Welcome to our blog, the place we get things off our chest. It's a mix of rants and raves, often about fees and the cost of financial advice, along with anything else we think you might find useful.

The boiled frog

By Ian Millward, published 07 October 2021.

Apparently, if you drop a frog into boiling water, it will, very sensibly, hop straight out. However, if you place it in tepid water and then gradually turn up the heat, it will stay put until it slowly boils to death (just for the record I haven’t put this to the test).

What has that got to do with financial advice?

Rather surprisingly, the end of the commission system and move to explicit charging coincided with a sharp increase in costs with the average client of a financial adviser now paying close to 2% a year.

Is this reasonable or an example of the boiled frog syndrome at work?

If you asked most financial advisers, they would, understandably, be affronted at the accusation of letting costs spiral out of control. The common response is along the lines of ‘it is quality not cost’ or ‘my clients know my value and are happy to pay it’.

And certainly, trust and competency are vital. But is 2% a year now an unofficial yardstick for reasonable value?

The reality is that there are some powerful forces at work that conspire to stop people weighing up charges objectively. Here are a few obvious ones.

1. Opacity – charges are still not always clearly presented, and we still hear of people who struggle to get a straight answer when they ask the question

2. Time - or rather the lack of it. We make decisions and rarely review them

3. The power of percentages - allowing big cost rises to be presented as small rises (for example, a 100% increase in fees from 0.5 to 1% a year being presented as a 0.5% increase)

4. Indirect fees - fund and platform fees (and often adviser's too) are taken behind the scenes - not having to write out a cheque somehow makes the money feel less real

But there are less obvious, arguably more influential, behavioural forces at work. Let’s come back to that word trust. Most of us are hard-wired to trust. Society is built on trust and interdependence. When you meet an adviser, you share your aspirations, they learn about your family, and you build trust and rapport. Having made a decision we tend to be very loyal to that choice.

Adam and I recently spoke with clients who had previously taken advice from an adviser with St James Place (SJP). They had approached us after reading articles about SJP’s charges and sales incentives in the Sunday Times. It was clear that they liked the adviser, who they considered ‘charming’, and almost felt sorry they were no longer able to deal with him due to the practices of the firm he worked for.

This is not an isolated example. We have dealt with seasoned and astute businesspeople where the tendency to exonerate the individual is exactly the same. An even more recent example was a new enquiry who suddenly needed to release the tax-free cash from his pension. His existing adviser took 6 weeks to write an advice letter and included a quote of £2,600 for their work (in addition to their existing high annual fee).

Not knowing how much work was involved, he asked us if we thought this was reasonable, and admitted he would simply have paid it had he not been speaking with us. We told him it wasn’t at all reasonable. Even knowing this his instinct was still to exonerate the individual adviser who he had grown to like.

These are admirable traits, which I am pleased to admit that I suffer from myself, but at times these good instincts can work against us. And there is a yet more subtle force at play.

I recently read a book citing examples of prosecutors in the U.S. and how they reacted when the onset of DNA evidence categorically disproved a previous successful conviction. Rather than objectively reviewing the facts (and releasing an innocent person) it cited examples of them concocting outlandish theories to support their original view.

These were not deliberate lies. Far from it. It was precisely because they invested so much of themselves (training, professionalism, integrity, sense of duty) that they found it so hard to alter their view. That is an extreme example, but I suspect we all recognise that ability to retell stories to ourselves in a way that supports an earlier decision or outcome.

So, back to financial advice? Is 2% a year a decent yardstick for total charges or sign of a gently boiling frog?

Our clients, on average, pay total costs of around 1% a year. Ok, we are tough on charges and would not necessarily expect more traditional firms to be able to match us, but that does not mean 2% is reasonable. Not by any stretch. It can result in thousands of pounds a year lost in unnecessary and excessive cost.

And there is a point where trust and cost meet head on. Our rule of thumb has always been that 2% is the ‘red flag’. Not a yardstick for reasonable, rather a high-water mark to trigger some serious questions and introspection.

Controlling costs is one of the most important things a good adviser should do for you. And if you are not happy with the answers? Well, in frog parlance, perhaps it is time to ‘hop it’!