The advice fee increase you might never notice

If your financial adviser told you that your annual fee was suddenly going up by 20%, you'd probably want to know exactly why. Yet the reality is that the actual amount you pay out of pocket can rise by exactly that much, all while the quoted percentage on your statement stays exactly the same. At a 1% annual fee, a portfolio worth 5 million rand produces an annualized advice charge of 50,000 rand.

Fast forward, and if that portfolio simply grows to 6 million rand, that exact same 1% fee now produces 60,000 rand. The percentage hasn't budged an inch, but the annualized rand amount you're paying is 10,000 rand higher. Now, there are a few important caveats to keep in mind here.

These are two hypothetical snapshots, each holding the portfolio value constant for the sake of the illustration. The 1% fee in our example includes any applicable VAT. It's important to note that these aren't actual invoices for a year in which a portfolio steadily grew from one value to the other.

Real charges will depend heavily on your specific agreement, the daily or monthly balances used, and your billing dates. This example is simply here to show how the price mechanics work. not to forecast what the markets will do. So when it comes to reviewing your actual costs, where should you start your line of questioning to get a handle on this?

Well, the best place to start is with the actual money you paid. Here's how you can break this down. First, request the total advice charge for the last 12 months in rand.

Ensure this includes any applicable VAT and any work that might have been billed separately. Next, compare that exact figure with the previous 12 months on the same basis. Finally, be sure to check for any once-off planning fees or other unique charges that won't recur, just so you know you're comparing apples to apples.

It's really tempting to take shortcuts when doing this math, but do not simply multiply today's portfolio value by your annual percentage and assume that was last year's bill. Why? Well, the provider may have used daily or monthly balances to calculate your fees, plus your own contributions and withdrawals throughout the year will completely change the true amount being charged.

Ask exactly which assets attract the fee and take the time to reconcile those figures directly to your statements and invoices. It's also vital to keep the different costs visible and distinct. Advice, investment management, platform administration, and product charges can often be separate costs, sometimes paid to entirely different providers.

By checking what each disclosure includes, you ensure you don't accidentally count the same charge twice. Remember, an advice fee is usually only one part of the total cost of your financial arrangements. Once you know exactly what you paid, your next question naturally should be about investigating exactly why that rand amount actually changed.

There are several possibilities to explore here. Was a higher percentage applied? Did the portfolio simply grow larger?

Was there additional work billed? Or perhaps a different tax treatment? Keep in mind, a contribution from your own savings can increase the assets being charged without any actual investment gain.

Rising markets can also increase the fee. But neither market growth nor deposits on their own tell you whether the actual advisory work increased. Of course, there may be perfectly valid reasons for a higher bill.

Major life events, like retirement, changing family responsibilities, or setting up more complicated arrangements can require substantial additional work from your adviser. Ask them what changed, what specific work was done, and whether that work was included in the ongoing service or agreed upon separately. A clear, honest explanation directly connects the price you pay to the specific responsibility your adviser has accepted.

Once you've looked back, it's time to look forward. Ask your adviser to run some scenarios, not market forecasts, but practical scenarios. What would the coming year's advice charge be if your portfolio stayed around its current value?

What would a planned contribution or a planned withdrawal change? How would higher or lower market values affect the upcoming fee? A percentage fee can certainly fall when assets fall, although you should be aware that minimum fees and other terms might affect your final result.

Because once the fees are crystal clear, the next critical question to ask is about measuring the true advice value you're receiving. How is that advice value actually measured? It's measured by the crucial decisions the advice helped you make.

Perhaps your retirement assumptions were carefully updated. A withdrawal plan was reviewed or specific agreed actions were successfully completed. Remember, more transactions don't automatically mean better advice.

Sometimes the absolute best advice means having someone explain exactly why a suitable existing investment should remain firmly in place. Beyond specific decisions, core value also includes intangible benefits, the experience you leverage, your access to expertise, and accountability. These things can't be measured strictly by the number of hours billed or meetings held.

However, portfolio growth alone doesn't prove that these benefits increased in the exact same proportion as your fees. Make sure to agree on what the coming year's service will actually include, so your next review has a concrete baseline to assess. If you decide you want to compare alternative fee structures, you have to ensure you're comparing the exact same scope of work.

Every model has its trade-offs, whether it's percentage fees, sliding scales, fixed retainers, project fees, or hourly charges. For instance, a fixed fee retainer can actually be quite expensive for a smaller portfolio. On the other hand, an hourly arrangement might make someone reluctant to pick up the phone and ask a truly useful question simply because they know the meter is running.

The lowest quote doesn't, by itself, establish the best fit for your specific needs. There's another logical approach to consider when evaluating your options. The capped fee solution.

Below the cap, the fee can still rise along with the assets being assessed. But above it, further asset growth doesn't increase that advice charge, provided the same cap and terms apply. ClearGauge offers capped ongoing advisory fees, so it explicitly has a commercial interest in this discussion.

Its caps are reviewed annually in March, while other provider charges remain completely separate. Always check the current schedule and the specific agreed terms. Before changing anything, be sure to clearly distinguish reviewing your advice arrangement from actually selling your investments.

Switching can trigger unintended transaction costs, tax consequences, or lost benefits. Always ask for a written summary of any proposed changes. Take your time to digest it, and carefully assess the consequences alongside the proposed fees.

Ultimately, the outcome of this review process may be to keep your current arrangement just as it is, to renegotiate it, or to seek a second opinion. What truly matters is that you can confidently explain what you paid, why it changed, and what you expect to receive moving forward. An unchanged percentage should never make the final rand amount invisible to you.

You can read the full article in the ClearGauge Financial Library, and if you'd like an independent written view of your own arrangements, explore the Financial Clarity Review. The exact scope and fee are agreed upon before any work begins and you can keep your existing adviser. ClearGauge wealth.

Advice before action.