Paying for financial advice: fees on investments or professional fees in rands?

Many financial advisers have moved away from taking commission to charging advice fees – but their fees are mostly calculated as a percentage of your investments.

Now a small but growing number of financial advisers are charging flat fees that are not based on your investments, but rather on the time they spend advising you or on the work they do for you.

This new trend is likely to put renewed focus on the value you get for the advice fees you pay.

The disadvantages of advisers earning commission on financial products are well-known: the advice you receive may not always be in your best interests and the adviser will be motivated to sell you products.

Advisers running their own advisory firms therefore typically recommend commission-free products and are instead paid an advice fee from the investments you make under their advice.

This is known as a fee based on assets under management (AUM) and is paid to the adviser by the investment house. Read more: What does it cost to get financial advice?

The disadvantage of an AUM fee, however, is that you could end up paying too much for advice, Lizl Budhram, head of personal financial advice at Old Mutual, says.

South Africa now has a platform, Doshguide, aimed at facilitating contact with advisers who charge flat - or rand-based – fees for their time.

Old Mutual has also given all its advisers the option to charge flat fees for a menu of financial planning activities.

Doshguide founder Rory Brachner says most people do not work out what a fee expressed as a percentage of investments works out to in rands or how it increases as your investments grow.

Scale for investment-based fees

AUM fees work on the principle that those who have more invested typically have more complex financial affairs. And an adviser takes more risk advising on higher amounts, Budhram says.

AUM fees, are, however, usually charged on a sliding scale, so the percentage reduces as your investments grow.

Top advisers still find there is a tipping point beyond which it does not make sense to charge a percentage of investment, Budhram says.

Brachner says while tiered fees help, you should still consider the AUM advice fee in rands – one Doshguide client with substantial investments saved R500 000 a year by switching to a flat fee.

Retirement investments

Budhram says the introduction of default regulations under the Pension Funds Act requiring retirement funds to offer you a default annuity motivated Old Mutual to introduce this fee payment.

These annuities are often really cost-effective, but you may still need financial advice, she says.

Trustees do not always allow advisers to earn fees on investments in default annuities.

Now, however, even a tied agent or adviser at Old Mutual can give you advice at retirement, work out how much disability cover you need, or provide an estate plan with a will for a rand-based fee, Budhram says.

If the advice suggests you need a financial product, a tied adviser can only recommend Old Mutual products. It is your choice then whether to use those products or find your own, but the advice has Old Mutual’s backing, she says.

Old Mutual’s flat fees have found favour with a few South Africans who understand financial planning and the cost of buying a product on which commission is paid, Budhram says.

Most South Africans do not, however, have this understanding and are reluctant to discuss fees with their advisers, she says.

Flat fees

Rand-based fees can be quoted by the hour, for a particular activity or project, or as a monthly retainer.

Advisers listed on the Doshguide platform favour a monthly retainer fee paid by way of a debit order. In this way, the fee is like your gym membership or medical scheme fee, Brachner says.

The monthly retainer depends on the adviser’s experience and qualifications, and your circumstances. Fees range from R1500 a month to more than R4500, Brachner says.

Disadvantages of flat fees

A disadvantage of a flat fee is you have to have the cash to pay the fee.

Investment companies will deduct AUM fee payments to advisers from your investment, but not flat fees.

Brachner says South Africans are willing pay a personal trainer and should be willing to pay an adviser. They should consider that beyond your health, nothing is more important than your finances, he says.

Advisers who charge flat fees are also scarce. Doshguide currently has less than 20 advisers listed.

But Brachner believes flat fees will be the next big thing as advisers are increasingly realising that younger generations will not use an adviser charging AUM fees, he says.

Advantages of flat fees

Flat fees offer an opportunity to professionalise advice – you receive a professional service and you are billed for it, Budhram says.

Brachner says flat fees avoid a misalignment of interests, especially if your real need is to pay off debt, build up an emergency fund, buy a house or build up a property investment portfolio on which your adviser will not earn a fee.

An upfront fee can be hard to swallow, but most South Africans do not understand that they may ultimately pay a lot more than the flat fee over the term of a financial product without knowing it if they accept advice based on commission, Budhram says. 

Evaluate your options

Jaco van Tonder, director for adviser services at Ninety One, says there is no single fee model that is “the best” for all clients and all financial advisers.

He says the AUM advice fee generally results in the wealthier clients subsidising the less wealthy clients to some degree.

Buying time may not work as well when you need a long-term relationship with an adviser and that relationship evolves over time, Van Tonder says.

Fixed fees can work well if you engage an adviser for a set of deliverables – but might be unaffordable for less wealthy or younger investors, he adds.

Budhram says you should not be shy to ask your adviser to explain to you whether commission, an AUM fee or a flat fee charged is better for you.