I have been following at a polite distance the argument among financial advisers between those pressing for fee disclosure in pounds and pence and those who would prefer to charge and disclose advisor fees as a percentage of the fund.
Over the summer, the IFA publication Professional Advisor ran a good debate that clearly set out the arguments for and against. You can read it here.
Where we stand on this
For the record, Pension PlayPen displays its fees on the front page of its website as a pounds and pence figure and this only varies if you have a voucher code at the point of payment.
First Actuarial directly bill almost all fees. A very few clients ~(mainly those we have inherited) are charged an agreed amount from the funds under advice but we do not go in for “Ad Valorem”.
Most people understand Ad valorem through property taxes, you pay a percentage of the value of your property to an estate agent when you sell it on an “ad valorem” basis, and that’s how you pay stamp duty too.
It’s blatantly re-distributive as those who have big properties subsidise the fees of those with small properties (though some estate agents have sliding fee scales). With stamp duty, the percentage of the tax actually goes up with the value of your property.
You may have pondered the use of the phrase “frictionless fees” in the title of this blog. That’s my beef with Ad Valorem and why we charge our fees in hard cash up front and with VAT payable.
What Ad valorem does is to hide the fee as a percentage of something that is insufficiently real to make the loss of the money quite painless. The fee doesn’t touch the sides- hence there is no friction?
Which is why those charging their fees on an Ad Valorem basis so love them. They are just so easy to collect and the damage done is not appreciated to much later (if ever).
Here are three ways of charging £10,000
- I can take 1% of the value of your £1m Pension Pot.
- I can take 1% of the balance of your bank account (on a day when there is £1m in it)
- I can ask you to send me a cheque/TT for £10,000
I reckon most people would find 1 easiest and 3 hardest. Most people see a raid on their bank account as an attack on their spending power and therefore more real than on a raid on their pension account – which is their future spending power. But a demand to physically write a cheque or go online and press the send £10,000 button is tougher again.
And with VAT entering the equation (at 20%) the escalation from 1 to 3 gets even tougher.
People like me, who argue for full disclosure, believe in the concept of necessary friction. We think that people should think before they buy and make an assessment as to whether they are getting value for money.
The argument in the other direction is that the ends justify the means and that if the “end” is more saving, the lack of transparency at outset is a small price to pay.
The really big financial decisions we take, the house purchase, whether to have a family and how to organise later life finances, cannot be made on Amazon, nor should we buy without understanding what and how we’re paying.
It is ironic that most financial advisors will tell you to think before you buy – with the exception of paying their fees!