fees in a frictionless way. Unfortunately! ;-)
But most importantly coaching is goal-based, so the fixed fee represents a service with defined deliverables and goals.
Break even and beyond
Paying invoices feels like real money when you need to make a card payment or even more painfully a bank transfer!
But let’s compare to see how painful percentages can be too, using fees from a very large UK firm.
You may be surprised how quickly the break-even point arrives.
As we are comparing different models, several comparisons are required, beginning with costs in Year 1.
£'s Year 1 fees - % vs Fixed basis
Year 1 assumptions:
Percentage: Upfront (3% first £250k, 2% next £250k, 1% remainder over £500k) + 0.8% management.
Fixed packages: Upfront packages (Cost Crusher + Investment Simplifier + Retire On Time) = £1,700.
Discounted at £20k beginner level (Begin Investing + Annual Accumulator) = £800.
Year 1 begins close with fixed fee already in the lead, then percentage fee pricing escalates quickly as your portfolio grows.
You may be surprised percentages are not winning for small pots, however many % firms enforce higher % for smaller amounts or minimum initial fees, while MoneyWalks offers Begin Investing to avoid excluding beginners!
Remember you also have full flexibility to spread fixed fee packages smoothing upfront payments. Perhaps begin with Cost Crusher + Investment Simplifier in Year 1, then graduate to Retire On Time from Year 2 or 3!
Following Year 1 let’s calculate ongoing annual fees from Year 2 onwards.
£'s Annual fees - % vs Fixed basis
Year 2 assumptions:
Percentage: 0.8% management (commitment).
Fixed package: Annual Accumulator (optional!) = £800, discounted at <£50k beginner level = £450.
Breakeven is around £100,000 before percentage fees escalate quickly, but again very close in the £25k to £75k range.
Remember Annual Ascent coaching is completely optional as you feel the need, not a commitment like percentage basis, so fees can be zero!
New investors with smaller pots can Begin Investing, enjoy their easily maintainable plan for a couple of years with no commitment, then return for Annual Ascent or Retire On Time.
We also believe coaching offers you more than investment management alone - see About
Finally let’s consider the compounding effect of those higher fees over time, and see how painful percentages are when deducted from your future.
Imagine you begin with a £100,000 portfolio, then contribute £10,000 per year through a combination of pension and ISA.
At an assumed growth rate of 6%, your portfolio after 20 years looks like:
Percent fee basis = £616,100
Fixed fee basis = £675,600
A massive difference of £59,500 !
Interesting incentives
While there is some logic to a percentage charge as your situation increases in complexity, advice naturally focuses on your investment portfolio as percentage fees and incentives are directly aligned to your pot.
So unfortunately in practice the service offered is often simply reviewing your investments and advising a transfer into proprietary platforms, due to incentives to transfer and retain as much as possible, with associated percentage fees deducted in the background.
Fixed fee allows for a broad holistic approach covering all aspects of your financial life - debt, tax, properties, family changes, and estate planning - with zero incentives to favour keeping money in investments or a particular platform.
