What if Five Guys charged you more than other customers?

Are you willing to pay more than others for your order of fries? Then, why pay more for wealth management?

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Today we’d like to talk about the price of wealth management using a finger-licking analogy.

Let’s say you go to Five Guys (purely for the fries) and you’re waiting in the queue. The two people in front of you both order fries and they each pay £5 for their portion. Now you order and when it’s time to pay, you are charged £20 for the same portion of fries.

“This is outrageous!”, you say, and “How is this even allowed?”

The cashier explains their reasoning: “We have a policy of charging more to people who have more money. We know that you have more money in your bank account than the two customers before you. So, we decided to charge you more.” You leave shocked, not really understanding why you should pay more than other people for the same thing.

This would be a scandal. And we are relieved Five Guys doesn’t operate like that!

Our question: then why is no one outraged that wealth managers use this model?

Today, a fair share of wealth managers use model portfolios. This means that the manager constructs a certain number of portfolios and each customer is allocated one of these portfolios, depending on their risk level. For example, at ikigai we have five model portfolios for five different levels of risk.

The problem is that most wealth managers charge a management fee expressed as a percentage of your money invested (also called assets under management). This means that the more you invest, the more you’ll be charged. How is this supposed to help you build earnings?

This is especially shocking when looking at how the costs accumulate over long periods of time. Compounding is the concept that makes investing worth the wait in the long run, but compounding also applies to the fees when they are expressed as a percentage.

If you invest over 10 years, the fees you will pay are likely to cost 10–25% of your initial investment*. So, if we assume a portfolio value of £500,000, this would mean fees of approximately £50,000 to £125,000 over 10 years.

This may seem surprisingly high, but what is even more surprising is how fees could affect the portfolio value after 10 years. In our case study, the amount that you could have ended up with varies by over £145,000 depending on the fees charged, as shown in the chart below.

The issue is the more you are charged in one period, the less you have available to invest in the next period. The effect of this accumulates over time and you end up with something that looks like this:

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Value of an investment portfolio of £500,000 over a 10-year period starting in December 2008. Performance is based on the ARC Balanced Asset GBP Index. Past performance is not a reliable indicator of future performance.*

You can see that over time, fees can really make a difference. You must understand the fees you will be charged before making a new investment in order to avoid bad surprises.

Our pricing is flat

At ikigai, we decided to charge a fixed amount. You pay £20 per month and you have access to ikigai wealth management and everyday banking. Unlike most wealth managers, with ikigai you don’t pay more when you invest more.

Since the work for us is the same whether you invest £1 or £500,000, we believe it is only fair for you to pay the same, regardless of how much you invest.

Please note that our custodian will charge you a small custody fee of 0.0125% per month and funds charge on average about 0.02%-0.03% per month (you will always be subject to these fund charges, no matter where you invest).

*All figures are based on a case study conducted by ikigai. The case study looked at the fees charged by 16 DFM providers in December 2019. The providers consisted of 10 online managers and 6 ‘in-person’ managers, where the average fees were taken for each category. The overall effect of fees on your investment portfolio over time will depend on the fees charged, any gains, losses or income on the portfolio and how much you have invested. The ARC Balanced Asset GBP Index has been used as the performance benchmark for the period beginning December 2008 and ending December 2018.

We built ikigai specifically for those who want to bring their lifestyle to the next level, by taking better care of their finances.

ikigai beautifully combines wealth management and everyday banking in one single app. And by doing so, it creates a whole new world of opportunities.

Discover more at: https://ikigai.money/

With investing your capital is at risk. ikigai is not a bank.

The value of your portfolio with ikigai can go down as well as up and you may get back less than you invested. Returns are not guaranteed and any historical returns, expected returns , or probability projections referenced on our website may not reflect actual future performances. You should seek financial advice if you are unsure about investing.

ikigai is a trading name of Ikigai Invest Services Limited, a company registered in England and Wales (Company number: 12011662). Ikigai Invest Services Limited is registered with the Financial Conduct Authority (FCA) as an EMD Agent (reference number: 902740) of PayrNet Limited, an Electronic Money Institution authorised by the FCA (reference number: 900594) and is an appointed representative of WealthKernel (reference number: 723719) which is authorised and regulated by the FCA. ikigai is not a bank. Registered address: 16 Great Chapel Street, London, England, W1F 8FL.

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