Advisers are increasingly beginning to challenge the typical percentage-based approach to advice fees, with growing momentum behind the firms considering and offering alternative charging models.
Jacksons Wealth Management managing director Pete Matthew kick-started the debate on percentage charges in a column for Money Marketing last month. In the article, Matthew explained how a client had led him to question his percentage-based, or ad valorem, charging model and had instead suggested a monthly retainer alongside a set of modular services geared around clients’ changing life stages.
He says he has had a lot of positive feedback since the article was published, and while Jacksons has not implemented an alternative fee model as yet, it is something the firm is talking about and actively considering.
He says: “It was inspired by this dinner I had with a seven-figure client, someone who is absolutely at the top of his game. And yet all he wanted from me was the planning. He had been investing for years, and we never pitch ourselves on investment management anyway.
“It was an interesting case because he was referred to me by his best mate, who is in a similar financial situation but a total delegator who wanted to give me all his money to look after. The conversation was along the lines of ‘this is the sort of thing I want from you Pete’ and I just thought: ‘How interesting’. It was like getting two hours of free coaching from him.”
Matthew freely admits fairness and value of advice charges are down to clients to decide, and points out ad valorem charging is unlikely to die out any time soon as many clients are happy with it.
He says: “I don’t see that changing, but I do think we’re going to have to offer an alternative. What we need to do now is try and price it and work out what it’s going to cost. One idea we discussed was a modular model, though it’s been pointed out to me that the difficulty with this is where you have a lot of crossover. If you are going to be truly holistic, is it possible to also offer modular advice? It’s a very good point.”
The hybrid approach
Plan Money director Peter Chadborn says firms' attitude to charging models is likely to differ depending on their ethos. He says: "For some firms, including ourselves, a move away from percentage-based charges will be the direction of travel, even if it’s aspirational. At the other end of the advice spectrum, there will be firms that are clinging on with their fingernails to percentage-based charging, and will never change."
Plan Money operates a mixed charging model with a fixed fee at the initial review stage, followed by percentage-based charges for implementation and ongoing service. The implementation fee is subject to a minimum of £1,500 and is also capped, while ongoing service is subject to a minimum of £500 for financial reviews and a minimum of £750 for a full financial planning service. The percentage charge for ongoing service is also adjusted according to the level of assets.
Chadborn says the rationale for using a percentage-based model is to reflect the way regulatory costs such as professional indemnity cover, levies and FCA fees are calculated. He says ideally he'd like to operate a wholly fixed fees model, but believes his current structure to be marginally more profitable.
Fighting for flat fees
Capital Asset Management chief executive Alan Smith has championed the retainer, or flat fee, model for several years. The firm’s monthly flat fee is calculated based on factors such as complexity, time required and the level of adviser dealing with the client.
In some cases, there is no initial charge while for other clients, such as those with legacy plans, there is a flat fee based on the ‘team time’ required, calculated according to a daily rate.
Smith says: “When a big influencer like Pete Matthew begins to reflect and says he’s thinking of doing this, then you know things are beginning to shift.”
He argues there are a number of factors at play which count against percentage-based charging, such as the conflicts of interest inherent in a contingent charging model, the cross-subsidy element, and the compounding effect of percentage charges.
He says: “There’s no doubt in my mind that the sands are shifting. It’s a very slow process as thousands of advisers and firms have been charging a certain way, in some cases for their entire careers. But for advisers like the Next Generation planners, and the younger people in our company, the monthly retainer approach is just obvious. They haven’t been tarnished with this age-old philosophy of percentage-based charges.
“There hasn’t been much need to change up until now. But there’s a perfect storm brewing, consisting of an inevitable market correction, Mifid II charges disclosure, and media scrutiny of fees and charges. The whole thing around advice charges could come crashing down like a house of cards.”
Smith says he is seeing more and more firms offering clients a choice on charges, which he welcomes as “a step in the right direction.”
For Matthew, a model that goes beyond ad valorem charges would be a “credible alternative”. He says: “We generally charge 0.75 per cent, and for ‘low-touch’ clients we’re happy to charge 0.5 per cent. We’re probably below the curve on this; we don’t have massive overheads and we use low-cost investment management. So it works out as fairly cheap on an ad valorem basis.
“What it will do is focus our minds on what exactly the ad valorem fee covers. If we can articulate that, then we can work out the cost. We can explain to clients, for example, they can pay a monthly fixed fee or a year in advance. It will help us set out what is and isn’t included for our ad valorem charge. If we’re getting paid big money, say £5,000 or £7,500 a year, we can ask ourselves whether we can justify that and whether that warrants a higher level of service. It has got us thinking, but it’s not something that’s going to happen overnight.”
Chadborn expects the advice profession to move gradually away from percentage-based charging. But he says without regulatory intervention the firms that adopt a retainer model will do so because they see it as necessary to deal with their chosen market. He gives the example of high-net-worth clients who may be more likely to question whether they are getting value for a percentage-based charge that equates to thousands of pounds.
He still believes though that having a fixed fee element in his firm's charging model is ultimately good for the client relationship.
He adds: "In my experience the initial fee-based approach proves impartiality and establishes trust right from the off, and everything flows nicely from that point. Advisers who say to clients they’ll do a review and when they move their investments they’ll get paid, it puts those clients back in that mode of ‘they’re going to sell me something’."
Smith believes it all comes down to the client proposition. He says the basis points model has proliferated because advisers’ services have been geared around choosing funds and asset allocation, or outsourcing this on the client’s behalf.
He says: “Investment management has largely become commoditised. Clients can buy low-cost, simplified multi-asset portfolios off the shelf and they tend to outperform. A service proposition where you’re promising to beat the market isn’t worth anything these days.
“So what is it that you’re doing for people, and what is the core proposition? For me, it’s about financial life planning, and working collaboratively with clients to build a plan that helps them achieve what’s important to them and their family. That may include property, cash or business assets. And if that is the case, what has that got to do with the amount they have invested in retail investment products?”