The downside of charging a fixed fee (and why we do it anyway!)…

There is a lot of commentary within the financial planning community about fees. I don’t want to debate the merits of different fee structures in this post. I will however, say that I believe any and all fee models can work. As long as the clients understand the fee, and are happy to pay, and receive a value-add service for their fee, then it makes no difference to me what other business owners choose to do.

Engage are one of a small group of firms who offer a fixed annual fee for the work we do. The fees are on our website and we make it clear to all clients what they’re going to pay our firm for the work we do.

I like that fact the clients know what fee is being paid to us. I like the fact that our advice has no conflicts of interests associated (whether clients invest with us or pay off a mortgage as an example). We don’t have to have clients invest a penny with us to add value to their lives and charge a fee for the value we deliver. Finally, I believe having a fee that doesn’t compound over time as the investment markets grow is in the best interests of our clients. Now I’m not looking for other advisers to agree, disagree or challenge the above, it’s my opinion, it’s my business and so I’m just outlining our rationale (please see above, I believe all charging structures are ok as long as the business provides value and clients are happy!).

The downsides of having a fixed fee practice are twofold

Firstly, our fees are generally paid directly by the client rather than coming out of the assets they invest with us. Common practice in our profession is, if someone has £1m invested and the fee is 1%, the £10,000 is deducted from the investments. We will assume the client knows this and the £10k is paid annually. At Engage, we have to go back to the client every year and say, please can you settle our sizable invoice. The fee amount is the same but the client actually writing out that cheque as opposed to hearing it’s already been paid has a very different viewpoint. There’s also no doubt that if performance has not been good, asking for that invoice is difficult for us and for clients – trust me I have been there.

Secondly, as our fees are not linked with the investment markets, we don’t get the fee increases that come with the average investment rises. The means we need to review our fees every year or every few years to adjust for inflation. This is a pain point from both an admin perspective and also from a continually changing fee structure perspective. It was manageable from 2017 when we set prices up to 2020. But since we last adjusted our fees at the end of 2021, we’ve seen inflation at 10% in 2022, and 7-8% so far this year, alongside a significant rise in costs. With the last change, we assured all clients that we wouldn’t raise prices again for 3 years ….. We are sticking to that promise but it’s possible we might not be able to make such promises in the future.

If it’s so much hassle why do we still bother with fixed fees?

I do often ask myself the question. The percentage model is easier to understand, easier to administer, easier to receive fees and results in fewer difficult conversations. Sounds like a no brainer.

The truth is that I believe it is in clients’ best interests to have a fixed annual fee.

I believe in the clarity it brings. There is never anything opaque about our fees.

I believe my clients’ long term investments will be better served by having less fees deducted from their portfolio. The impact of less fees from their portfolio compounded will be huge. The majority of our clients are younger with a longer investment timeframe, so the impact of this has even more bearing on our demographic.

I know it can be a challenge for clients to write a large cheque, especially when times are tough, but I can always stand on the belief that it is in the best interests of their financial future, and confident in the value that fee will bring to them.