Flat Fees in the UK: Different Country, Same Lame Arguments

You don't think that massive operations such as heart bypasses or hip replacements subsidize the cost of broken fingers and simple arrhythmias, or actually pro bono care? Or that large corporate clients enable law firms to take contingency fee lawsuits or small estate issues? It seems ironic to me that at time when many segments of U.S. and British society are bemoaning the "fact" that the "rich" don't pay their "fair share," that some advisors concerned about AUM fees that the "wealthy" have been happy to pay for literally hundreds of years.

2) Contingent Charging
A couple of years ago, the then Financial Conduct Authority [the U.K. version of the SEC] chief executive Martin Wheatley expressed concerns about what he referred to as 'dealing bias' in relation to percentage charging adviser fee models. In other words, to be compensated, the adviser must recommend products or services upon which a percentage charge can be applied. This would mean advisers may be reluctant to recommend national savings products, investing in a business, or buying a holiday home: none of which can produce a percentage-based adviser fee, but all of which (and many more) can be legitimate decisions within a comprehensive family financial and investing plan."

All of which is absolutely true, of course. Yet Smith's analysis seems to assume facts not in evidence: to wit, whether this is a bad thing or a good thing? With or without AUM fees, this is a built-in dynamic of the financial advisor/client relationship. That is, most clients want to spend money on things that will make them happy now; most advisors advise them to save and invest for the future.

Most advisory clients realize this, and seek the counsel of an advisor to save them from themselves. So rather than a nefarious secret to trick people into sound investments, financial advice and planning are what clients want: someone to challenge them when they are contemplating doing something that will adversely affect their financial plan—and future.

The good news is that both sides know it: clients are well aware that if they take money out of their investment portfolio to buy a second house, it will cost their advisor money. So they evaluate the reasoning behind his/her advice to not buy it. Would you rather stake your financial future on an advisor who has a sizeable incentive for you to grow the largest portfolio possible; or on a crazy uncle who encourages you to indulge your short-term impulses just to stay in your good graces?

3) Service vs. Costs
"A client's desire for advice does not rise and fall in line with the investment markets," wrote Smith, "and therefore the revenue they generate for the adviser. They are inversely correlated, as a client may need more advice in times of market stress, during which the adviser may be experiencing a 20% or 30% reduction in income on a percentage-based model." 

And there it is: the argument that always seems to be slipped in at the end of briefs in favor of flat fees: "Why should advisory fees go down just because markets fall?" Here's a newsflash: virtually all industries are cyclical. Sometimes they go up, sometimes they go down. But rather than bemoan this fact, the businesses that succeed over time prepare for down markets during up markets.

Perhaps more to the point, advisory revenues should go down because it creates a powerful 'identity of interest' with their clients: client portfolios shrink, and their advisors make less. Everyone feels the pain. And that's the big picture. What do you think is the better pitch?

1) "We charge a flat advisory fee so that when markets go down, our revenues don't change a bit, and we can continue to give you the same sound advice led to the loss of half your portfolio."

2) When clients panic and want to sell at the bottom, their advisor can tell them: "We feel so strongly that the market will recover as it always has, that we've bet our future on it. So you can, too."