I know of many professionals such as engineers, lawyers, accountants and doctors who have never engaged the services of a financial planner. Some have looked after their financial affairs well, others not. One such professional recently sought my counsel as she considered working with a financial planner for the first time.
She spent 30 years doing her own financial planning, but with retirement looming, decided to seek professional financial advice and consulted me on her choice of financial planner. Not knowing the financial planner in question, I did some research and gave the thumbs up. I liked the financial planner’s flexible approach to charging fees, depending on the service sought. In this instance, the client wanted help in reviewing her affairs and advice on any changes to legal structures and existing investments. The financial planner did a thorough job and charged a once-off fee for the work done. The client was happy with the work done and the fee charged.
The financial planner’s recommendations were implemented, and the client was happy but she recognised that there may be value in engaging the financial planner’s services on an ongoing basis. The client asked the financial planner to quote for such a service, with a primary focus on the client’s investments. The financial planner quoted for the ongoing service at a 0.25% fee charged as a percentage of assets under advice. This proposal was the catalyst for the client to seek my counsel for a second time. Their dilemma was not about whether they wanted to work with the financial planner (they did), but rather about the way the fee was being charged. The client had three questions in this regard. The first question was, “Is this standard practice for financial planners?” “Yes,” was the easy answer. She then asked, “Why?”
This question was a little trickier to answer. Her query related to the fact that the investments were being managed by various fund managers who were charging asset-based fees, so she wondered why the financial planner charged in the same way given that they don’t manage the money. I explained that the financial planner would provide ongoing oversight of the assets and by charging an asset-based fee, the financial planner’s interests were completely aligned with that of the client as the fee rises or falls according to the value of the assets. While the client understood this, she didn’t accept it because of her third question.
Why does the financial planner take a fee in the initial value?
She explained that she had spent 30 years saving and investing her earnings as a medical professional to achieve a portfolio of significant value, and now the financial planner was proposing to take an asset-based fee on the full value of the portfolio, despite having not been involved with its accumulation. Her third question was, “Why does the financial planner take a fee on the initial value?” The easy answer was that this is industry practice. But I knew that this would not suffice. After much discussion, we agreed that what she needed to do was agree with her financial planner what the “ongoing service” would involve and that she should ask for a “retainer fee” with the financial planner.
To appease her concerns, the fee needed to be disconnected from the value of her portfolio, which she felt was the product of her hard work. They came to an agreement on this basis. But I remain uncomfortable that I could not answer her question adequately. Why is it standard practice for a fee to be charged on all the assets that a client already has in their investment pot? Is there a legitimate explanation that it is in the best interests of the client? Or is it simply standard practice because few clients question it?
