The 18-page report accuses the UK’s financial planning and wealth management industry of having “vested interests”, resulting in many clients paying too much for services.
The firm is now calling for the industry to adopt a flat-fee model, which it describes as “fairer for individuals”.
Adviser fee models
The report examines two adviser charging models to calculate just how much some individuals are being overcharged.
For instance, option A refers to a 1% advice fee model while option B charges a flat-fee alternative.
If a lump sum of £1m ($1.26m, €1.17m) is invested over 30 years at an annual growth rate of 7.6%, then the 1% fee will start at £10,000, which then goes up in line with the portfolio value.
Meanwhile, the flat fee would also charge £10,000 but would aim to increase in line with the long-term inflation target for the UK – currently 2% – which is adjusted every three years.
The report calculates that over a 30-year period the investor who selected option A would have £1m less than the investor opting for option B.
“That is clearly a vast sum of money which the investor has overpaid and transferred from their own family’s wealth to that of their wealth manager,” said Capital Asset Management.
The firm claims that the 1% wealth management advice fee is often not made clear to the consumer, many of whom don’t understand the impact the fee has on their investment portfolios.
The report stated: “Over a lifetime of investing, this percentage fee eats away at the money being invested (the portfolio) but the real consequence is rarely seen, known or understood by the investor.
“There is a flaw here because in the percentage model even if the service selected is simply to manage investments, there isn’t a direct cost relationship between managing, say £100,000 and £1m.
“The point is that it doesn’t cost the wealth management firm ten times as much to manage £1m and yet the fees charged may be 10 times greater.”
‘Tough questions’
Alan Smith, chief executive of Capital Asset Management, said: “Investors should be asking some tough questions of their wealth managers if they insist on clinging to the old broken model.”
The report also quoted Paul Lewis, presenter of BBC Radio 4’s Moneybox programme, who said:
“Only use a financial planner who you can pay in pounds. Never choose one who wants to charge you a percentage of your money. Percentage fees are a hangover from the days of commission. If you cannot afford the fee in pounds you probably do not need financial advice.”
